It is surprising how much variability there can be in the effectiveness of board meetings in venture-backed businesses. The range of attitudes of entrepreneurs to their boards includes:
- a great big yawn
- trepidation at being interrogated
- looking forward to the board as a forum for solving problems
I don't have the experience on both sides of the Atlantic to prove it, but I have a feeling that there are more convoluted, ineffective boards in European growth companies than in the US. This would make sense, as most European directors (including the entrepreneurs) probably have less board experience than their US counterparts.
Will Price of Hummer Winblad triggered my thoughts on this topic with his recent comment on startup boards which, in his view, too often focus on "status updates" rather than operational strategy and problem-solving. In my view this applies equally to growth companies at any stage. The blogosphere has produced some other interesting ideas on this topic, such as Zoli Erdos' comment that boards should collaborate using wikis...
High-tech tools aside, getting a board to function as a productive forum AND an effective instrument of corporate governance is tricky, so here are some thoughts on how to get off to the right start*:
1. Keep it small.
As with any meeting (unlike a lecture), productivity is inversely correlated with group size. We like boards of 5, perhaps 7 at most. If external non-executive directors (NEDs) are desirable, we recommend picking 1 or 2 (subject to point 2 below). We even have a few boards of 3 people, which can be very effective for companies where the going is good and speed of execution is the primary determinant of success.
2. Bring in relevant NEDs only. I mean REALLY relevant!
If the board is going to help the CEO with his key challenges, everyone on it must understand the business and preferably have experience relevant to it. The most effective NEDs are those that have built a similar business themselves, or that are experts in an operational area of key concern, such as sales, or product development. The most unproductive NEDs are "industry luminaries" whose name adds lustre to the company website but who have little to add to discussions of hiring strategy, development choices, or sales productivity. If it is industry relationships and customer leads you're after, we recommend forming an industry advisory board to meet a few times a year.
The other most common non-productive NED is the corporate finance specialist or (in the UK) former financial director from a PLC "who is important to the board because he has taken his company public." This is possibly the worst reason to put someone on your board. If and when you need corporate finance advice for your float or your M&A transaction you can always hire the right advice in the market.
3. To chair or not to chair?
It is common in the UK for boards to nominate a chairman, whereas in the US many young private companies operate without a formal chairman role. Most people find it surprising that even in the UK a chairman is (a) not a requirement, and (b) not necessarily a good thing.
The chairman can fulfill a number of roles -- he can act as coach and mentor to the CEO; he can mediate among different types of shareholders (eg, investors, founders, angels); he typically sets and hence influences the agenda for board meetings. The bigger the board the more likely a (good) chairman will help keep it efficient. But the same rules as in point 2 above apply -- the only thing less productive than a board with non-relevant NEDs is a board with a chairman whose only relevant experience is chairing large boards.
For a small board without a chairman, one Director can "chair" the meeting without necessarily being the permanent chairman, or you could alternate the role of chairing each meeting among the directors.
4. Rely on trust and relationships, not control rights.
Control rights are important and they DO need to be negotiated at the time of investment. But actually using your control rights in a board setting, ie putting a disputed issue to a vote, is already a sign of a failed board. The key to good board dynanmics is trust and respect among the participants. Every conceivable effort should be made to reach agreement by consensus or at least by informal majority. All directors -- investors, founders, non-execs -- need to work hard to ensure the board steers clear of pushing through measures with votes.
5. Minimise the formal stuff. Spend time on the big issues.
Too often board meetings turn into one-way investor presentations, which is a chore for the CEO and a bore for the directors. They key is to structure a better agenda and to get directors educated before the board meeting. Once a new board has settled in, organise it such that the formalities and the monthly financial status update are a short routine. Better yet, get your board members to read the financial pack before the meeting and -- after a brief CEO update -- provide Q&A on the numbers only. Then you can get down to discussing a the key topics of concern to the business.
This is also a way to involve members of the management team who are not directors. So, for example, you might want to discuss the trade-offs between two different sets of new product features, so you could invite the product manager to present the alternatives and lead the discussion.
6. Encourage open debate.
Self-evident yes, but is it common practice? Not really. If senior managers are not comfortable voicing their opinions and concerns with the board, then the forum is not working. Think about restructuring the board, and/or the agenda to ensure open debate is rewarded and the directors and managers can brainstorm without being judged. This may sound a bit New Age, but in my book a board that doesn't listen will quickly fail to govern effectively.
7. Meet often.
If the entrepreneur feels his board helps him with operational matters and strategy then he won't mind meeting monthly. Time permitting investors should aim for that (although in reality we typically end up with 8-10 meetings/year). Frequent interaction both at board meetings and in between is critical to the development of the trust dynamics described above.
8. Don't always wait to meet.
It is important to recognise that there are topics which are best handled outside of board meetings. CEO criticism, senior management changes, and other sensitive topics require multiple one-on-one conversations between the relevant board members. The best forum for raising a sensitive issue to the board is often not the actual board meeting at all.
If a lot of this sounds like Relationship Building 101 then it's because boards are precisely that: an ad-hoc relationship between people with a common purpose. How often that common purpose is forgotten in acrimonious (or simply ineffectual) board settings is anyone's guess.
For the entrepreneur the board can and should be a great resource of experience and a source of key support. For investors a healthy board means an ability for the company to make informed decisions early and to pre-empt problems before they arise. For both parties this should be an effort worth making.
[* The focus here is on single-board structures as typically found in the UK and US, but these best practices apply equally to dual board structures (Germany, France, etc) where the Supervisory Board (Aufsichtsrat, Conseil d'Administration) acts as the main forum for discussion.]