Corporate Governance and Basic Responsibilities of VC-Backed Company Directors

The subject of this week’s blog is corporate governance and the roles we play as company directors.

While researching this topic, I found an excellent whitepaper entitled “A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors” published by Pascal Levensohn of Levensohn Venture Partners. This paper, like the two preceding it, “After the Term Sheet: How Venture Boards Affect the Success or Failure of Technology Companies” (2003), and “Rites of Passage: Managing CEO Transition in Venture Backed Technology Companies” (2006), is written by a working group of venture capitalists to promote VC-backed company director education.

This guide addresses the critical role of corporate governance in contributing to effective boards and answers essential questions and recommends guidelines for all VC-backed company directors.

The paper points out that privately held boards have a very high percentage of inexperienced corporate directors. First-time entrepreneurs who become founding CEOs frequently become corporate directors even before they obtain their first institutional round of venture capital financing. Also, many venture capitalists, particularly younger partners of larger firms, join founding CEOs as rookies on a board. Independent directors may also lack the relevant experience. In the current environment, regulators, institutional shareholders, and the courts are demanding greater oversight and sensitivity to governance requirements by corporate directors. To have a high-functioning, effective board, directors must be familiar and comfortable with board governance issues facing Emerging Growth Companies throughout their life cycle.

Pay particular attention to sections on how to achieve an aligned and effective board, recommended guidelines for internal controls, as well as things you need to know about legal and business basics before you join the board.

Additionally, I found the section on how to conduct an annual CEO performance review and annual board peer review especially useful.

As you embark on 2010, now is a good time to review this with the board to determine how effective you are as individual corporate directors and as a collective board.