The Board Imperative: A Balanced and Cohesive Board

I am just coming out of an effort to recruit an independent board member for one of our portfolio companies. It was quite an enlightening experience, and it got me to reflect on my role as a board member.

As in everything to do with the evolution of a company from the startup to the expansion phase, the company Board of Directors invariably must go through its own metamorphosis. In the startup phase, boards are typically comprised of the founding team members (or a subset of them.) In some cases, a seat or two may be occupied by an outsider, as a trusted advisor, a representative of friends and family investors, or in rare cases, a venture capital advisor. In this phase, the board acts more like an advisory group than a truly formalized board of directors. The company is still majority owned by the founders, and the founding CEO is still very much in control of the company and reports only to himself and (perhaps) the other founders.

Becoming a More Formalized Board of Directors

When startup companies enter the expansion stage through a significant investment from an institutional venture capital firm, the Board of Directors starts to take on a more formalized and structured role. For one, an institutional venture round is invariably coupled with the establishment of the Corporation, with an elected Board of Directors to whom the management of the company is accountable to. Two good readings: the first fowarded to me by my partner, Mark Barry, called the Basic Responsibilities of VC-Backed Company Directors; the second is good ol’ Wikipedia Board of Directors.

The specific role of the board is generally outlined in the corporate Bylaws, and tends to be set during the legal documentation of an institutional VC investment. The role typically includes:

• Being accountable for running the company through its corporate bylaws and policies
• Holding the CEO accountable for the proper administration of the company… and, yes, the founding CEO now reports to the board and can be fired by the board
• Ensuring the financial health of the company, including proper budgeting and venture capital financing
• Representing and protecting the interests of all stakeholders… not just the investors or the founders, but also employees and customers
• Dealing with legal and financial issues such as fraud and lawsuits

In addition to these formal responsibilities, the board should also be accountable to managing itself as a governing entity and a group of representatives with sometimes conflicting needs and interests.

Requiring Balance in a Board of Directors

In our standard investments, OpenView tends to be the first or second institutional investor. We require an odd numbered board seats (three are too few, seven too many – hence five). Two of those seats are allocated to management (the CEO and another founding member); two are allocated to the investors; and an independent seat. While the board is responsible for the election of the independent board member, we tend to defer to management for the selection of final candidates, expect the board to be the final decider, and reserve a right to block as preferred investors.

For the board to be truly representative of all the stakeholder interests, it must be balanced. To be balanced, it must at the very least leverage the role of the independent by making that role meaningful and powerful.

In the case of this one portfolio company, the situation we were addressing through the election of an independent board member is a good example. We were dealing with a founding CEO who is young and inexperienced (but very much a needed force in pushing the company to the greatness it can achieve); a representative of the founding members of the company (who hold preferred shareholder rights); a representative from each of the firms invested in the company; and two observers as representative from each of the investment firms. Without getting into the dynamics, the board was in effect unbalanced.

What we decided to do was to create more balance through the independent board seat. We decided to make that seat act as the Chairman and provide it with the power to enforce the balance. We decided that the role of the independent must be (in priority order):

1. to provide mentoring to the CEO;
2. to set the board agenda and to run the board meetings; and
3. to help the company chart its market evolution.

This brings us to another very important point: in searching for an independent board member, it is imperative that the board start the process with a clear definition of the role. The key questions here are: “What is the skill set that we are trying to fill through this role? Will that skill set plug the most critical operational or strategic hole in the company? What would the independent have to deliver to the company for us to unequivocally say that he made a positive impact? And will he make a positive impact on the cohesion of the board?”

Finding Cohesion within Your Board of Directors

As with any high performance team, the board needs to be highly aligned around a set of key corporate objectives. Cohesion requires diversity and the trust among the diverse group that their individual interests are recognized and represented. In effect, the managers need to feel that they are not being overwhelmed by the investors. The investors need to feel that the managers are accountable and responsible. And the independent is empowered to keep the board in balance.