Who Does My Investor Board Member Represent?

Board-of-director-level issues rarely surface when the going is good.

Board meetings are pleasant when the company is executing well, revenue is growing, the value of the business is rising, and shareholders are starting to count their money. In these times, board meetings tend to be relaxed, and mostly focused on the business and its bright future.
But when the going gets tough, board dynamics can change to the worst. And with it, the role and priority of each board member can be accentuated and/or confused.

Investor Board Members

One of the confusing roles is that of the investor board member. When the going gets tough, the company is feeling a cash crunch and conflict arises around the continued funding of the company and its associated valuation — the investor board member may invariably have to wear his or her investor hat when working with the CEO and the board. And that can sometimes create the blurring of the lines in the fiduciary duties of that board member.
Let’s me be clear at this point — the fiduciary duty of the investor board member is always to represent all shareholders and the best interests of the company. Always. Regardless of whether that duty may conflict with his or her VC firm’s interests.
Now that does not mean that the investor board member would not assume the investor role outside the board meetings. But when it comes to board discussions and decisions, the investor board member should always be wearing the company board hat. In fact, he or she is obligated to.
So lets step back and go through the basics of the fiduciary duties of board members.

Board Member Roles and Responsibilities

First and foremost, the primary responsibility of a company’s board of directors is directing, approving, and overseeing the strategic and financial operations of the business. In some cases where the chairman of the board is not the CEO, the board is also responsible for managing the operations of the company and its senior team. In all cases, the CEO reports and is accountable to the board.
Each board member has a fiduciary duty to represent the best interests of the company and all its shareholders. Failure to do so can result in a personal liability to the board member.
There are two forms of fiduciary duties:

1. Duty of Care: This is where the board member makes best efforts to have a solid understanding of the business, be well informed and aware of the strategic and operational goals, and make the time and effort to engage in the evaluation of all the options available to the company before making decisions as a board. In that, board members should solicit the expertise and options of third parties (lawyers, consultants, bankers). Board members should also hold each other accountable to being engaged and making themselves available and informed.
2. Duty of Loyalty: Each board member must represent the interests of all shareholders over and above his or her own personal or professional interests. The duty of loyalty is one that can be confusing for CEOs/founders, and is the one where investor board members can feel the divergence of interests between their duty of loyalty and the priorities of their investment firm. But when it comes to board matters, investor board members must make sure that they are not allowing their investment priorities to come into play as the board deliberates over company strategies, funding, or acquisition decisions.

These are the basics.
Here are examples of questions that come up in these situations:

• When is the right time to set up a board of directors for an early stage company? I have written a lot about this, and a fantastic resource to check out is OpenView’s Building a High-Impact Board of Directors eBook. The quick answer is you should not wait long.
• I’m the founding CEO and I have a board. But I own a large percentage of the company and it’s still my company. When the going gets tough, do I have to abide by what my board tells me? Absolutely. Once you set up a real and legitimate board of directors, you don’t own the company any more. You, as CEO, are accountable to the board. You also have the same fiduciary duty to represent the interests of all shareholders, including those of your investor(s). If you are not ready to give up control, then don’t form a board and don’t raise money from an institutional investor.
• How do I avoid having a duty of loyalty conflict with my investor board member? First, make sure that you are setting the right expectations for the company to the investor when you decide to raise money. Conflict with your investor typically arises when the company does not perform to expectations. Second, make sure you never run the risk of running out of money. Third, make sure you are not reliant on one investment firm. Diversify your investor base. One investor is too few. More than three is too many.
• I don’t think my investor has the company’s best interest at heart. What do I do? First, make sure that you have a complete and cohesive board. Make sure that you have independent board members who are qualified. Independent board members can provide more balance to a board, which can alleviate the gravitational force of the investor board member. Second, make sure to give the investor board member that feedback. Be clear why specifically you feel this way, and be specific in your expectations. Before you confront the investor, make sure that the rest of the board shares your concerns. It may be that you are the one guilty of not representing all the interests of all the shareholders.