You’ve worked hard, sacrificed and succeeded in reaching your initial vision. As you consider what’s around the corner for your company, the picture that is starting to make the most sense is the idea of expansion, requiring more capital and the need to broaden ownership. If you formed a board sooner rather than later you could capitalize on directors supporting you in efforts to raise capital and in supplementing your thinking as you grow beyond what you have personally experienced.
You have colleagues who have talked about their experiences with their boards, and you do not want to get into the same ditches they describe. One of your friends talks on and on when you have lunch together about how life was simpler before he had a board demanding answers. Every time he finds a new market or product area to enter, he says the board wants to hold him back
What do you need to consider in forming your board in a way that gets the benefits you need from it without the nightmares? Keep three points in mind: 1) Be intentional in shaping the role of the board, 2) select your first directors for their competencies, and 3) consider the processes and norms you need to establish about how your board operates.
Be Intentional in Shaping the Role of the Board
What is your picture of the role of a board? How did your picture take shape? Maybe you serve as a director on the board of another public company, serve on not-for-profit boards or have been a party to conversations about the board in another company. Each of those experiences can implicitly shape your view of a board. Without awareness of how you perceive a board and its role, you can inadvertently recreate your prior experiences with boards in much the same way that many leaders recreate a leadership style based on how they were led by others. Avoid recreating a negative relationship with a board based on your baggage.
Do you see a board as a necessary evil? It may be that from your own nature or personality, you have issues with authority or a high need for control. In that case, you may well want to control the board, and think it is best to keep directors in the position of pawns. We have worked with boards whose biggest challenge was the owner’s view that the board was an anchor around her neck, and she had instilled that perception in each member of the management team. She really wanted only a “rubber stamp” board, not one that added to the quality of her decision making. An entire generation of managers grew up in that company believing that a board of directors is a millstone around management’s neck.
In fulfilling their fiduciary responsibilities, directors have a legitimate role to play in the following areas:
- Examining the future markets, technologies and talents needed in the industry and helping you shape your strategy;
- Monitoring organizational results compared to plans, and assuring that financial results are reported with integrity;
- Managing risk;
- Evaluating executive performance and ensuring that a sound succession process is in place and that your “back-up” is ready in case you get hit by the bus tonight (you don’t really think you are still going to running the company when you are 80 do you?);
- Setting the policy about how to operate as a board or governing body of the organization and developing itself as a board; and
- Providing advocacy for the organization as appropriate to the stage of the organization’s maturity.
These responsibilities are not defined in order to “get in the way of management.” They are what shareholders expect of directors by way of exercising their duty of loyalty and duty of care.
Select Directors Based on the Competencies Needed for the Strategy
It all makes perfect sense at the time. You have been doing business in a community for several years, so you select directors who have been highly regarded in the community, family members who have put money into the business since you can trust them, providers of services to your business (because they will understand your business) and friends who have succeeded in running their own businesses. You also believe that these folks are local, so they understand market conditions and have more of a stake in local businesses succeeding.
A few years after forming a board in this fashion, it is common for the CEO to complain that the business has outgrown the board; and with every proposed initiative, he has to “hit the ball and drag the board”. Board members have become comfortable with the organization’s success and are afraid to take the risks often associated with changes in an industry and a rapid change curve. Besides, why take action when “it ain’t broke”?
Another consequence to basing board member selection on relationships is that the organization ends up with directors who are not actually independent…one of the most important criteria for directors to possess in the current business climate. A director who is providing services to the organization for a fee is not independent, nor is a family member. Or, there is a need to evolve the board’s membership, and it has become too personal and directors believe they should have a seat on the board until they retire. Both of these situations are painful to remedy once they are in motion.
The board should be comprised of directors who possess the competencies needed to govern the organization given its vision and strategy. Some of those competencies are needed by all the directors at the table (for example, the ability to speak up and say what needs to be said or to diplomatically challenge each others’ thinking) and some competencies are needed at the table by one or two directors(for example, international business experience or experience with mergers and acquisitions). Asking a person to become a board member should be construed as recruiting a professional, not offering a personal gesture of friendship.
Processes and Norms for Board Operations
The norms about how boards operate develop quickly and the roots grow deeply. For instance, if we expect meetings to consist of simply going over reports generated by management, we can develop a habit of always looking at the past and not discussing the future or strategy of the organization. Boards need to be deliberate in deciding their practices about how they operate. Several areas deserve thoughtful consideration:
- Meetings – How often the board meets, how the agenda is constructed, how much time is allocated to reviewing the past versus discussing the future are all significant decisions affecting the success of the board’s work.
- Information – How much information do directors need, whether it is strategic or tactical in nature, who provides it (management or outside sources), by when and in what form affect the quality of decision making and the confidence directors feel in making high stakes decisions.
- Decision-making climate – What is the tone of decision making…is it formal with little discussion or lively debate?
- Tenure – What is the expectation about service? Do directors expect to be re-elected automatically at the end of a three-year term and to remain on the board until retirement? Or do they know the membership evolves to some extent in support of strategy?
- Performance accountability – Is there an established process for dealing with performance issues? Are they swept under the table and never confronted? Or is there a director review process that enables the board to hold people accountable for performance?
- Board development – What processes does the board use to evaluate itself, to set goals and measure their attainment and to seek further education? Is there any board development?
Entrepreneurs who know they will need a board may not have any experience with the critical success factors needed for a successful governing body, but given the consequences; it is well worth the time to do some homework before selecting the first board. It is so much easier to do it right the first time than to live with an ineffective board or to go through the trauma of having to repair a dysfunctional board.