Events and
publications
June 23, 2010
Business model innovation
8.00 – 9.00 am
University of San Diego
July 23, 2010
Free
webinar: Agile Strategy for New Ventures
An introduction to applying the principles of agile strategy to maximize new
venture success.
| Join our innovation community |
 |
Developing an effective board
for venture success
A venture’s board of directors plays a significant role in its success. An effective board both contributes substantial value to the venture and directs it wisely to maximize growth and value for its stakeholders. By contrast, an ineffective board can become a major drain on vital senior executive time, and can destroy substantial amounts of stakeholder value. This article introduces a framework for improving board effectiveness to drive venture success.
Many venture boards suffer from one or more problems that lead to sub-optimal results. Boards dominated by one or two personalities do not act with the considered wisdom of all members. Boards made up of unqualified members are unable to act effectively. Board members who act only in the interests of some stakeholders bias the board in ways that may not be in the best interests of the company. Some boards are too involved in day-to-day detail, whereas others are too detached from the business. Many boards lack focus and structure, and are managed too loosely.
In our experience, building an effective venture board requires excellence in three areas:
- Board design – defining the right board structure, roles and responsibilities.
- Board members – selecting right mix of qualified members, and reviewing fit and performance periodically.
- Board management – managing the board with the right blend of formal meetings, informal oversight and information sharing.
Board design
Before inviting candidates to join your board and preparing for your first board meeting, it is important to give careful thought to the structure, roles and responsibilities of your board.
Board structure and roles
The structure of your board will largely be determined by your venture’s phase of growth. During the start up phase, the board structure will most likely be small and relatively informal, comprising founders and investors. As your venture grows, non-executive appointments will be made to bolster functional and industry skills and add representatives from new investors. Over subsequent stages, the board structure will be further formalized and aligned with the venture’s financial, organizational and ownership structure.
One initial structural decision is the size of the board. As a general guide, a board must be large enough to accommodate the necessary skill sets to fulfill the board’s mission, while at the same time small enough to promote cohesion, flexibility, and effective participation. In practice, venture boards are typically three to five members in the early stages, growing to eight to ten members over time.
You will need to determine the core policies governing board members, such as how board members are elected, re-election frequency, term limits (if any), as well as the number of boards a director may sit on simultaneously. These and other policies normally form an important part of your company’s governing bylaws.
Another key decision is to define the board’s leadership role, the chairman. We believe that the responsibilities of the chairman of the board and the chief executive officer differ significantly, and that ventures are best served by having a non-executive chairman who is not the CEO. Such a structure ensures the chairman can focus on his or her role as leader of the board, eliminates conflicts of interest, ensures the board can fulfill its central role of oversight of management, and provides the CEO with a “thought partner” in running the business.
Some argue that a joint chairman / CEO is more effective at creating a bridge between the board and management and can ensure that both are acting with a common purpose. However in our experience, this structure is normally a result of a powerful founder or leader asserting his or her control, rather than a truly optimal structure for the board. Ventures in this position should at least ensure that a non-executive independent undertakes a senior leader role in working with the chairman / CEO to manage the board.
Regardless of which leadership model is selected, it is imperative to delineate clear roles in order to avoid an undue concentration of power. To achieve impartiality, the board leadership must be independent in thought and action, look to strengthen oversight, and provide checks and balances and improve information flow between the board and management.
The chairman’s role is that of board leader and steward of the company. He / she presides at meetings and reviews and manages the composition and performance of the board. Overall, the chairman is responsible for the board’s performance much like a CEO is responsible for the management team’s performance. In addition, the chairman ensures that the external accountabilities are addressed and often plays the role of external figurehead.
In addition, individual members usually take on specific roles. Public companies normally require directors to participate in specific committees on issues such as auditing, compensation, and nomination / corporate governance. Smaller companies, however, may allocate these roles on an ad-hoc basis depending on director preference and/or availability.
Board responsibilities
Many boards lack clarity as to their responsibilities, and as a result end up either neglecting certain responsibilities or taking on responsibilities that are really the function of management.
The central responsibility of the board is to oversee and direct management in order to secure the best long-term interests of the company and its stakeholders. We believe this translates into the following five specific responsibilities for venture boards:
- Review and approve strategy and plans: the board’s first primary responsibility is to approve the venture’s strategy and business plan. Management is responsible for developing the company’s strategy and business plan; the board’s responsibility is to review, provide input, request clarification, and ultimately approve the strategy and business plan.
- Appoint and review the CEO and key executives: the next key responsibility is to appoint the company’s CEO, and to approve the CEO’s appointment of key executives. This includes setting the CEO’s and key executives’ compensation plans. The board must periodically evaluate the performance of the CEO and key executives, as a basis for both compensation awards and to approve continuation in those roles. The board must also develop a management succession plan to ensure long-term company leadership.
- Approve major decisions and commitments: the board must review and approve all major decisions and commitments that can materially impact the future of the company. These might include major investments, changes in the venture’s fundamental business model, and strategic combinations such as alliances or acquisitions, Once again, it is management’s role to develop the recommended action, and the board’s to review, question, clarify and ultimately approve.
- Monitor company performance against plan: a fourth key responsibility is for the board to continually track and monitor the company’s performance versus its plans. In doing so, the board will need to rely on the information and reports generated by management. As such, boards should ensure that sufficient precautions are taken and processes are in place to ensure that the information it reviews is timely, complete and accurate in all material respects. The board must identify issues that need to be addressed, and move quickly to direct management to take appropriate action to both exploit opportunities and guard against threats. Ultimately, if management cannot or will not address issues according to the board’s directives, the board will need to appoint alternative executives to do so.
- Ensure ethical, legal, and regulatory compliance: the board has a significant responsibility regarding ethical, legal, and regulatory issues in order to protect the interests of stakeholders and manage ongoing risk. Company boards must ensure compliance with all applicable legal and regulatory requirements by putting the right processes, checks and balances in place.
In addition to these five major responsibilities, individual boards may take on other responsibilities. A common example with venture boards is for board members to provide help to the venture by introducing management to their personal networks. Such responsibilities must be secondary, however. Many boards suffer from the problems described at the beginning of this article precisely because they have appointed board members for their connections rather than their abilities as directors! Boards should take particular care not to expand their responsibilities to encroach on management. We believe that for most ventures, the above five responsibilities should define the role of the board.