Board of Directors: How to Develop a High-functioning Board

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Getting to high growth and predictable revenues is challenging. Founders will encounter many obstacles on their way. A high-functioning board of directors can help founders overcome these obstacles like a low-functioning board can worsen the situation. 

 

Many founders have difficulties setting-up a high-functioning board of directors that guides them through difficult times and helps them make major decisions. Rather, they end up spending valuable time managing a low-functioning board of directors. A frustrating situation for both founders and investors alike. 

 

In this article, I provide some guidelines as to how to develop a high-functioning board of directors. In the first part, I cover some fundamentals around the role of the board and board composition. If you are already familiar with these topics you may directly jump to the second part, in which I share my views on how to schedule, prepare and conduct board meetings, how to communicate effectively in- and outside Board meetings and the paramount importance of creating a trustful relationship among the board members.

 

The Role of the Board of directors & Board Composition

The Role of the Board of Directors

 

Management should always be responsible for the day-to-day business of a companyThe role of the board of directors is to help founders make material business and strategic decisions, e.g. about accelerating growth and significantly increasing cash burn, opening or shutting down businesses in certain segments or geographies, material changes to the product or tech road map, hiring and firing of key employees, allocating ESOP warrants. The exact responsibilities are usually described in the Shareholders' Agreement and the Articles of Association.

 

Founders must be familiar with the corporate governance aspects of their companies and control-related topics. A great book about economics and control that founders may refer to in this regard is “Venture Deals” by Brad Feld and Jason Mendelson.

 

Board Composition

 

A smaller company will usually have 3-5 board seats and a bigger company can have up to 9 board seats. There are diverging views as to whether a board of directors with more than 5 board seats can be a well-functioning board at all. While I agree that managing a board of directors with more than 5 board members can get difficult, I recommend analysing on a case-by-case basis which board members really create value for the company and help the company achieve the next milestone. Founders are well-advised to keep committed and value creating board members as board directors or board observers.

 

Board Directors

 

Board directors are usually nominated by the founders and the venture capital investors backing and owning a significant stake in the company. Board directors have voting rights. As founders spend a significant amount of time with their board directors in- and outside board meetings and since leading a hyper growth business can be a roller-coaster ride founders need to have people around that they feel at ease with. Both professional and personal fit is therefore important when it comes to choosing investors that nominate board directors.

 

Board Observers

 

A board observer is someone entitled to participate in board meetings without having a right to vote and sometimes even without a right to speak at all. In the latter case, the role is indeed essentially reduced to a mere right to be present. However, even if board observers formally have to be silent, they are sometimes included in discussions given that they may have detailed knowledge on specific topics

 

Venture Capital investors often ask for a board observer seat – in addition to a board director seat – so they can train their analysts and associates that very often also do preparatory work for them. While it seems that board observers are not always welcome, granting board observer seats to VCs that back a company or business angels that have backed the company for a long time and still add value can make a lot of sense from a value creation perspective. 

 

Voting

 

There is a misconception concerning voting. What is being discussed controversially in the board is very rarely decided by voting. Normally, voting takes place after the board has formed its view and only if the shareholders’ agreement or the articles of association require a formal decision. The board is not about voting, it is about sharing knowledge, experience and opinions and eventually about value creation. If topics are being discussed controversially, this is actually a good sign. It shows that the board members are committed and actively engage and that the founders tap into the collective knowledge of the board of directors and not only into the knowledge of the individual board members. Founders should thus appreciate diverging standpoints and establish an environment that encourages fruitful open discussions

 

But certainly, the board can have a material impact on a company’s strategy and operational performance. Founders therefore often try to keep the majority of the voting rights in the board as long as possible.

 

Independent Board Members

 

Independent board members are very often added to the board as board directors if investors and founders cannot agree on who should have the majority in the board of directors, the founders or the investors. In such case, the independent board member is supposed to add the required independence in decision-making. 

 

But adding an independent board member can make sense anyway if the respective person can bring something special to the table, e.g. industry knowledge, network or commitment to mentor the founders. Irrespective of why independent board members are supposed to be added to the board of directors, founders should always look for experienced persons that can add value and are committed to closely working with the company and the founders. Again, the role of the board of directors and the role of each board member is to create value for the company.

 

How to Create a high-functioning board of Directors

Creating Trust

 

High-functioning boards are usually determined by a relationship based on mutual trust. In an environment determined by trust, founders do not hesitate to ask for advice because they do not fear that asking for help is considered a sign of weakness. Board members feel comfortable dividing responsibilities and working constructively together irrespective of diverging views. They can articulate openly what is good, what is bad and what needs to be changed or improved. Be it how meetings are prepared, how meetings are conducted or how communication takes place in- and outside meetings. 

 

Therefore, if founders want to create a high-functioning board of directors, they need to create trust in the board! This requires they create meaningful relationships before, during and after board meetings, communicate openly and transparently, walk the talk and execute on promises made, consciously communicate in order to avoid misunderstandings, value and accept the fellow board members with all their particularities, be honest and offer assistance themselves. Self-optimization is a key trust killer. All of this is certainly true for both founders and investors.

 

Preparing Board Meetings

 

Board meeting preparation starts with scheduling the meetings. Typically, board meetings are scheduled on a bi-monthly basis, but this certainly depends on the stage of the company and the situation the company is in. Important is that the meetings are scheduled at the end of a calendar year for the complete next year and that the board sticks to the schedule agreed upon as far as possible. When scheduling the meetings, founders need to align scheduling with the internal company reporting so that they can provide the board with actual numbers. Remember: Investors want to help, and, for this, they need to understand how the company is currently trading. Therefore, founders need to get the meetings on the calendar a year in advance taking into account when the finance department usually communicates current trading

 

Establishing the Board Meeting Agenda

 

Now this is crucial: Board meetings are not reporting or status update meetings!!! For an investor, nothing is more frustrating than sitting in a room listening for hours how management goes through slides reporting on how the business is trading. Reporting should be done on a monthly basis and before the board meetings so that the board members know the latest numbers and are always up to date in this regard. In board meetings, only the first 30-45 minutes should be spent on reporting and only on the really relevant aspects. Therefore, a good agenda could look as follows:

  • The good, the bad and the ugly (15 Minutes)
  • Update on key developments, metrics and trends (30 Minutes)
  • Major topic 1 (60 Minutes)
  • Major topic 2 (60 Minutes)
  • Major topic 3 (60 Minutes)
  • Formalities (15 Minutes)
  • Closing Exec session (board directors and board observers only) (15-30 Minutes)
  • Closing session (board without founders and CEO) (15 Minutes)

Distributing the Board Meeting Material

 

Board directors expect to receive the prep material at least 4-5 business days in advanceNo last-minute decks, no excuses, no whining!!! If something material occurs after the material has been sent out, updates are fine. 

 

The material should encompass the latest reporting (if not already circulated separately) and the presentation the management wants to go through during the board meeting, if any. There is no need to establish a 50 – 60 slides presentation. The opposite is true, the board members expect to receive material that focuses on the essentials and sets the scene for a lively and fruitful board discussion. Founders are well-advised to be short and precise and to focus on what really matters.

 

Conducting the Board Meeting

 

Some board of directors are low-functioning boards only because founders drive board meetings as reporting meetings rather than as meetings held in order to engage in value-creating discussions and tap into the collective intelligence of the board. Following the guidelines above regarding meeting preparation, agenda setting, and material distribution will help overcome this misconception and enable the board to focus on what really matters, i.e. how the business can be improved going forward. 

 

Therefore, founders should follow the agenda and create an atmosphere that allows them to source as much input as they can from their fellow board members. This links back to the requirement to build trust and proactively ask for sharing viewpoints and giving advice. It is important to keep in mind that this can also mean that the board criticises how the business is being driven by the founders and the broader management team. It is therefore paramount that criticism be taken as what it is, feedback, and that feedback given by trusted advisers is meant to help and improve the business. There is no sense in becoming defensive. Founders should rather accept and embrace the feedback and consider any feedback valuable. If all board members share the same criticism it may very well be grounded. If not, i.e. if the board members have different opinions on the respective matter, founders should listen carefully to what each board member has to say, use the diverging feedback to make their own assessment and guide the board of directors towards a constructive dialogue that does not always have to lead to a unanimous point of view. Remember: Conflicting thoughts are the reflection of a diverse group of people with different backgrounds, knowledge and experience that founders should appreciate having access to! 

 

And founders should give feedback too. Board members want to create value and any feedback they get on how they are doing in this regard enables them to improve too.

 

Taking Board Meeting Minutes

 

It should be needless to say that founders need to follow-up on what has been agreed in the board of directors. But unfortunately, this is not always the case and founders sometimes do not provide information requested by the board or do not implement what has been agreed in the board. Against this background, I recommend that minutes of board meetings are being taken and that such minutes do not only reflect the formal decisions taken but also the information to be provided to the board members after the meeting.

 

Communicating outside Meetings

 

Founders should also regularly update the board members between board meetings on how the business is generally doing and on any major developments. Founders need to find a natural rhythm for such updates. A good starting point are monthly reporting updates in which current trading and key performance indicators are shared. Together with such updates, founders may reflect in a short and precise e-mail on the overall situation, major achievements and challenges. If anything material has occurred or if founders need help or advise, founders must not wait until the next board meeting. Material information must be shared immediately. And founders can always reach out to board members and ask for help and advice, irrespective of any formal schedule. 

 

The board of directors is there to help the founders and all board members are responsible for creating value for the company. The board members in fact have a fiduciary duty to always act in the interest of the company, not in the personal interest (in case of founder board directors) and not in the interest of their shareholders (in case of VC board directors).

 

Key takeaways

 

  • Management should always remain responsible for the day-to-day business. The role of the board of directors is to help founders make material business and strategic decisions.
  • Leading a hyper growth business can be a roller-coaster ride. Founders need to have people around that they feel at ease with. Both professional and personal fit is therefore important when it comes to choosing investors that nominate board members.
  • The board of directors is not about voting, it is about sharing knowledge, experience and opinions and eventually about value creation.
  • Founders should appreciate diverging standpoints and establish an environment that encourages fruitful open discussions. 
  • If founders want to create a high-functioning board of directors, they need to create trust in the board!
  • Self-optimization is a severe trust killer!
  • Founders need to get the meetings on the calendar a year in advance taking into account when the finance department usually communicates current trading. 
  • For an investor, nothing is more frustrating than sitting in a room listening for hours how management goes through slides reporting on how the business is trading. Again, the board is about value creation, not reporting!
  • Board directors expect to receive the prep material at least 4-5 business days in advance. No last-minute decks, no excuses, no whining!!!
  • Board members expect to receive material that focuses on the essentials and sets the scene for a lively and fruitful board discussion. No 50-60 slides presentations.
  • Conflicting thoughts are the reflection of a diverse group of people with different backgrounds, knowledge and experience that founders should appreciate having access to!
  • Founders should give feedback too. Board members want to create value and any feedback they get on how they are doing enables them to improve too.
  • Founders need to implement and follow-up on what has been agreed in the board of directors.
  • Founders should also regularly update board members between board meetings on how the business is generally doing and on any major developments, good and bad.
  • Together with such updates, founders may reflect in a short and precise e-mail on the overall situation, major achievements and challenges.
  • The board of directors is there to help founders and all board members are responsible for creating value for the company!

 

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