Building a Great Board of Directors

Article by MK Marsden and Herb Rubenstein

Introduction

Every day in mainstream media, CEOs are hearing about key issues that they have to consider:

• Information explosion, Big Data

• Legislation like Europe’s GDPR, privacy

• Data breaches, the liability

• Cyber security breaches, ransomware

• Sexual harassment and discrimination

• Blockchain, Bitcoin, Cryptocurrency, AI, Machine Learning

• Diversity

Start-ups and Private Companies have an opportunity design their board of directors and/or advisors to address the complex needs of governance today. Gone are the days of “Male-Pale-Stale” buddies on the board. If companies plan to stay alive and compete, today’s business climate requires that they have diversity in skills, age, experience and operational expertise on their boards.

Few CEO’s that we have worked with see their Board of Directors as an asset to help them assess and reduce risk, manage activist investors, stay current on critical innovations and ensure board best practices.

The Challenge

When companies take outside funding, even seed funding, they can quickly experience their board being populated with people representing the investors. In my last CEO tenure I recruited an effective Independent Board Director to provide active oversight of the company's business and to minimize corporate risk while promoting the creation of shareholder value. Like all other board members, the Independent Board Director job serves as a fiduciary. An effective Independent Board Director can help the CEO and leadership team by challenging the company’s operations, business model and strategies. A strong Independent Board Director with good operational expertise can help identify business and technology risks, will contribute to leadership development and can help the company attain a sustainable competitive advantage that is beneficial to everyone.

In a rush to get to market, most start-ups focus on product, leadership team, cash flow burn rates, etc. and fail to invest sufficiently in the board design. As a first-time CEO, this may be something you think you can come back to and manage later. Not having a properly functioning board can prove quite challenging as the CEO have to manage thru each stage of growth of the business and subsequent rounds of funding.

As founders and Independent Board Members in companies and non-profits, here are our suggestions to avoid pitfalls.

1) Have a clear mandate. Take the time to put a board design document together. Set the tone at the top, describe your business strategy, the risks to the business, the skills you need on the board and the expectations. Describe your company culture and how you expect the board to engage with you, the leadership team and your employees. Establish flexible board terms that can help you manage change as you grow the business and require different board expertise.

2) Build a diverse and international board. Diversity is complex and goes beyond race and gender. Companies today need cross-industry expertise, they need millennials, digital natives and leaders with deep operational expertise. I recently completed a board training delivered by the Institute of Corporate Directors at the Rotman business school at the University of Toronto. This industry leading Executive Management training programs taught me how to bring my operational and digital expertise to my boards. The course provided me with a deep understanding of governance, best practices to identify business and accounting risk, how to avoid groupthink, strategies and the legal requirements to manage activist investors and much more. Many of these items might seem secondary to a start-up or early stage company. However building a great board early helps CEOs leverage talent and expertise that they don’t have on the leadership team, avoid wasting a lot of time with board meeting distraction and get valuable guidance on the business strategy. Your board is here to guide and govern not operate the business that is the CEO’s job with the leadership team.

3) Obtain all necessary and diverse skill sets to provide effective oversight. Many early-stage companies will start by building a board of advisors. Regardless of whether you are building a board or a board of advisors it is important to make sure your overall boards has a wide range of strategic thinking and current operational skills. They must also be skilled in collaboration and have the available time. All companies require traditional board expertise in the areas of legal, accounting and HR. Today’s boards should also have someone with IT, Big Data, and cybersecurity expertise. Another important skill to consider is company culture. The CEO and leadership team should outline the skills required to both complement and augment their leadership team and then recruit board members with the requisite skills. The needs of the business should drive the board selection. Clarity is important in building out a well-balanced board that can support your business thru growth.

4) Go beyond your immediate community. Like attracts like. There are more resources now then ever to help companies identify and recruit skilled board members. Large companies will often rely on recruiters however companies of all sizes have ready access to resources they can leverage:

- The Institute of Corporate Directors, www.icd.ca/Home.aspx, with a database of over 4000 trained and designated Directors world wide.

- The National Association of Corporate Directors, www.nacdonline.org with over 17,000 directors representing more than half the Fortune 1000.

- Women in the Boardroom http://womenintheboardroom.com/ , senior executive women with extensive professional skills supporting boards.

There is no reason to recruit simply from your own connections or community. Today’s business needs depth and breath of skills at the board level to help the company succeed.

Conclusion

As the CEO you will deeply invest to ensure that your company succeeds. Building a highly effective board is a strategic advantage to your business and a benefit to your shareholders. There are many times thru the evolution of your company where an adversarial relationship can develops between insiders in the company and outside financial people. Look at Uber the removal of the founder/CEO and the ongoing fighting between board members, investors and the leadership team.

As you launch your business, invest the time in board design and seek out Independent Directors. Down the road when you are succeeding the Independent Director is the person who can help bridge the gap between the investor interest and the leadership interest. From day one through the growth of your enterprise they afford a different points of view and help navigate a resolution that works in the best interest of the corporation and all the shareholders. All companies and investors are best served in the short and long term by an effective board. Early stage companies have the opportunity to “Start-up” right.