The Role of the Independent Board Member In Start-Up and Emerging Companies

Article by MK Marsden and Herb Rubenstein

Introduction

This is the first article in a two-part series that explores the role of an Independent Director in startup and emerging companies. Part two explores how small and emerging companies can find the right Independent Board member and how to onboard them effectively for success.

The Current Environment

Most start up and emerging companies if they have an active board of directors at all usually only has investors and persons who work in the company in leadership positions on their board of directors. Board meetings may be held only annually or twice a year and generally include a report by management to the board of directors of what has transpired since the last board meeting and what they hope to accomplish in the coming months or year. At this meeting, board members are rarely fully prepared or have studied the company and its financials, organizational design, or business strategies in any real depth. Also, at these meetings board members, to their credit, give what advice they can and offer what assistance they can to the company to help make it successful.

Today’s business climate is riddled with constant change that adds to the complexity CEOs face in growing their business. It is easy for the CEO and leadership team to become consumed in the running of the day to day of the business. For this reason, CEO’s and their leadership team often do not devote the time and effort necessary to build their board of directors. Start-ups and emerging private companies can be strategic and design their board of directors by having not only their major investors on the board of directors, but also recruiting an independent director or two. This article explains why adding an independent board member can make a huge difference in the success of a start-up or emerging company.

The Potential Benefits of An Independent Board Member.

There is universal agreement that in larger, publicly traded companies, an independent board member is essential, and even required by law in the US and most countries. The mere fact that the board member does not have an investment in the company, is not related to the CEO nor has business dealings with the CEO, other executives in the company, or other board members adds three key dimensions to creating the most effective board possible.

First, the independent board member often is more willing to identify key risks the company may face and may be bolder in telling the management of the company that he or she believes the company is doing something wrong or could do it much better. Second, independent board members often come from different industries and business, as well as ethnic and gender backgrounds, as managers or investors in start-up or emerging companies. Not only, therefore, do they add diversity in skills, age, experience, geographical background, and operational expertise, they also can provide leads to the company to market segments, supply chain providers, and potential strategic alliance partners the management and other board members do not have access to.

Further, an independent board member can provide the oversight and guidance needed to succeed in today’s business complexity, by serving on the audit committee or even the nominations committee to recruit other excellent, independent board members.

Research shows that independent directors improve the performance of a company through their objective view of the company's health, operations, and possibilities. In the US, independent directors are found on 66% of all boards and 72% of S&P 500 company boards, according to The Wall Street Journal.

This article accepts the definition of an independent director as: “A director (member) of a board of directors who does not have a material or pecuniary relationship with company or related persons, except sitting fees. Independent Directors do not own shares in the company.” (Wikipedia)

Independent directors have all the same fiduciary responsibilities as the other board members, and they often serve as a good sounding board for the CEO and senior management. In those situations where the management and its investors may not see eye to eye on a certain strategy or use of an accounting procedure, often independent director can bridge that gap and help find effective resolutions that serve all stakeholders.

Additional Value Provided by the Independent Director

As start-ups and emerging companies design their boards it is valuable to consider at the skills, experience, and competencies that might be missing on their company’s management team and its investor group serving on the board of directors. Selecting independent board members who can fill these competency gaps and augment the leadership team and board capabilities is a wise investment that can pay dividends by both accelerating growth and by reducing risk. Many independent directors have first-hand operational expertise that can help guide the CEO with short term and long-term business strategies, a s well as support the CEO in dealing with difficult issues like succession planning and funding strategies through their tenure as his or her role changes.

Independent directors bring value thru sector or subject matter expertise, their fresh viewpoints, and possibly their expertise in cyber-security, data analysis, artificial intelligence, community building, cutting edge human resource strategies, branding, regulatory knowledge, pricing, international markets, social media and marketing, as well as reaching out to different age segments to become clients.

In addition, having an effective independent board member or two can prove to be a key strategic advantage for a start-up or emerging company. Independent board members can often help in securing equity or debt funding on favorable terms, assist in recruiting key leadership talent, provide connections with key partners, and create significant new client and customer opportunities.

Conclusion

The key benefit of the independent director is their knowledge, diverse perspectives coupled with their ability to augment the CEO and leadership teams knowledge and expertise. Generally, their cost to the company is not huge for start-up or emerging companies. Their role is as an advisor and not to take on operational responsibilities. They are there to help the CEO and senior management run the company more successfully. They are a powerful resource to help CEO’s and senior management understand and react to today’s complex climate so they can unleash the shareholder value they know they have in the business.

Finally, independent directors understand that an important role for them to play with other board members who are investors is for them to be team players, facilitators, and improve the overall capabilities of the board of directors. Independent board members work hard to develop excellent personal relations with all board members and senior management of the start-up or emerging company, but they also bring to the table in an independent manner their true expertise and their best advice for the benefit of the company, its investors, and its customers.