Over the course of my carreer, I have had the opportunity to sit on boards as an outside director, and to be the Chairman & CEO of startup companies where I directed the board. I’ve been on both public and private boards, and those where the company was transitioning from public to private.
I got to thinking about boards because I am frequently asked by entrepreneurs how and when they should create them. As such, I’d like to share a few thoughts on the subject.
First and foremost, I think all companies should have boards. I ran my first company without the help of a board; at the time I viewed them as a distraction. I felt the same way about including venture guys in my company as well.
Now that I have been around the track a few times, I would not think of investing in or running a company without one. The trick is to create the right Board. Let’s get down to basics to get you started. If you already have a board, and its not working as it should, I would take a look at these same principals and make changes accordingly.
Size — I believe the optimal size of a board is five. Yes, it can be bigger or even an little smaller, but I would keep the number odd and I would only allow one executive member on the board. When a board gets larger than 5 or so, it starts to create pockets of indecision and spreads the focus too thin. I am a proponent of keeping it very tight, directed, and on point.
Makeup — As I mentioned above, I believe that only one executive member of the company – preferably the CEO – should serve on the board. Additionally, I would keep the “professional investor” types to no more than two and get the others from outside the company. These independent directors come without a financial bias and should be mined specifically for areas where you know you need additional expertise. Be prepared for push back here, but I would do my best to logically explain my position. As a worse case, you can always grant board attendance rights.
Diversity — I feel strongly that it makes sense to build diversity into your board at her creation. This is a good time to think of your audience. I would always try to have diversity of both gender and race if possible. No matter how hard we try to understand issues from another perspective, defeating our own biases is very difficult. Embrace the opportunities that come from a different viewpoint. Make sure you understand and can hear clearly the voice of your customer.
Roles — Roles are an area of board creation that are often overlooked. In addition to the CEO, I would seek a financial audit type professional, a marketing / user interface type, a legal / HR expert, and lastly a category expert in the particular space in which you are playing. The goal here is to not get too heavy with financial types, and too light on those that can actually help you run and succeed in the business.
Control — In public companies the shareholders vote and approve the Board of Directors. In reality, the CEO typically submits a list of his buddies, trying hard to mask them into the necessary roles needed or demanded by the regulatory bodies. I believe this to be a huge mistake and a painfully ignorant failure to assemble a team that can add tremendous value to the company. One need only look to the last few years of our economy to see what this form of trickery can lead to. Building the right board foundation from the start is your responsibility.
In a private company, board seats are usually attached to money invested. As such, most boards end up with a cast of financial guys, most of which have never run a single department, much less a company. As the CEO, I would urge you to seek the type of board I have described above. Look for people who have been there and done that.
A board’s purpose is to protect the shareholders by both adding value to the company, thus increasing the value of their holdings, and to make sure the company maintains its integrity in the process of doing it. These activities should not be viewed as mutually exclusive. If they do, you have big problems coming your way, and I would make immediate changes. A good board can see a few moves down the road, and provide tremendous insight with regard to future challenges and hurdles.
Vinod Khosla once told me that a board’s primary role is to hire and fire the CEO. At first pass this seems somewhat cold, but in reality, it is true. It is ultimately the CEO’s job to run the company, and it is the boards responsibility to make sure she is doing a good job of it. When a board starts executing in an executive capacity within a company, failure is only a wink away. When employees start to understand that the CEO is no longer directing the company, the chain of command is forever corrupted. Your people lose direction and a focus. Decisions have no where to route and the company is entering what I call a “death spiral”. Thus, a good board understands that they can and should direct through the CEO, but if that is not working, it is time to make a change.
Now, you “can” help your chances as a CEO if you build a smart and powerful board by engaging them throughout the process, learning from their experiences and thus greatly enhancing your own skillset.
In a future article I’m going to discuss the ins and outs of working with a board. I have learned many lessons on this topic, and hopefully you can learn from a few of my positive as well as negative experiences.
As always, I would love to hear your opinion as to what you think makes up a great board. Comments welcome.
