Tag: Board of Directors
Seth and I have each attended over 27,367 board meetings. Ok, I don’t know the actual number, but it’s a lot. We’ve both been on good boards and bad boards. Boards that have helped companies and boards that have sunk companies. Boards that know how to resolve conflict and boards that have multiple passive-aggressive actors engaged in a complex dance that serves no one, especially the company.
So, I’m totally digging Seth’s new series. Not surprisingly, since Seth and I have been working together for over 17 years, there’s a lot that is the same as my board approach. But, I’m also learning something from each post which I plan to incorporate into my board world going forward.
The first four posts are up. In order:
- Designing the Ideal Board Meeting
- Designing the Ideal Board Meeting – Before the Meeting
- Designing the Ideal Board Meeting – Your Board Package
- Designing the Ideal Board Meeting – The Board Meeting
If you are a founder, CEO, investor, or outside director who is on a private company board, this is a must-read series. And, if you want to go deeper on how boards work, grab a copy of the book I wrote a few years with Mahendra Ramsinghani ago titled Startup Boards: Getting the Most Out of Your Board of Directors.
Over the past few days, I’ve had a similar conversation about reporting tempo with three different people (2 CFOs and 1 CEO). In each case, we snuck up on the issue, rather than starting with it.
The fundamental question addressed what the reporting tempo to the board should be.
A number of years ago, I decided to shift to quarterly board meetings. Historically, the number of board meetings I had per company was all over the place. Some had four per year, some six, some eight, and some had twelve. This was an artifact of the last 30 years of venture capital, where VCs often would use the board meeting as the way to primarily engage with the company.
I wrote about this in my book Startup Boards: Getting the Most Out of Your Board of Directors. I’ve shifted to a cadence I call “continuous board interaction” which is gated by the desire and need of the CEO as well as the needs of the company. As such, a quarterly board meeting is plenty since I’m having continuous interaction with the CEO and board. This approach was originally stimulated by Steve Blank’s posts Why Board Meetings Suck and Reinventing the Board Meeting – Part 2 of 2 but modified to fit the more varied and flexible reality that I operate in.
This does not mean that quarterly financials work for me. When the financials are tied to the quarterly board meeting, it’s almost impossible to have continue board interaction. There’s just not enough financial context about what is going on in the business. On the other hand, with a few exceptions (hyper-growth cases or ones where you are focusing on specific metrics), daily financing reporting is not helpful either, as is it overly burdensome on the company. It also quickly turns into metric reporting, which is very distinct from financial report, and often extremely helpful, especially in a continuous board interaction approach. However, many board members can’t handle daily anything, especially if they are on ten boards, except for the companies that they need to spend daily attention on.
That’s the context for how we wandered up to the discussion in each meeting. After the second conversation, I thanked the person I was talking to (she knows who she is) for providing the content for today’s blog post. Of course, since the conversation came up again with someone else after that, it sealed the deal that this would be a blog post.
Here is how I like to do board level financial reporting for private companies I’m on the boards of. I don’t force this – if the CEO wants to do something different that’s up to her. But I encourage this, or something like this.
Quarterly board meetings: The financials are decoupled from the board meeting. There is a quarterly financial and metric review in the board meeting, but it’s not the meat of the meeting unless there is a specific set of financial issues that need to dominate, such as the 2017 budget, a big financial miss, or a significant change to the plan for some reason.
Monthly financial package: This is a full financial package distributed to the board and executive team. It includes P&L, Balance Sheet, and Cash Flow statements. It has actuals to budget for monthly, quarterly, and YTD. It also has trailing 12 months of each (P&L, BS, CF). In addition, there is a cover MD&A (hopefully written by the CFO – not a formal SEC one, but a comprehensive management discussion and analysis). I prefer this package to be distributed by the CFO and not the CEO – it then becomes part of the operating rhythm. I also like the Q&A that occurs (in email, or in a Google doc around the MD&A) to be driven by the CFO with support from the CEO.
Optional monthly financial state of the company board call: This is a call with the CEO, CFO, and the board. Ideally it is led by the CFO. It’s limited to one hour, is completely independent of the board meeting, and is optional. The CFO sends out a short (less than 10 page) presentation summarizing the key financials, key metrics, and any topics for discussion at least two days in advance of the call. While I rarely attend these, I find that the board members who don’t engage continuously can use this to keep current on the financials and in the rhythm of the company.
This rhythm works around the monthly financial close cycle. The CFO sets the schedule. An example would be (based on day of the month) that the financials are closed by day 15. The monthly financial package goes out on day 17 with the presentation for the optional monthly state of the board call. The call happens on day 20.
If you’ve got a different, or better, rhythm, I’d love to hear it.
Ari Newman is an entrepreneur, mentor, investor, and a friend. He works at Techstars where his responsibility is to ensure that the connections between alumni, mentors, and staff are as robust as they can be – helping entrepreneurs “do more faster” day in and day out. His most recent company, Filtrbox, participated in the inaugural Techstars class (Techstars Boulder 2007) and was a win for all parties involved; Filtrbox was acquired in 2010 by Jive Software (NASDAQ: JIVE).
I’ve worked closely with Ari for a while and love his candor. He talks, from an entrepreneur’s perspective, with recent first hand experience. Following is his advice to early stage entrepreneurs for creating structure in their company.
Here’s the punchline: if you run your company as if you have closed a VC equity financing round even though you actually closed a convertible debt round, you’ll be in much better shape when it comes time to raise your Series A financing. Specifically, I am talking about putting a board in place, running formal board meetings, and making sure you have people at the table who act as the voice of reason and sanity. One of the key benefits of doing this early on is that when it comes time to raise that next round, the people you’ll need the most help from are already involved and engaged.
Convertible debt financings have become an increasingly attractive approach for seed rounds because it delays the valuation discussion, costs less from a legal standpoint, and is an easier financial instrument to “keep raising more small amounts of money” on. There are two different cases, with shades of grey in between: (1) there are only a few investors or (2) it’s a “party” round, with $1M+ raised and many investors. This second kind of seed financing can be a double-edged sword for the entrepreneur and company if not very carefully managed. This post is not about the economic implications of debt rounds versus priced rounds – there has already been plenty written about that including this great one from Mark Suster. Rather, this post is a call to action for entrepreneurs who have successfully raised a debt round and must now turn their idea into a serious business.
So why would you treat your debt investors (somewhat) like equity investors? This may seem counterintuitive, even even a pain in the ass. So, I’ll explain my reasoning through the story of ASC, a fictitious company that has a combination of characteristics I’ve seen across a number of early stage companies.
Acme SaaS Corp (ASC) was started by two entrepreneurs; they have a big vision and if they can execute on it, the business will be a clear home-run. One of them used to be a lead developer at [insert hot consumer tech company here]. They need to raise money before building anything substantial after determining that they needed a little dough to follow the Lean Startup methodology.
They decide to go out and raise money on a convertible note – several angel investors have signaled interest in participating in the note and they don’t feel ready to pitch VCs yet. Fundraising goes better than expected and they quickly find themselves with a $750k round consisting of several VCs and a bunch of angels. The investors, founders, and “community” are all super excited about ASC. They close on the $750k, hire a buddy or two, buy some Macs, and get to work.
ASC starts building product, but as they get into the thick of it, the team realizes executing on their vision is going to be extremely hard. Things start to get a little fuzzy in terms of priorities, but not to fret, the new office is coming along really well with all of the hiring! For the first the months, the team meets often and strategizes on what they want to build while some code gets written. Early customer development talks are going great which keeps the team really excited. Three months in, the burn is now at $70k/month.
Two more months go by and the team is continuing to iterate, but every two-week sprint results in some re-factoring and re-thinking. No updates, screen comps, or metrics have been publicly shared yet. It’s too early for that shit. Heads down on product, they say. Every now and then, investors are told things are going great and the founders are really excited about what they are doing. Soundbites from potential customers are encouraging. Eventually early product demos start happening but they’re rough and the product looks very alpha. At month six, one of the early hires leaves, a developer who turns out wasn’t a good fit. There is $350k left in the bank.
Seven months in, there is a beta product. It’s better than before, but not by miles. The people on the sales side don’t feel they can charge for it yet because who’s going to take out their wallet for something that isn’t perfect. A bunch of potential customers are kicking the tires on the product but it seems that every engaged beta customer needs something slightly different or feels as if the product is not ready to be truly used in production. “This is all a part of the normal product and customer development process,” the CEO tells the team. The burn is now at $90k/month as they had to hire a “customer delight” person to handle the beta process. The team thinks their investors still love them and that they are still a hot company. The first material update goes out to the investors, with lots of positive quotes from VPs at potential customers, and they all indicate future product acceptance if a bunch of other stuff gets in place. Investors are dismayed that there are no real customers yet. There is no discussion of burn, runway, and more financing yet. The team wants to make a little more progress first.
A month later, another email update goes out to the investors – the team has decided to pivot based on feedback and they are super excited about the new direction and once they have the product updated to capture the new, bigger opportunity, it’s going be great. Oh, and the email says the founders will be in touch to discuss another round of funding since there are only 2 months of runway left.
Sound familiar? I could continue but the odds are that this story isn’t going to end well. The company flames out and the team gets aquihired. The investors get nothing.
While you may think ASC is an extreme case, it happens all the time. I’ve observed too many companies that have some or all of these elements in their story. I’m not saying, under any circumstance, that the debt round was the catalyst or sole reason for the company’s missteps but there are a number of times in this story where good company hygiene, good governance, and a properly utilized board would have helped to positively affect the outcome. Following are a few ways that a board would have helped out.
Easy Debt Round Lasting A Year – Even if the raise wasn’t that easy, the company was able to raise enough to buy a year or more of runway. In startup time, that feels like forever. It’s enough time to hang yourself if you are not careful. Had the company created a board and run it properly, they would have ratified a budget, reviewed compensation plans, and agreed on spending levels during early product development. The year would have been a full year, not just 7-9 months.
Real Product and Market Focus – This company lost 3-6 months of execution because they got lost building towards a high level vision. That high level vision was a beast to tackle, and being younger founders, they they didn’t realize they were in over their heads. With advisors or a board, the founders could have opened the kimono and asked for guidance. There are about a dozen corrective actions, best practices, or methodologies that could have been applied during this critical time. It’s up to the team to be able to execute them, but they had their heads in the clouds for too long and no one else at the table with them.
Don’t Pivot in a Vacuum – Had ASC properly used its board, advisors, and investors, it would have brought the pivot strategy to the table early on. A discussion around overall business viability, time to market, and capital impact would have ensued. A review of the cash position, burn rate, and execution plan would have revealed there was not enough cash on hand to nail the pivot while leaving 3-6 months of time in market before raising again. The plan would have to get way tighter, way faster. They didn’t keep the investors up-to-date, then pivoted without engaging or validating whether there was going to be follow-on support. They took a right turn into a brick wall. Investors do not own the company or its strategy. I often say “it’s your company” when I’m bluntly asked what direction a company should take, especially if I’m wearing my investor hat. While that is true, if you rely on outside capital to reach escape velocity, keep the cockpit talking to the engine room.
Use The Smart Money or Lose It – Almost every investor I know makes investments because they want the return, but they also believe they can be helpful to the company in some way. When teams don’t communicate and engage with their investors, the void is often filled with skepticism, doubt, and (often false) assumptions about the business or the team. You borrowed money (or sold a portion of your company) from these folks – they want you to be successful. Leverage them for the better of the company, whether that means using their wisdom or their rolodex. They also can create major signaling problems for your next round if you allow the radio-silence void to be filled with doubt and distrust. Who would blindly give ASC another big check after what occurred above?
Company Hygiene Matters – One of the responsibility of a Board of Directors is to regularly discuss financials, burn rate, and cash management. Had ASC created a board, the company would have potentially managed their cash more conservatively and had the wherewithal to initiate the shift of the company sooner, whether it be through M&A talks, raising more capital, or making the pivot earlier.
I bet that some of you reading this post are entrepreneurs who are in this situation. I beg of you, treat your debt holders like equity holders, and utilize their expertise to help further your business. One easy way to do so is to act as if they are board members. In the super hard, fuzzy, pivot-happy early days of a company, a little structure, accountability, and organizational discipline can be all the difference between running headlong into a brick wall or creating a meaningful, well-operated company.
Follow Ari on Twitter at @arinewman or ask him about the power of the Techstars network at email@example.com.
I’ve been on a lot of boards. I’m still on a lot of boards. And I’ve been thinking about boards a lot as I work on my next book Startup Boards: Recreating the Board of Directors to Be Relevant to Entrepreneurial Companies.
I used to think every board needed a chairman and early in my investing career I was often this chairman (or co-chairman). At some point I began feeling like the chairman role in a private company both undermined the CEO and sent the wrong signal to the employees of the company, and I preferred that the CEO be the chairman. I also started disliking being the chairman, as it seemed to create a view that I had some kind of ultimate power and responsibility for the company that I rarely had, and that almost always belonged to the CEO. So I stopped being chairman and in a number of cases refused to be called it, even when I played the role of it. The one exception I made was non-profits, where chairman seems to have a somewhat different connotation. And since I’ve decided not to be on public company boards, I don’t have to make a decision in that context.
Several years ago I started using, and encountering, the phrase “lead director” more frequently. Recently, I decided it’s the right one and have used it to replace chairman in my vocabulary. And, when asked the question, “does a private company board need a chairman”, I now say “no, but it needs a lead director.”
The lead director is responsible for working with the CEO to manage the board of directors. The lead director is always the most active director and in many cases represents the largest non-founder shareholder in the company when a company is private. The lead director is not the communication conduit to the CEO – every director interacts directly with the CEO – but the lead director gets involved in any conflict between a director and the CEO, any concerns that arise, and any conflicts between directors. And the lead director helps the CEO manage the board meetings.
The lead director should be the CEO’s board confidant, organizer, and conflict resolver. I sort of like the word consigliere, as used in The Godfather, a lot, although it has both obvious negative connotations and a different actual function in real life than the one represented in the film, so I’m searching for a better one.
When I look at the boards I’m currently on, I play this role in many, but not all of them. And the phrase feels correct to me.
Do you have a lead director on your board? How about a chairman? What do they do and how does it feel? And is there a better word than consigliere?
I joined my first board of a company other than mine in 1994 (NetGenesis). Since then, I’ve sat on hundreds of boards and been to a zillion board meetings. It crushes my soul a little to think of the number of board meetings I have sat through that were ineffective, poorly run, or just plain boring. I guess that’s part of the motivation I have in writing Startup Boards: Reinventing the Board of Directors to Be Useful to the Entrepreneur (the next book in the Startup Revolution series which should be out sometime this summer.)
In the mean time, over the past two years I’ve done a lot of experiments with the boards I’m on. I’ve tried a lot of different things – some that are awesome, some that don’t matter, some that suck, and some that have been epic fails. For any that aren’t awesome, I’ve tried to kill the experiment quickly so it didn’t hurt anything and when I reflect on everything I’ve tried I think I’ve managed to “do no harm”, which is more than I can say for a lot of the other VCs who I’ve sat on boards with since 1994.
By this summer, I expect I’ll have a very clear view on the best practices from my perspective for making a Startup Board effective. Until then, I’m still running experiments, or experiencing experiments that the entrepreneurs run. And I’m thinking out loud (including in posts like this) on what has worked and hasn’t worked.
One of the things I’ve played around with is the board package. The number of different formats, styles, information incorporated, and distribution methods over the years boggles my mind. I not-so-fondly remember toting around “binders full of board meeting material” in the 1990s. Or pre-Gmail having a “board meeting folder” in Outlook so I could quickly find the upcoming board meeting documents. Or fighting through 19 attachments to an email to figure out where the actual board material was. PowerPoints, PDFs, Word documents, text files, Excel spreadsheets, Prezi docs, videos, email outlines – the list goes on.
Recently, I had a magical moment. I’m a huge believer in distributing the board material a few days in advance, having all the board members comment on it in advance of the meeting, and then having the meeting without going through the board material page by page. No death by endless Powerpoint, no reading a document I’ve already read. My favorite board meetings are the “one slide board meeting” where the only piece of paper allowed in the room is the agenda of the meeting.
When entrepreneurs don’t get this, I suggest that they pretend their board members can read and cognitively process the information in advance. And, if they don’t believe their board members will do this, just start having the board meeting under this assumption and watch how they board members get their shit together and read the material in advance.
In this recent magical moment, rather than receiving anything via email, a Google Doc notification showed up in my inbox. I went to it and the entire board package was in a single Google doc file. The entire management team and the entire board was included on it. As I read through the Google doc, whenever I had a comment or a question, I highlighted the section in question, hit Command-Option-M, and left a comment. Then, as other people read through the package, they left comments. And then the management team responded to the comments.
Voila – an interactive board package. Zero special technology. It wasn’t planned, or assigned. It just naturally happened. When we showed up to the board meeting, everyone had the issues in their mind. We’d already cut out an hour of setup, and probably another hour of discussion. So we got right down to the higher level issues that the board material, and comments, and the responses generated.
In this case, the CEO created a very simple agenda immediately before the board meeting that captured the strategic issues we needed to address. There were a few tactical questions outstanding – they got knocked off quickly. We had a two hour board meeting – 90 minutes of it was intense and fruitful. No one referred to any paper – we looked each other in the eyes for 90 minutes and had a deep, engaged, substantive discussion.
I’ve been describing this as a part of a “continuous board engagement” – similar to “continuous deployment and continuous innovation” in Eric Ries’ The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. I get information daily from most of the companies I’m involved in. I’m in the flow of a lot of information – some “noise” but a huge amount of “signal.” Then – the week before the board meeting, the current state of things gets consolidated into a dynamic document that allows everyone involved to interact with each other around the content.
I’m going to play a lot with this in the next few months. Any suggested tweaks or changes to this approach? Any obvious pitfalls?
This week I had two meetings with CEOs of companies we’ve recently invested in where the question of “what is an ideal board meeting” came up. I’m writing an entire book on it called Startup Boards: Reinventing the Board of Directors to Better Support the Entrepreneur so it’s easy for me to define my ideal board meeting at this point since my head is pretty deep into it intellectually.
One of the things I always suggest to CEOs is that they be an outside director for one company that is not their own. I don’t care how big or small the company is, whether or not I have an involvement in the company, or if the CEO knows the entrepreneurs involved. I’m much more interested in the CEO having the experience of being a board member for someone else’s company.
Being CEO of a fast growing startup is a tough job. There are awesome days, dismal days, and lots of in-between days. I’ve never been in a startup that was a straight line of progress over time and I’ve never worked with a CEO who didn’t regularly learn new things, have stuff not work, and go through stretches of huge uncertainty and struggle.
Given that I am no longer a CEO (although I was once – for seven years) I don’t feel the pressure of being CEO. As a result I’ve spent a lot of the past 17 years being able to provide perspective for the CEOs I work with. Even when I’m deeply invested in the company, I can be emotionally and functionally detached from the pressure and dynamics of what the CEO is going through on a daily basis while still understanding the issues since I’ve had the experience.
Now, imagine you are a CEO of a fast growing startup. Wouldn’t it be awesome to be able to spend a small amount of your time in that same emotional and functional detachment for someone else’s company? Not only would it stretch some new muscles for you, it’d give you a much broader perspective on how “the job of a CEO” works. You might have new empathy for a CEO, which could include self-empathy (since you are also a CEO) – which is a tough concept for some, but is fundamentally about understanding yourself better, especially when you are under emotional distress of some sort. You’d have empathy for other board members and would either appreciate your own board members more, or learn tools and approaches to develop a more effective relationship with them, or decide you need different ones.
There are lots of other subtle benefits. You’ll extend your network. You’ll view a company from a different vantage point. You’ll be on the other side of the financing discussions (a board member, rather than the CEO). You’ll understand “fiduciary responsibility” more deeply. You’ll have a peer relationship with another CEO that you have a vested interest in that crosses over to a board – CEO relationship. You’ll get exposed to new management styles. You’ll experience different conflicts that you won’t have the same type of pressure from. The list goes on and on.
I usually recommend only one outside board. Not two, not three – just one. Any more than one is too many – as an active CEO you just won’t have time to be serious and deliberate about it. While you might feel like you have capacity for more, your company needs your attention first. There are exceptions, especially with serial entrepreneurs who have a unique relationship with an investor where it’s a deeper, collaborative relationship across multiple companies (I have a few of these), but generally one is plenty.
I don’t count non-profit boards in this mix. Do as much non-profit stuff as you want. The dynamics, incentives, motivations, and things you’ll learn and experience are totally different. That’s not what this is about.
If you are a CEO of a startup company and you aren’t on one other board as an outside director, think hard about doing it. And, if you are in my world and aren’t on an outside board, holler if you want my help getting you connected up with some folks.
tl;dr – Yes.
I’m on the firstname.lastname@example.org list for a number of the companies I’m on the board of. CEOs and entrepreneurs who practice TAGFEE welcome this. I haven’t universally asked for inclusion on this list mostly because I hadn’t really thought hard about it until recently. But I will now and going forward, although I’ll leave it up to the CEO as to whether or not to include me.
In an effort to better figure out the startup board dynamic, I’ve been thinking a lot about the concept of continual communication with board members. The companies I feel most involved in are ones in which I have continual communication and involvement with the company. This isn’t just limited to the CEO, but to all members of the management team and often many other people in the company. Working relationships as well as friendships develop through the interactions.
Instead of being a board member with his arms crossed who shows up at a board meeting every four to eight weeks to ask a bunch on knuckleheaded questions in reaction to what is being presented, I generally know a wide range of what is going on in the companies I’m on the board of. Sure – there are lots of pockets of information I don’t know, but because I’m in the flow of communication, I can easily engage in any topic going on in the company. In addition to being up to speed (or getting up to speed on any issue faster), I have much deeper functional context, as well as emotional context, about what is going on, who is impacted, and what the core issue is.
Every company I’m involved in has a unique culture. Aspects of the culture get played out every day on the email@example.com email list. Sometimes the list is filled with the mundane rhythms of a company (“I’m sick today – not coming in”; “Please don’t forget to put the dishes in the dishwasher.”) Other times it’s filled with celebration (“GONG: Just Closed A Deal With Customer Name.”) Occasionally it’s filled with heartbreak (“Person X just was diagnosed with cancer.”) Yet other times it is a coordination mechanism (“Lunch is at 12:30 at Hapa Sushi.”) And, of course, it’s often filled with substance about a new customer, new product, issue on tech support, competitive threat, or whatever is currently on the CEO’s mind.
As a board member, being on this list makes me feel much more like part of the team. I strongly believe that board members of early stage companies should be active – and supportive – participants. My deep personal philosophy is that as long as I support the CEO, my job is to do whatever the CEO wants me to do to help the company succeed. Having more context, being part of the team, and being in the flow of the firstname.lastname@example.org communication helps immensely with that.
There are three resistance points I commonly hear to this:
1. “I don’t want to overwhelm my board members with emails.” That’s my problem, not yours, and the reason filters were created for people who can’t handle a steady volume of email. If you are a Gmail user, or have conversation view turned on in Outlook, it’s totally mangeable since all the messages thread up into a single conversation. So – don’t worry about me. If your board member says “too much info, please don’t include me”, ponder what he’s really saying and how to best engage him in continuous communication.
2.”I don’t want my board members to see all the things going on in the company.” That’s not very TAGFEE so the next time you say “I try to be transparent and open with my investors”, do a reality check on what you actually mean. Remember, the simplest way not to get tangled up in communication is just to be blunt, open, and honest all the time – that way you never have to figure out what you said. If you don’t believe your board members are mature enough to engage in this level of interaction on a continual basis, reconsider whether they should be on your board.
3. “I’m afraid it will stifle communication within the company.” If this is the case, reconsider your relationship between your board members and your company. Are you anthropomorphizing your board? Are you shifting blame, or responsibility to them (as in “the board made me do this?”) Are you creating, or do you have, a contentious relationship between your team and the board? All of these things are problems and lead to ineffective board / company / CEO interactions so use that as a signal that something is wrong in relationship.
Notice that I didn’t say “all investors” – I explicitly said board members. As in my post recently about board observers, I believe that board members have a very specific responsibility to the company that is unique and not shared by “board observers” or other investors. There are plenty of other communication mechanisms for these folks. But, for board members, add them to you email@example.com list today.
Over the past year, I’ve been systematically trying to change the way the board meetings work for the companies that I’m on the boards of. I’ve done a bunch of experiments and continue to learn what works and what doesn’t work.
Ever since I started investing in the mid-1990’s I’ve been exposed to a concept called “board observer rights.” When we did investments at Mobius Venture Capital, in addition to a board seat, we always got board observer rights. This was a way for us to bring another person to the board meeting other than the board member (usually an associate or a principal but sometimes another partner), or have someone sit in for the board member if the board member wasn’t available.
Early in the life of a company, this often seems manageable. But after several rounds of financings with new investors, I’ve often found myself in board meetings with ten or more people. I think the most I’ve ever seen was about 25 people in the room for a board that had five board members. As you’d expect, there was very little critical thinking or real discussion in these board meetings; instead, the management team just presented to the mass of people in the room. And, in this context, the board members rarely formed a tight and effective working relationship.
Over the last few years, I’ve become very anti-board observer. I’ve been on several boards where the CEO didn’t allow board observers in the meeting. I’ve been on several boards where there were observers in the room, but they weren’t allowed to sit at the board table and could only “observe”. In both cases, the quality and level of discussion in the board meeting was dramatically higher.
I’ve come to believe that formal board observer rights shouldn’t exist. Instead, they should be voluntary and controlled by the CEO. In some cases, the CEO will want observers at the meeting; in other cases he won’t. But it should be up to him.
The best board meetings I’ve been at have been ones that only have the board members and select participants from the management team in the room. Casual discussion, either through dinner the night before or lunch after the board meeting, with an extended group including people from the management team and any other investors, is an effective way to engage everyone else. But the 25 person board meeting is rarely effective.
Over the past two years I’ve been struggling mightily with the dynamics of “classical VC funded board of directors” and how these boards work. When I hear a VC say “I’m an active board member” it gives me the same nauseous feeling I get when someone says “I’m a value added investor.” I’ve been on some awesome boards, some terrible boards, and everything in between. Today, I refuse to be on a shitty or dysfunctional board and I’m proud that every board I’m on is one that I’d consider to be effective, although they all operate in different ways.
I’ve experimented with a bunch of different approaches across a lot of boards and have been thinking hard about this lately. I’m working on a book called Startup Boards with Mahendra Ramsinghani and have done some interviews about this topic lately, including a chaotic one the other day with James Geshwiler on the Frank Peters Show.
My long term friend Matt Blumberg (Return Path CEO) and I were going back and forth about his recently board meeting (which ironically I missed) and he wrote some kind words about me and his other board members (Fred Wilson – USV, Greg Sands – Sutter Hill, Scott Weiss – A16Z, and Scott Petry – Authentic8.) I asked him if he’d write a guest post about what makes an awesome board member. He was willing – it follows.
I’ve written a bunch of posts over the years about how I manage my Board at Return Path. And I think part of having awesome Board members is managing them well – giving transparent information, well organized, with enough lead time before a meeting; running great and engaging meetings; mixing social time with business time; and being a Board member yourself at some other organization so you see the other side of the equation. All those topics are covered in more detail in the following posts: Why I Love My Board, Part II, The Good, The Board, and The Ugly, and Powerpointless.
But by far the best way to make sure you have an awesome board is to start by having awesome Board members. I’ve had about 15 Board members over the years, some far better than others. Here are my top 5 things that make an awesome Board member, and my interview/vetting process for Board members.
Top 5 things that make an awesome Board member:
- They are prepared and keep commitments: They show up to all meetings. They show up on time and don’t leave early. They do their homework. The are fully present and don’t do email during meetings.
- They speak their minds: They have no fear of bringing up an uncomfortable topic during a meeting, even if it impacts someone in the room. They do not come up to you after a meeting and tell you what they really think. I had a Board member once tell my entire management team that he thought I needed to be better at firing executives more quickly!
- They build independent relationships: They get to know each other and see each other outside of your meetings. They get to know individuals on your management team and talk to them on occasion as well. None of this communication goes through you.
- They are resource rich: I’ve had some directors who are one-trick or two-trick ponies with their advice. After their third or fourth meeting, they have nothing new to add. Board members should be able to pull from years of experience and adapt that experience to your situations on a flexible and dynamic basis.
- They are strategically engaged but operationally distant: This may vary by stage of company and the needs of your own team, but I find that even Board members who are talented operators have a hard time parachuting into any given situation and being super useful. Getting their operational help requires a lot of regular engagement on a specific issue or area. But they must be strategically engaged and understand the fundamental dynamics and drivers of your business – economics, competition, ecosystem, and the like.
My interview/vetting process for Board members:
- Take the process as seriously as you take building your executive team – both in terms of your time and in terms of how you think about the overall composition of the Board, not just a given Board member.
- Source broadly, get a lot of referrals from disparate sources, reach high.
- Interview many people, always face to face and usually multiple times for finalists. Also for finalists, have a few other Board members conduct interviews as well.
- Check references thoroughly and across a few different vectors.
- Have a finalist or two attend a Board meeting so you and they can examine the fit firsthand. Give the prospective Board member extra time to read materials and offer your time to answer questions before the meeting. You’ll get a good first-hand sense of a lot of the above Top 5 items this way.
- Have no fear of rejecting them. Even if you like them. Even if they are a stretch and someone you consider to be a business hero or mentor. Even after you’ve already put them on the Board (and yes, even if they’re a VC). This is your inner circle, and getting this group right is one of the most important things you can do for your company.
I asked my exec team for their own take on what makes an awesome Board member. Here are some quick snippets from them where they didn’t overlap with mine:
- Ethical and high integrity in their own jobs and lives
- Comes with an opinion
- Thinking about what will happen next in the business and getting management to think ahead
- Call out your blind spots
- Remembering to thank you and calling out what’s right
- Role modeling for your expectations of your own management team
- Do your prep, show up, be fully engaged, be brilliant/transparent/critical/constructive and creative. Then get out of our way
- Offer tough love…Unfettered, constructive guidance – not just what we want to hear
- Pattern matching: they have an ability to map a situation we have to a problem/solution at other companies that they’ve been involved in – we learn from their experience…but ability and willingness to do more than just pattern matching. To really get into the essence of the issues and help give strategic guidance and suggestions
- Ability to down 2 Shake Shack milkshakes in one sitting
- Colorful and unique metaphors
Disclaimer – I run a private company. While I’m sure a lot of these things are true for other types of organizations (public companies, non-profits, associations, etc.), the answers may vary. And even within the realm of private companies, you need to have a Board that fits your style as a CEO and your company’s culture. That said, the formula above has worked well for me, and if nothing else, is somewhat time tested at this point!
I had two similar experiences last week where I heard from employees of two different companies that I’m on the board of. In each case, a senior exec said something like “I heard the board wants us to do blah.”
I was in each board meeting and the board most definitely did not say “we want the company to do blah.” Rather, in each case there was a discussion about the topic in question. In one of the cases consensus was reached quickly; in the other there was a robust discussion since two of the board members disagreed and the CEO wasn’t sure what he wanted to do. Ultimately in that case as well there was consensus.
In each case I asked the executive what he’d heard back from the CEO. I got two versions of “the board had a discussion, there was a lot of disagreement, but the board wanted us to do blah.” I then asked, as non-politically as I could, “Do you think CEO wants to do that?” In both cases, the answer was “I’m not sure, but he knows the board wants that.”
I think this is a brutal communication mistake on the part of each of the CEOs. I’ve seen this many times over the past sixteen years since I stopped being a CEO and started being a board member. In each case the CEO is abdicating some responsibility for the decision. In the worst situation, the CEO is blaming the board for a decision and ultimately setting up a very negative context if the decision is an incorrect one – as in “see – I didn’t want to do this but the board did – so it’s not my fault.”
I’ve come to believe that the only real operating decision that a board makes is to fire the CEO. Sure, the board – and individual board members – are often involved in many operational decisions, but the ultimate decision is (and should be) the CEO’s. If the CEO is not in a position to be the ultimate decision maker, he shouldn’t be the CEO. And if board members don’t trust the CEO to make the decision, they should take one of two actions available to them – leave the board or replace the CEO.
In one of the cases, I asked the executive “if I told you the CEO was strongly in favor of the decision, would that impact you.” The response was a simple one: “yes – I’d be much more motivated to make sure we did it right.” I smiled and reinforced that the CEO was in fact supportive, which I think was a relief (and motivator) to this particular executive.
In my leadership experience, people really value when a leader takes responsibility for a decision, even if it turns out to be an incorrect one. CEO’s – don’t be the guy who says “the board made me do it.”