Reinventing the Board

10/3/11Follow @geshwiler

Imagine a world where technology companies are more successful and grow faster because of the strategic help and guidance from their boards of directors. Or, at least imagine a world where they don’t suffer from unhelpful, or worse, problematic boards that consume management’s precious time. Some commentators like Steve Blank, Jeff Bussgang, Brad Feld, and Fred Wilson have suggested board meetings could be better by changing the format, process, or content.

Here’s a more fundamental recommendation: change the board.

Operational changes such as rethinking the meetings might create some temporary benefit. The company and shareholders, however, are still working with the same components. Further, in nearly any technology company, the board not only has an opportunity to change, it’s necessary.

Why take the time to address a potentially painful subject like the composition of the board of directors? Because only a small percentage of companies backed by angel investors and venture capitalists achieve success through a profitable acquisition or initial public offering. About half end in failure; others underperform initial expectations. If the board can at least not contribute to failure, or better yet, be neutral or even beneficial, we not only increase the likelihood of success for a few companies but also create a disproportionate effect on GDP because of the high economic value these companies create.

Boards not only are part of the company, but ostensibly, leadership starts at the top. The companies themselves evolve-or at least they should-and so should the board. We want technology companies that make new and innovative products and services to grow quickly, take over the world. If they aren’t achieving high growth, something is usually wrong. Whether they are growing rapidly, stagnating, or struggling, the company’s strategy, division of labor, operations, and team members change or need to change. The board should change, too, evolving in structure and skills to match the company’s situation and needs.

I was discussing this subject recently with a CEO friend, who responded, “The problem with your argument is you presume boards add any value at all. I see why investors need to look after their investments…but they shouldn’t try to do management’s job for them.” I told him I thought we were in agreement: Too many boards don’t actually add value, and their job shouldn’t be to micromanage the CEO.

(Above, a short video with additional information about building good boards.)

Good boards can help capitalize on opportunities and provide strategic perspective, complementary business development connections for management, and stability through transitions-good and bad-and have positive signaling value for other stakeholders. Further, they perform roles requiring independence from management such as serving on audit and compensation committees. But how does a company achieve a good board? First, let’s take a look at how things go wrong.

Creating and Evolving the Board: What Often Happens in Practice. When founders, CEOs, and investors create boards, they at least want an amicable board if not one that really creates benefits. Nobody starts out wanting to have a bad board, and like a lot of relationships, they tend to start out well. There’s an initial honeymoon period when the company is founded or gets its first investment. Alternatively, if boards are formed out of obligation to external stakeholders, usually investors, the selection process usually happens through the capital matchmaking process. Getting a “yes” from an investor and accepting the investment tends to be a mutual qualification process, albeit with some compromise on both sides.

Management and investors typically draw from their respective social networks to recruit board members. Doing so may create a relatively good fit, and may be necessary to persuade highly skilled and experienced people to join the board of an unproven company. However, this often creates … Next Page »

James Geshwiler, a managing director at CommonAngels for more than 10 years, has financed over 40 software and Internet companies and worked with them through over 100 rounds of investment and related changes in boards of directors. [Editor's note: CommonAngels is the lead investor in Xconomy.] Follow @geshwiler

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  • http://www.gilberttweed.com Neil Greco

    Astute observation about developing and managing Boards. Several of my recent Board projects have resulting in exactly this approach – as the business evolves and the executive management team adjusts, so does the need to adjust the Board so as to complement the requirements of the business.

  • http://www.OhioTechAngels.com John O. Huston

    Thanks, James, for providing your usual masterful insights, but, here’s a question: Have you seen many of your 40+ ventures achieve a highly lucrative liquidity event with the CEO being the Board Chair at the time of exit? My best Boards have split these duties but perhaps in Boston it works.

  • http://www.commonangels.com James Geshwiler

    John: I think the question is not what has happened but what could be better. To answer your question directly, what I’ve seen and experienced has been mixed. To focus on the negative, one good exit in particular had quite a dysfunctional board. Could it have been a better outcome with a better board? We’ll never know since we can’t run control studies on companies. At the same time, I don’t think anyone involved would have made a case that the board helped either, and all would likely say it hindered. I think everyone would have rather said, “hey, we all did our best and we know this is the best we could have done.” You can’t say that when there are all sorts of internal problems. The role of the chair, however, will be the subject of the next piece. So, stay tuned!

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