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 what the academic literature calls “path dependence and lock-in.” In other words, people tend to choose people like themselves.

As the board matures, the existing board tends to recruit similar people-or people they just like-rather than those with contrasting skills and personalities. Private company boards also tend to grow, with new people added to the board rather than replacing existing members. Early investors, founders, and other board members don’t like to be removed from the action, and particularly if the company is successful, they want to share in the credit. The end result often is a large, unwieldy board that reflects the needs and personality of the company at its founding more than its current requirements.

A Better Route: Board Structure Mirrors Corporate Evolution. Growing companies go through distinct phases of evolution where roles and the skills needed to succeed change to meet operational and market needs. The organizational process literature has various names for each of these phases; the ones I like for high-growth technology companies are:

Entrepreneurial Phase. The company’s main job is to assess the marketplace and gain initial sales and recognition. Team members each play a multitude of roles. Decisions are made in real-time; frenetic activity is a hallmark.

Collectivity & Scaling. The company has increasing focus after finding the optimal ways to engage the marketplace. New functions emerge, and the organization has a greater division of labor. Coordination challenges set in, and there is a greater need for internal communication.

Early Maturity, Formalization & Control. The company begins to take a more functional structure with greater specialization as product and service designs become more stable and refined. Focus shifts to rules and procedures. There also often is a drift to strategic conservatism.

Not only do the company’s organizational needs change, but the board should change, too. The board is just one potentially, very important team among many in a growing technology company. It can be managed and evolved just like any other team with one exception: since there often isn’t a designated chairperson, or the title is in name only, no one person is usually in charge.

Building and Rebuilding the Board. Board design and makeup has to involve consensus-building. Whether creating a new board or evolving an existing one, the process is much the same. Start by creating a group of the primary shareholders or their representatives to discuss what the board should look like. Then, take the following steps:

1. Conduct an annual self-assessment. What are the company’s current and near-term future needs? How do the board’s skills and constituents compare with those needs?

2. Write position descriptions for board seats. Common forms of board members include organizational builders, technical experts, industry veterans, market mavens, visionary leaders, and financial professionals. Position descriptions should be similar in length and specificity to a management hire.

3. Conduct interviews with a variety of potential candidates to compare and contrast candidates as well as ensure the selection of the individual with the best potential fit.

4. Select candidates and create (or re-create) the board.

Like other team-building exercises, good process takes time. The CEO often has many competing, urgent priorities and may be viewed as too conflicted to orchestrate the board evolution. The chairperson or a lead director should own the process and be accountable to their peers. The most operational items such as board meeting agenda and style flow out of the board’s composition. Then, start executing for another year until the next self-assessment.


Author’s note: For further reading on this subject, see:

Adizes, Ichak. Managing Corporate Lifecycles. 2004.

Salazar, Andres; “Board Member Selection in New Technology Businesses,” Entrepreneurship in a Diverse World, Vol. 8 pp 2005

Lynall, Golden, & Hillman, “Board Composition from Adolescence to Maturity” Academy of Management Review, 2003

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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