Building the Board of Directors
Grand Moff Tarkin did not preside over a highly functioning board of directors.
My later stage private company clients frequently ask for guidance on how to build a board of directors. Regardless of what stage the company is in, having a strong and productive relationship between management and the board is very important.
When the relationship goes well, it can be very valuable, and when it is strained it can materially impact the operations of the company (and make everyone wish they sold aluminum siding). While these tips can be extrapolated to suit earlier stage companies, my experience is that most companies don’t get serious about building their board until they are about 12-18 months away from an IPO. Thus, the further along you are in your journey to accessing public markets the more likely this advice is to apply to your business.
Mismatched Boards. While it might be tempting to add board members who are titans of industry and sit on Fortune 500 boards, their experiences with businesses that are years, if not decades, past their IPO are not only not helpful, they can be a hindrance. The journey of corporate governance and maturity is an incremental and iterative one. A newly public company simply cannot act like a large established company. Board members from these companies, as all humans are apt to do, are inevitably going to compare the operations, maturity and governance of the Fortune 500 company to your company. This reference architecture is both unhelpful and wasteful because it typically fails to acknowledge the years if not decades it took to build the infrastructure they are accustomed to. The weight of managing such a board and its expectations will drain senior management resources at the expense of managing the business.
Big Boards. A bigger board is frequently not a more effective board. Even when a Board has a strong Chairperson or Lead Outside Director (which are both frequently missing) it's rare to find “shy” board members and larger groups are inherently harder to manage. The tension will be between the board members who have to carry the load as the company and its governance matures and the CEO, CFO and GC who have to manage the board. 9 is a large board for a nearly public company. 7 is lean. Anything above or below those parameters and you are going to run up against bandwidth constraints by management or the board. If the Chairperson is a founder, invest carefully in a Lead Outside Director who is wise enough to manage other board members.
Board Overlap. It's quite common for an enthusiastic board member to want to recruit someone from another board they sit on to join your company. Be careful. Humans are tribal creatures and we tend to align ourselves with people we already know and trust (and who look and think like us). If 3 of your 9 board members sit together on another board (or are great friends) while they might work really well together, they also might end up as a voting bloc or a board within a board.
Diversity Matters. Diverse companies and boards perform better. Be intentional about ensuring that your board represents the communities and customers you serve.
Industry Expertise. The more creative and unusual your business, the more important it is for board members to either have relevant industry experience, strong adjacent industry experience or be very curious and quick learners. Having a board member give you advice on what to do in your business where their only reference is a completely different business than yours is unhelpful and unproductive.
Strategic Investors. Strategic investors, who could be either large customers or potential acquirers, will frequently take a board seat to keep an eye on their interests. If possible, offer a board observer seat rather than a full seat so you can keep some key information close to your vest. If you are unsuccessful, talk to your counsel about ensuring that the interests of the company are always paramount to the interests of a single board member.
Underboarding. This is less common, especially given today’s market requirements. That said, a rush to build a board, or the desire to keep everything close to the vest with significant insider membership and the bare minimum of oversight sends the wrong signals to markets and regulators, and will fail to act as an effective governance mechanism.
Board Continuity. Finally, early investors with board seats are frequently asked to leave a board either by management or by their limited partners. If you can get an earlier investor who is a board member to stay for a year or two after the IPO, it can be enormously helpful. In addition to their knowledge of the industry and the company, the trust and rapport that such a board member has with management can soothe other board members and management when there is friction.
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