In a previous post, I wrote about how to have productive board meetings. As noted in that post, a board is only as useful as its constituents. This post provides some food for thought for those who are constructing a board. It’s obviously not always possible to select all one’s board members, but I hope that the thoughts here at least aid CEOs or board presidents as they think about rounding out their boards, even if some of the directors are predetermined. As with my prior post about board meetings, I will focus this one on for-profit, private, relatively small companies.
One question a founder may face is: when to constitute a board at all? Many new companies do not have a formal board of directors, and that is often appropriate, even beneficial. In my view, a company should wait to form a board until one or more of the following conditions are met:
- The company accepts financing from investors who are not friends or family
- Management can clearly articulate the company’s product and target market and add directors who can provide value in its effort to build and market that product
Another question is board size. For obvious reasons, it’s best to have an odd number of directors, though not absolutely necessary (as there are ways to break a tie in the unlikely event of a contentious tied vote). For very new companies, three directors can be effective, particularly as frequent communication is necessary at an early stage and fewer people make for easier communication. Fairly soon, though, five directors becomes helpful, as a diversity of experiences, networks, and perspectives is needed. Five is an ideal number for most private companies; seven can be hard to schedule and manage and, in my view, should be accepted only because the size is necessary to accommodate investors or very valuable directors.
When considering whom to put into each of the director seats, it is useful to consider the roles and sources of value that should be present on a high-functioning board.
Good boards include directors with a variety of incentives and perspectives (roles). At the basic level, these should include management, investors and independents. The first two are self-explanatory, with the CEO and perhaps one other management team member representing the management team. An independent is a director whose only allegiance is to the company; s/he probably receives options or stock as compensation, but is not an investor or a close acquaintance of management. Having an independent can be extremely useful, as s/he can provide a much-needed “neutral”, but interested, point of view.
In addition to ensuring that each of these perspectives is represented on your board, you should also consider the value that each individual brings to the table. Broadly speaking, a director can provide advice, introductions, and/or board process support. Again, the first two items on this list are self-explanatory. Aside from connections and guidance, though, good boards have a healthy dynamic – they are productive and accountable to themselves. Having one or more board members who help management keep board meetings and in-between interactions on track and positive (provide process support) is very helpful. These are often people who have served on a number of boards before and who have a relatively high level of “emotional intelligence.”
Ideally, then, your board comprises three to five people who represent investors, management and an independent perspective. The board is capable of making key customer and partner introductions, judiciously provides helpful feedback to management, and governs itself effectively. Accomplishing this mix is sometimes impossible, but the value of a helpful board is worth the effort to assemble a group with as many of these characteristics as possible
