This may be news, but boards of directors can offer bad advice. Having served on more than forty boards, I’ve seen such a variety of good and bad advice that my stories could fill a book. (oh, wait. They have…) So, lets delve into board composition, risk of an unbalanced board, and one of those stories…
The composition of your board matters
A typical board is composed of five persons in a company that has received outside funds
from professional investors. Two members usually represent the founders or management, two are from the investors, and one is often elected by the four to represent the industry in which the company works.
The financial investors typically have deep experience running companies, often in other industries. The fifth board member often is an expert, but not an executive with operational experience. Realizing that this description is a generalization that fits some, but not all, growing firms, the dynamics of the board are a key component in the effectiveness of advice and leadership given by the board.
Do you defer to those outside board members?
[Email readers, continue here…] It is not uncommon for the founders or executives on a board to defer to the three outside board members, responding to questions and defending previous actions. All this is proper to the extent that the two founders or executives do not leave their brains at the door when attending a board meeting, acceding to the suggestions of board members as if each were a direction or order.
My story of an unbalanced board and influence
I still recall vividly the board of a young company that was composed of the entrepreneur and four investors, each of whom had differing thoughts on how to use resources to grow the company, giving mixed signals to the entrepreneur who wanted greatly to please each and all. That company embarked upon an expansion drive before perfecting the operation in its first city, as a result of the board’s direction to the entrepreneur, which was against his better judgment although he remained relatively quiet and certainly compliant.
“The board knows best” is not always true. And in this case, the company over-expanded, did not have the resources to fix problems at its new remote offices, and died a slow death from issues of control and quality, all of which might have been mitigated had the company spent more time debugging the first-city operation.
True. It’s a double-edged sword. The power of the Board is that they are able to advise and strategize at a high level without being stuck in the weeds. The disadvantage is that they don’t have day-to-day operational perspective. So it’s crucial for the entrepreneur to *synthesize* the board’s suggestions, then plot the course. What’s also crucial is to have board members who can put aside their egos, who are capable of continuing to be engaged even when their advice — after careful considerations — is not being taken by the CEO.
I was once a young and dotting entrepreneur who have followed suggestions of well-meaning advisors with stellar careers and 30-40 years my senior. Some initiatives worked, some flopped. I’m fortunate they’re great teachers who set aside their egos.
I got wiser each day because of them. (To J.B. who passed away from cancer earlier this year, I hope you’re smiling down from heaven)
Poorly-informed strategic direction / advice from one or board members, when followed by a company’s executives, can lead to the demise of the company. Ignoring the requests / directions of key board members, particularly when those requests are grounded in solid business practices, can lead to the demise of the CEO. I’ve seen both happen within the same company.
Great piece as always, Dave. And Chris, your point that “Their customers are more important to them than your customers are to them” is right on. The customers are stakeholders, yes, and when they’re not the same customers from the VC’s perspective and the founder’s perspective–we have a problem. There’s a misalignment.
The Duty of Loyalty (of which Duty of Good Faith is a large part) and the Duty of Care are paramount. Together, they form the essence of a Board’s Fiduciary Duty: one must act in a way that will benefit someone else (i.e., the shareholders or owners of the company). I agree with Arthur Lipper. Follow the business judgement rule, always. And yes, that means hire and fire the CEO, when the need arises. The aim of all boards should be to think at the strategic level, but too often, it isn’t noses in, fingers out. It’s noses AND fingers in! On the other hand, I once heard a company founder say that investors should just stay quiet (on their boards) and let the founder work. I’m sure many founders wish they could simply take other people’s money and do whatever they want. No, the Board doesn’t always know best, but maybe–if I can paraphrase what has been said of democracy–it’s the worst form of corporate governance except for all those other forms that have been tried from time to time.…
Because an effective BOD is a huge asset is why this topic is important. This and other factors go directly to improving the probability of venture success and prudently managing risk. Having been on many BODs it is clear that while there are great intentions, it’s problematic.when people don’t know what they don’t know – and are challenged to learn fast. This is a big issue since by their nature, young ventures are doing new things in new ways, etc. To get past this it’s critical to have a quality BOD to improve decision making and to make supporting entrepreneurship more rewarding.
In the subject of poor Board advice: Personally, I noticed that board meeting are quick-fire Q/As, and being that the board members are rich, successful, and sometimes ‘expert’ in the opinion just announced, it is discrediting to go against a board member, as your ‘hunch’ will not hold water. I found it better to nod, take down the advise, take a few days to digest and then break down the logic with as much material as possible.
The role of the Board of Directors is to determine the primary mission of the company and when senior managers of the company should be changed.
Officers of the company should be, on request, advisors to the Board, but not serve on the Board. Actively involved founders of the business should
appoint trusted advisors to the board, but not serve themselves. The fiduciary obligation of both individual Directors as well as cumulatively, the Board
of Directors is to have as basis of all decisions, that which is in the best interest of all of the owners of the company. Directors should not be allowed
to approve or propose actions which are intended to benefit specific shareholders. There should be both term and age limits for Directors, as well as
reasonable compensation.
What I’ve seen is not so much good or bad advice but a difference in perspective. If founders will remember that their objective and those of the VCs, especially early professional investors, are rarely completely aligned they will have a better understanding of the advice. Investors have customers they have to please too. Their customers are more important to them than your customers are to them. Wouldn’t it be fair to say that your customers are more important to you than your investors customers? Understand what your VC has to deliver and you will understand their advice.