Five Boardroom Flash Points for Young Companies
BY Ralph Ward
Younger companies often face some tricky issues that seem to pop up sooner or later, and a good board can be hugely helpful in dealing with them. Hal Shear, president of Research Investment Advisors Ltd. in Boston, has years of experience with boards from the inside, and has seen how most of these common "flash points" are handled. "All companies have stages and challenges," he notes, and sees the following as the most typical boardroom challenges.
Use (and abuse) of name directors. The top three or four investors are typically on the board in the beginning, and "add credibility in the marketplace and in recruiting talent. This early credibility is tremendously important. When it comes to sales or drawing a senior manager, they can really open up doors."
It can be tricky, though, to draw the line between a director actively making sales calls or such (going too far), or at the other extreme serving as " just a name on the letterhead" (not going far enough). "It's unrealistic to assume that Henry Kissinger would have much active involvement, but if a director's just a name, people see through that."
Making full use of the board. Young companies in particular have a long learning curve when it comes to learning how to use the board, the founders either expecting miracles from their Rolodexes (see above) or fretting that the board will boot them out (see below). But Shear finds that smart boards can be put to innovative use, such as helping the company come to grips with strategic and cultural change.
"I remember one example where an early venture investor had a conversation with the founder, and the board was also involved. A year later, the VC took some actions that meant the exact context of that discussion needed to be remembered. The directors were able to supply that context. Without them, there would have been nothing between the founder and the VC."
Outgrowing your early board members. A young company goes through great change up to the IPO stage, but "the IPO is not the bright line mark for change. That happens earlier, when [he company] reaches 50, 100 employees. The company starts moving in different circles and needs new board talent. If you are a director with a tech background and the initial technology push is over, your value is not as high."
At this point in company growth, it's valuable to have director evaluation in place, less as a tool to judge whether directors are pulling their weight than to decide where you need new talents. "Directors need individualized job descriptions. This is usually done in two stages, first a shopping list of specific people, and second a list of general board talent."
Self-dealing. Board members are only human, and there will be times when their interests conflict with those of the company. Shear recalls a case when "a venture capital director on the board of a young company recruited the company's head of sales away to another venture." A strong policy against self-dealing written into your governance guidelines, as well as a thorough disclosure regimen, can help fend off such instances of your directors versus your company.
The nervous founder. Speaking of "your company," Shear sees a common problem among founders and entrepreneurs in dealing with a board. "The more naïve founders worry about what control they'll be giving up to a board. At its simplest, there is no control other than performance. If you perform, you control -- if you don't, you don't."