Six Steps to Building an Effective Board
A properly functioning board can be a powerful force for your company's success. When a board is working effectively, its members will offer you unbiased advice on a variety of topics, including strategic partnerships, financings, acquisitions, and key hires. Moreover, they will ensure sound governance by insisting on proper oversight, audit, and human resources procedures. A board in disarray, on the other hand, can be a distraction, causing missed opportunities and creating liabilities for your company. The value of a good board cannot be underestimated, while a bad board may be worse than none at all.
Middle-market companies that are forming a board for the first time face additional challenges. Since founders may own all or most of the company, they are often accustomed to having the final say on key decisions. In the past, these entrepreneurs may have relied on handpicked insiders for advice. Now they may be reluctant to form a board for fear of giving up control to outsiders. Others simply do not want to take time away from running their existing business to build a new one.
In my view, however, nearly all companies can benefit from the involvement of qualified independent directors--and sooner rather than later. Although advice from insiders can be valuable, it often reflects a narrow perspective--one company, one industry, as well as one set of issues and challenges. Your employees, friends, and family members are more apt to tell you what you want to hear, while an outside board can broaden the range of experiences and skills to tap and provide more objective advice.
How can you ensure that your board functions efficiently? Based on my experience, here are six steps to building an effective, independent board:
#1: Find the expertise you are missing. Outside directors can bring in experience that your team lacks. For example, if your company is about to embark on an aggressive acquisitions strategy, you might want to select someone with significant merger-and- acquisition experience. If you are thinking about expanding internationally, you may want to consider a person with overseas experience. CEOs of companies that are similar to--but not directly competitive with--your company can offer insight into broader industry trends, especially if these executives are a bit further along in their growth trajectory.
#2: Look for board experience. People who have served on boards can hit the ground running, because they already understand the critical issues of audit, compliance, finance, and strategy, as well as other dynamics that can affect board performance. For this reason, current or former CEOs make ideal board candidates. Since they have prior board experience, the learning curve is relatively short and easy.
#3: Do not overlook non-CEO candidates. CFOs, COOs, directors of development, and directors of sales--especially if they work at significantly larger companies--can bring valuable experience to your board. Because these types of executives frequently want board experience, they may be willing to serve on much smaller company boards than a CEO would consider.
#4: Keep your board size manageable. Small, focused boards are generally preferable to larger ones, especially for midsize companies. I usually recommend that companies start with five board members, and then perhaps expand to seven over time. Larger companies may function well with nine directors or even more; in general, however, managing more directors will require a greater investment of your time. Regardless of the number, make sure that you have an odd number of board members to avoid deadlocks, as well as several directors who are clearly independent.
#5: Choose people who can participate fully. The people on your board must be able to dedicate significant time to your company--not just for scheduled meetings, but also on an ad-hoc basis when time-sensitive challenges arise. For that reason, I like to find board members who are in close proximity to the company. The benefit is that when issues surface, you can meet them face-to-face. For these same reasons, do not select people who serve on so many boards that they will not be available when you need them.
#6: Divide your board into focused committees. Boards work on a broad range of issues, including compensation, audit, transactions, capital expenditures, financings, overall business strategy, key personnel decisions, lawsuits, and other problems that arise. You can increase your board's effectiveness by forming focused committees in critical areas. Generally, I recommend that boards immediately form compensation and audit committees, and then establish governance, acquisition, and other committees as the company grows. Make sure you choose the right people to head your most critical committees--a board member with accounting and/or financial expertise to run the audit committee, and an independent director to run the compensation committee.
A diverse, experienced board can play a crucial role in the success of your business, offering outside experience and perspective that can help you avoid problems and take advantage of opportunities. Choose your board wisely, and it can help guide your company to substantial growth.
Bruce R. Evans is a Managing Partner in Summit Partners' Boston office. He has served on more than 25 boards, including 10 public company boards. His investments include Hittite Microwave Corporation, optionsXpress Holdings, Pediatrix Medical Group, and Unica Corporation.
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