In the early 2000s, a Fortune 500 company arranged a that included several oil and gas company executives, a former General Electric exec, a Stanford professor and even a former member of Britain's House of Lords. dream team board of directors
That board, for Enron, turned out to have been complicit in the company's creative accounting practices and various kickback schemes. Other boards at the time for WorldCom and Tyco allowed for similar malfeasance.
Around the same time, I was part of the board of ExactTarget, now known as Salesforce. While our board's pedigree might have suffered by comparison to Enron's, I've never seen a board so engaged and integral to a company's success. We were the Golden State Warriors of boards.
Those two varying boards display the range of board performance. Some are passive, some are heroic, and some are outright criminal. And while some companies with dysfunctional boards have been successful, I'd wager that there are fewer failing companies with truly high-functioning boards.
Having this type of board of directors is an oft-overlooked component of a startup's success. Ideally, a board should have these attributes:
1. Engagement: Think of a board as a team.
Too often, board seats are a form of patronage. The average board member received $191,440 in compensation last year, according to the National Association of Corporate Directors. Even so, many members sit on multiple boards in addition to often running their own companies.
Corporations have recently pushed back against this phenomenon. Some 77 percent of S&P 500 companies limited their board members' outside directorships in 2017, up from 71 percent in 2010, according to Spencer Stuart.
The same dynamics play out for startups. An active, engaged board can be a huge asset for a new company and even spell the difference between failure and success. Often that's not the case. The excellence ratio for boards is akin to NBA teams; some two-thirds are productive about 10-20 percent perform poorly and 10 percent or less are very effective.
Most people don't think of a board as a team. That's a mistake. Framing it that way will prompt members to put more energy into trying to help the board function better.
2. Leadership: Beware of overtaxing
Boards are subject to the same dynamics that affect group behavior, so you need a strong leader in place to move things along. One common hazard is management team board members.
Though you need the CEO on board, other members of the management team don't bring an independent perspective so that can be a wasted opportunity. When I speak of leadership here I also mean the CEO, whose input to the makeup of the board is crucial.
Scott Dorsey, a co-founder of ExactTarget, was an extremely effective leader on our board. He did a fantastic job recruiting independents and he worked hard to get consensus on every issue the board faced.
That's what I mean by a high-functioning board. Dorsey created an atmosphere in which different board members stepped up depending on what the issue was and what their particular area of expertise was. It worked very well for an incredibly long period of time.
One hazard for board leadership is the tendency to ask too much of leaders. When you have a CEO who is also the chairman of the board it makes it really difficult for that person to both run the company and try to get the board to come together and be a high-performing team. When that's the case, having an independent director or a lead director playing the role can help the chairman do that.
3. View diversity as a strength
The final component of an effective board is a diverse makeup. I mean that both in terms of gender, race and experience. A study of 2,500 boards found that just seven were dominated by women, but more than half of those boards outperformed their industry peers.
Having more diversity has also been shown to make companies more innovative and more profitable. One reason companies have resisted may have nothing to do with overt sexism or racism but rather the implicit belief that homogeneous boards make for easier meetings.
This is known as the fluency heuristic: We think when things are easier, they're better. But they're not. Research shows the reason why diverse teams are more productive is because members of the group disagree more and have more uncomfortable conversations.
That's been my experience too. Meetings among ExactTarget's board were grueling affairs in which every hour was exquisite agony.
One telltale sign that you're on an effective board is if you work hard preparing and executing those meetings. If you feel a pit in your stomach before the meeting wondering if you will be able to keep up, then you may on the right track.