Constructing, Managing, and Working with a Board of Directors

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Though most people have experience reporting directly into a boss or manager of some sort, very few people can say that the “boss” into whom they report is represented by the company’s Board of Directors. Indeed, in most companies, only a single person (namely, the CEO) can make such a claim. Even among CEOs, experience reporting directly into a Board is more the exception than the norm, as the majority of private companies in North America don’t have formal Boards at all.

As a result, CEOs running newly public companies, those who have raised external equity for the first time, and those occupying the CEO seat for the first-time, are often intimidated by the idea of reporting into a Board, and are uncertain of how to construct, manage, communicate with, and learn from them. This combination of uncertainty and inexperience often creates undue stress for CEOs, and can create situations in which they are more focused on impressing their Boards than they are on leaning on them for support, guidance, and mentorship.

Over many years as a CEO reporting directly into a Board (and now as an investor who sits on Boards and works directly with CEOs myself), I’ve come to learn a few things about how to construct, manage, communicate with, and learn from this critically important group of people.

What follows is my best attempt at sharing these lessons with you. Note that my commentary below is specific to private company contexts, where at least a subset of the Board is comprised of investors in the company (considerations specific to public company boards are well beyond the scope of this blog post).

Constructing a Board of Directors

It should be mentioned that most CEOs don’t have the luxury of constructing a Board, at least not in its entirety. How a Board is specifically constituted (including who elects its members) varies widely across companies, and can be shaped by legal and regulatory requirements, terms of external equity investments, and the company’s governing documents, among other considerations.

However, if you’re fortunate enough to find yourself in a position where you’re able to construct a Board (in whole or in part), below are a few of the variables that you may wish to consider in selecting its members:

• Diversity: At the risk of stating the obvious, one cannot overstate the importance of diversity among Board members. This includes not just visible considerations (things like race, gender, and age, all of which are incredibly important), but also diversity of experience and expertise. This is important not only because of the well-established fact that diverse teams tend to make better decisions than more homogenous teams, but also because as a CEO it is a virtual certainty that you will encounter both problems and opportunities spanning all of the functional disciplines within your company (sales, marketing, finance, operations, HR, and so on), and as a result, there is considerable value in being supported by Board members who can bring specific expertise to bear in one or more of these disciplines. Be sure not to limit your pursuit of diversity to just demographics and functional areas of expertise, however. Instead, attempt to include diversity in substantially all of its forms (experienced investors v. experienced operators, those from Country A v. Country B, those who have deep governance experience v. those who are newer to the discipline, etc.) to extract the maximum possible benefits.

• Don’t Over-Index on a Single Profile: Closely related to the concept of diversity, I have found that there are diminishing marginal returns to adding a greater number of Board members with very similar profiles: Your first sales expert (or M&A expert, or operations expert, or Private Equity investor) is incredibly helpful. Your second expert of the same variety is somewhat helpful, and your third expert of the same variety is unlikely to provide much incremental value at all.

• Availability and Bandwidth: It will surprise nobody to hear that those with long and varied experiences sitting on Boards have the potential to provide CEOs with tremendous value. However, be careful if that experience comes at the expense of their willingness and ability to actually help you when you need it most. Ideally, one should seek out Board members who have both the willingness and capacity to speak with them on short notice, and who have the bandwidth to genuinely help them work through problems and opportunities as they arise, as opposed to visiting the office for a quarterly pat on the back.

• Trust, Chemistry, and Sense of Psychological Safety: Though this may sound like a “soft” consideration, in my experience it is perhaps the most important variable to consider when selecting Board members. Ideally, your Board members will be people with whom you feel completely comfortable being open, honest, and vulnerable. Having this sense of psychological safety with Board members is incredibly important, because as a CEO you can be sure that there will be countless instances in which you simply won’t know the answer to something, and will need to lean on the Board for their advice and mentorship. If you’re not comfortable being vulnerable with your Board, then you’ll likely become more focused on impressing them than learning from them, which in turn will dramatically reduce the value that you’ll be able to extract from them.

• The Value of the Industry Veteran: I’d estimate that approximately 60% – 70% of my time as a CEO was spent on things that were largely independent of the product or service that I was selling (things that are common to leaders across all industries like culture, hiring, organizational design, incentive structures, and so on), implying that roughly 30% – 40% of my time was spent on issues that were highly specific to software. Though most experienced Board members should be able to help you with issues residing within the former category, I would highly encourage you to secure at least one Board member who can help you with issues that reside within the latter category. Every business will have problems and opportunities that are highly specific to the industry in which it operates, and these types of issues often warrant much more nuanced consideration, context, and pattern recognition than would issues that tend to be common across all industries. I currently sit on a Board featuring two veterans of the relevant industry, and I am continually amazed at the specific insight and expertise they offer that I (and others like me from outside of the industry) simply cannot.

• There’s Nothing Wrong with Having a Temporarily Empty Seat: In part due to the considerations mentioned immediately above, in my opinion it’s better to have a temporarily empty seat on the Board (with a view towards eventually filling it with a value-additive industry veteran, or at least somebody with a similarly compelling profile) than it is to have all seats filled simply for the sake of having them filled. Of course, recruiting external Board members isn’t always easy, and if you do have an empty seat, the Board should have a clear plan for how to attract and retain a person of the caliber that they are seeking (as these types of people often don’t have the willingness or ability to sit on small, private company Boards without a commensurate economic incentive to do so).

• Be Thoughtful About the Merits and Risks of Sellers/Previous Owners Sitting on Boards: For those acquiring small and medium sized businesses, there is frequently a desire to see the seller (often the previous CEO) occupy a seat on the “new” company’s Board moving forward. Sometimes this is reflective of the buyer’s preference (they understandably want the company to continue to benefit from the years of experience that the seller possesses, especially if she was important to the day-to-day operations of the company), and sometimes this is reflective of the seller’s preference (especially if they’ve rolled equity into the new post-close entity). Though these types of situations can and do work well in certain circumstances, in at least an equal number of circumstances they can prove to be highly problematic. This is so for a number of reasons, including:
  • Despite everybody’s best intentions, operational and ownership transitions between incoming and outgoing CEOs often don’t work out as well as was originally envisioned
  • If the new CEO has to make changes to the company (especially drastic changes), articulating the need to make these changes to the Board can be much more challenging for the new CEO if the mistakes being cleaned up were effectively caused by one of the Board members
  • Sellers understandably tend to be very emotionally connected to their companies, and as a result are often resistant to change, or think that they know better than a young, inexperienced CEO. It is almost always harder than originally anticipated for sellers to watch a new owner make changes to the business that they previously thought of as an extension of themselves.

I’m not suggesting that one should never consider offering a Board seat to a seller, but instead that one should be very thoughtful about the potential merits and risks of doing so. If you do offer them a seat on the Board, be sure to build in a “graceful exit” mechanism in case things don’t work out as originally planned.

• Provide Everybody with a “Graceful Exit” Option: Your relationship with your Board members is arguably no different than any other relationship in your life: That is, sometimes they simply won’t work out as expected. For this reason, both the Board member and the CEO may want to consider establishing one-year “trial-periods” whenever a new Board member is recruited (either when the Board is being initially formed or otherwise). These one-year trial periods can be subject to a mutual renewal option, and can provide both parties with a “graceful exit” opportunity in case the relationship doesn’t work out as originally envisioned. Of course, if the relationship is a mutually beneficial one, then both parties would simply choose to renew at the one-year mark. Without such a mechanism however, removing a Board member (even if it is the objectively right thing to do) can be an incredibly awkward and difficult exercise for both parties (CEOs are often incredibly hesitant to suggest such a change, and Board members often don’t want to be seen as abdicating their responsibilities to the company and its CEO).

• The Person is More Important than the Entity: Institutional investors (private equity firms, VCs, and the like) often choose one of their team members to sit on the Boards of their various portfolio companies. Without diminishing the importance of what certain institutions can indeed bring to the table, as a CEO running a business with institutional investors, it was my experience that the individual representative from that institution was a more important consideration than the institution itself. For example: While you may be very excited at the prospect of having Institution XYZ on your Board, learning from and working with the Founder of that firm is likely a very different proposition than learning from and working with its newly hired Senior Associate. Beyond considerations related to experience and expertise, it will surprise nobody to hear that a CEO may simply have better personal chemistry with Partner A than Partner B. For these reasons and more, when considering adding an institutional investor to your Board, I would weigh the individual more highly than I would the institution.

• Have a Trusted Advisor and Mentor Outside of your Board: Though your Board members can and should serve as your trusted advisors and mentors, as a CEO it’s always a good idea to have at least one (if not more) trusted advisors and mentors outside of your Board. I had one such mentor myself: When I first acquired my company, I asked him to sit on my board, and was somewhat surprised when he declined. When I asked him why he did so, he said something to the effect of “I want to be the person that you call with the questions that you may not be comfortable asking your Board members”. Over my 7-year tenure as a CEO, he played exactly that role for me, and I benefitted tremendously as a result. Again, this is not to suggest that you should be uncomfortable being vulnerable with your Board, nor is it to suggest that Board members shouldn’t be thought of as trusted advisors. Instead, I found that I benefitted greatly from having a trusted, external thought partner, if for no other reason than to help me organize and calibrate the thoughts and questions that I would eventually present to my Board.

Working with a Board of Directors

Once your Board is constructed, the process of actually reporting to and working with them begins. Though there are countless lessons and best practices that CEOs should consider in this regard, below are just a few of the major lessons that I took from my own experience:

• Though in a sense your board is technically your “boss”, as a CEO you will lose out on so much value if you treat them as such. Instead, think of them as a roster of 4-6 coaches, advisors and mentors. Though this may sound like a subtle difference, in my experience it was a considerable one (consider the types of issues that you’d feel comfortable broaching with your coach vs. your boss. For me, at least in the early years, there was a big difference between the two).

• As a CEO, it is worth being clear about when you want explicit direction and direct opinions vs. when you want more indirect experience shares. Your Board members are often also trying to walk this same tightrope themselves, so it’s helpful to be clear with them on which you’re seeking.

• Young CEOs in their first year or two tend to think that they’re 1 or 2 bad quarters away from getting fired. This is simply not true. Your Board does not want to fire you. This misguided (though somewhat understandable) sentiment creates an underlying sense of fear that often colors what the CEO chooses to share and not share with their Board, which in turn can limit the extent to which the Board can be genuinely helpful to them.

• Young CEOs in their first year or two also tend to think that substantially every metric should be trending green, moving to the right, and upward sloping every quarter. Again, this is simply not true, especially in the CEO’s first year or so, where much of their time should arguably be spent diagnosing the company’s most pressing issues before suggesting potential solutions to them. Profitability is a particularly interesting consideration in this regard: Though young, inexperienced CEOs often think that immediately growing profitability represents one of their most important duties (which can be true in some circumstances), in an equal number of circumstances, the right thing to do for the company may be to temporarily decrease profitability, both to “catch up” with historical growth and to prepare the company for future growth. This is especially true in instances where a) the company has under-invested in internal tools, processes and systems (or they’ve simply outgrown the ones that they currently have in place); and/or b) The previous founder/CEO occupied several roles that would otherwise require 1-4 incremental hires under a new owner (founders are often able to simultaneously play these roles due to their decades of experience, but expecting a new owner/CEO to do something similar is often unrealistic).

Tactical Considerations Specific to Running Board Meetings

Though formal quarterly meetings shouldn’t serve as the only venue in which you should communicate with your Board members, they nonetheless represent valuable and unique opportunities for the CEO to communicate with, learn from, and ask questions of everybody simultaneously. What follows are a few suggestions to ensure that you extract as much value as possible from these sessions:

• Send the deck (and any other supporting materials, including and especially financial statements) to the Board at least 1 week prior to the actual meeting

• Don’t do a page flip during the meeting, but instead assume that everybody has read the deck thoroughly in advance (hence the importance of the 1-week notice). Invite and discuss questions based on the materials, but don’t rehash the content contained within them.

• The best Board discussions focus on items that are measured in years. Good discussions revolve around items measured in months or quarters. Less productive discussions tend to revolve around things that are measured in days or weeks.

• If you have anything that’s very material in your deck (especially if it represents bad news), don’t wait for the meeting to share it. Instead, share it with the Board as soon as possible. Ideally, set up 1-on-1 conversations with Board members to discuss the issue well before the meeting. Nobody likes a big surprise.

• There are diminishing marginal returns to adding increasing amounts of content and detail to the Board deck. My first deck was 90 slides (yikes!). My last few were 20-30 at most. If everything is important, then nothing is important.

• Solicit feedback after each meeting that you can incorporate into next quarter’s meeting (a simple and useful framework for doing this might be: what should I start/stop/keep doing). In addition to this, if the CEO has suggestions or requests of her Board members that she’d like to see them incorporate into the next meeting, then she should speak freely in doing so, and her Board members should provide her with a mechanism to make these types of suggestions.

In Sum

Reporting into and working with a Board, especially for newer CEOs, has the potential to be both incredibly fruitful and mildly terrifying. However, it’s important to recognize that this fear (or anxiety, or uncertainty) is often the result of simple inexperience as opposed to being reflective of the realities of reporting into those at the highest levels of the company.

Constructing a helpful, thoughtful, and trustworthy Board is among the prospective CEO’s most important decisions. Those CEOs who are fortunate enough to construct the majority of their Board have a once-in-a-lifetime opportunity to hand select the group of advisors, mentors, and coaches who will be sitting right beside them in arguably the largest and most important professional undertaking of their lives.

Proceed accordingly.

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