In the last few months, there has been much written on the hubris of founders and management teams. As we enter a new age of uncertainty (move over 2020), sector stakeholders, investors chiefly among them, have imparted all sorts of advice on how founders can navigate these new market dynamics.
But there is another faction of company leadership that seems to be getting lost in the fray: the board of directors. What is the board’s role and how can they help startups, particularly now? To answer these questions, let’s review why boards are so critical, recent trends in corporate governance and how boards can assist in this current business environment.
What is the role of the board?
While many startups and early-stage companies either lack a formal board structure or don’t have a board at all, putting a system of board governance in place with the right people, even before absolutely required to do so, can drive significant business value from the get-go.
At a high level, the role of the board should be to minimize conflicts of interest and maximize shareholder value. Working together with the management team, the board should seek to balance the interests of all stakeholders by ensuring accountability and transparency. By virtue of the knowledge and experience members bring to the table, the board can assist in a multitude of ways to maximize value — new relationships, industry connections, and advice being a few examples.
From a legal perspective, the board’s legal duties are governed by local laws in which the company is incorporated, articles of incorporation, and potentially security regulations from respective securities commissions, if the company is public. These formal responsibilities are often collectively referred to as corporate governance, which can include duty of care, duty of loyalty and, perhaps most importantly, a fiduciary duty to act in the interest of another party (shareholders), above their own personal interests.
Why would a founder/CEO even want to establish a board when they already control the company?
Founders and co-founders have likely spent weeks, months, or even years building a core product or service, ironing out a strong business model and staffing up a dream team. It might feel unnecessary or even counterintuitive to introduce another layer of governance and relinquish control, but there are several key incentives for founders to put a board in place:
The board keeps founders intellectually honest and pushes them to reach their highest potential.
Board members help identify blind spots and biases, which we all have.
Input from the board helps founders navigate conflicts, especially ones that can involve co-founders.
The purpose of the board is to create an extension of the team. Just as great entrepreneurs seek out skills they may not themselves possess, they can similarly do so with their board, and this can be integral to advancing the strategic goals of the business.
What has happened to boards over the last 10+ years
Composition: With valuations trending up and the emergence of more founder-friendly terms in financings, founders are giving up less of their company, which has fundamentally changed the composition of startup boards over the last decade. It is now common to have founders control the board for a much longer period of time, and these founders can populate the board with family or friends who do not necessarily have the skills or experience to drive the strategic direction of the business. This can result in a sort of herd mentality or a game of egos that ultimately holds the company back.
Structure: It’s currently common to see very little in the way of board structure: ad hoc meetings, no board committees, and no feedback on CEO performance. In some cases, governance has gone out the window, which often results in a tempest of confusion and finger-pointing when things don’t go as planned.
Advice and value-add: When startup boards are both unstructured and composed of directors that lack relevant experience, it’s fair to ask whether boards have been performing their duties well over the last number of years. Were directors truly doing the work to weigh options and provide sage advice to management teams, or did they feed the valuation frenzy and remain complicit in setting unrealistic financial expectations for management teams and investors?
Agenda-setting: With the influx of a lot of “tourist VCs,” like traditional buyout funds (taking minority equity positions) and hedge funds, came a different mindset that was not obvious at first. These investors are showing signs of reverting to their true characters, which is reflective of their investment style and ownership levels. Many investors now want to exert control when they in fact don’t have controlling interest in the company and are surprised when founders and management teams push back. Or simply walking away and offering no assistance when things look like they are going south. This may not be surprising or wrong necessarily, but as a board director, an investor director must act in the interests of the company first, meaning all shareholders, not just themselves or the fund they represent and navigate that conflict well (often referred to as wearing two hats).
What should the board’s role be (and not be) in the current market environment?
With markets in turmoil, startup boards are now faced with a host of hard decisions. Startups that only months ago thrived in the bull market may suddenly find themselves needing to cut costs, extend their runways, or pivot their growth strategies. In their role of looking after all stakeholders boards should be:
Actively assisting in assessing opportunities and risks (and trade-offs) in the business
Supporting the CEO and management in making key decisions and then holding the team to account for ensuring the sustainability and success of the company
Helping drive alignment at the board level on key decisions and courses of action
Assist with communications on progress and decisions with all stakeholders as necessary
The onus is on every board member, be they an independent director, investor director or otherwise, to roll-up their sleeves and help startups traverse these new waters with prudent financial guidance and well-considered ideas drawing on customer, partner, or investor relationships. This does not mean micromanaging from the sidelines; it means being a true partner in the business.