Over the past months, we have encountered a number of young technology companies that are not making the progress that they should be. Interestingly, when we took a closer look we found that they all had one thing in common — a dysfunctional board of directors that was not taking an active role in setting the direction for the company and seeing to it that the company’s CEO was “staying the course.”
Active Means Active
"Strong boards usually help build strong companies."
–Jill Andresky Fraser, financial editor, Inc.com
Not surprisingly, establishing and working with a strong board is not a skill that comes naturally to most entrepreneurs. Nevertheless, the more we see stagnating companies, the more we are convinced of the critical nature of the board. If your board is only a “reporting board” (read the article to find out what this means!) then it may be time to start worrying.
A strong and active board of directors is critical to the progress of any start-up in its sometimes difficult evolution from a few people with a good idea to a solid company with marketable products. It can help the company gain credibility in the outside world, complement management's strengths and skills, and function as an all-important sounding board.
Zohar Gendler, general manager of the Technion Entrepreneurial Incubator Co. Ltd. (TEIC), is experienced in assisting start-ups in board selection. He believes that it is essential to have an effective and dedicated board, explaining that "the decisions reached during the early stages of a company impact the whole life of the company — from deciding on product characteristics and target markets to formulating strategic plans and timelines."
According to Gendler, "The company that benefits from the active involvement of the directors in closing deals and in selecting the CEO and other key personnel, is off to a very good start." Bradley Feld, in the Inc.com guide "Building a Great Board," emphasizes the importance of a working board of directors, as opposed to "reporting" or "lame duck" boards: "These boards roll up their sleeves and help the founders and management team of the company get the job done. They meet frequently, have animated, engaging discussions, and offer significant ongoing support and help to the key owners and managers of the company."
Picking a Winner
So what should entrepreneurs look for when putting together their dream team? Steve Rhodes, Trendlines managing director and a veteran board member, recommends creating a board that complements the existing management. "Look for people who will bring new areas of expertise to your company," he says. "If you own a small technology company but don't have any marketing experience, seek out directors who can provide that expertise."
MIT Enterprise Forum's Joe Hadzima reinforces this approach. "Directors can have relevant industry experience, general business experience, growth company experience, financing expertise, strategic contacts, financial community credibility and many more attributes." He asks, "Which is most critical for your business?" He notes that "not every director will have all of the desired attributes and not all of these attributes may be needed at the same time — some are more important in the short term while others might be more critical over the longer run."
Strings Attached
Key investors will usually insist on at least one board seat as part of the deal. As one VC fund veteran comments, "We invest in the company because we see a great potential. How else can we ensure realization of that potential unless we're an active part of the company's decision-making process?" "We know how sensitive this whole issue can be for the entrepreneur. So we make sure that whoever's representing us on the board can add positive value," he adds.
The sensitivity comes from the entrepreneur's two big worries: (1) the investor/director will try to dictate policy, and (2) he or she will lose their job as a result of the director's dissatisfaction with the way things are progressing. Whether or not these fears are real, it's important for the entrepreneur to negotiate with the investors regarding their choice of representative.
Connections, Connections
Gendler knows a strong board of directors can provide "essential networking opportunities" for the company. And Feld states that "good board members...have a very broad range of contacts that they can reach out to, which may include possible financiers, strategic partners, or even potential customers."
When it comes to raising funds, American Express Small Business Resources notes, "Board members who have a strong financial background and knowledge of how to raise money are always an asset." Gendler concurs: "The stronger the board, the easier it is to raise capital for the company."
Dedication
What is considered the single most important reason for becoming a director?
According to a Deloitte & Touche survey of Fortune 1000 Directors, 74% cited "the opportunity to contribute and be part of a force for change," while 61% favored "respect for the CEO."
"The commitment has to be there," emphasizes Rhodes. "Each director needs to be willing to get involved and stay engaged." This might mean attending meetings on a regular basis, representing the company, activating connections to help the company, and so on. The company should ensure that the board receives regular (and sometimes real-time) updates to keep the involvement flowing and to prevent potentially embarrassing scenarios
Composition Cautions
Keep the numbers down. "The smaller your board, the more efficiently it is likely to operate," according to American Express Small Business Resources.
Make the most of your network of family, friends, and business acquaintances but proceed with caution. Inc.com's financial editor Jill Andresky Fraser warns that prospective investors might not be too impressed when calling up board members to check out the company caliber. "If they wind up speaking to your brother-in-law and your best friend from kindergarten, that's not going to speak too well of you or your company."
A Last Word
"The best board of directors an entrepreneurial firm can hope for is one that is outspoken when it comes to challenging management and is in possession of expertise that will actively contribute to the company's success—namely, knowledge and skills that the entrepreneurial venture is currently lacking and unable to purchase," according to John McCarthy of Insight magazine. "The value of this board of directors will far outweigh matters of money or investment in the long-term health, growth, and prosperity of your company," he concludes.
As Rhodes points out, "Your board of directors needs to be more than an impressive letterhead or an assorted collection of friends and cousins. With the right people and a clear agenda, it can be your company's springboard to success."
