BoD Dynamics

Quick Summary: The CEO is responsible for the cohesiveness and effectiveness of the Board of Directors.

Abstract:

Working with any group of individuals is always challenging.  Except for some rare circumstances and individuals, everyone wants to be successful and make a difference in whatever endeavor they are pursuing.  Members of Boards of Directors are no exception.  With the typically diverse backgrounds of Board Members and their only occasional involvement with the company, it is challenging to form and maintain a cohesive environment that meets the needs of all involved individuals. As the common focal point, the company’s CEO must take on the responsibility of managing the board to everyone’s satisfaction.

When two or more people are gathered together, there are always dynamics and often, unexpected interchanges of thoughts.  Board of Director meetings are no different.  Directors are brought together with one common theme; helping the company grow and prosper within ethical and legal boundaries.  Board Members may have had no previous interaction with each other except during board meetings, conference calls, and sharing of emails and other correspondence.  In practice, their interaction may be limited to only a few hours per month.  Some members may be in far more frequent contact with the CEO while others will only be involved in the formal meetings.  With these comments in mind, it is easy to understand that the CEO, the common denominator, has a challenging job in managing the Board to ensure that all members are fully engaged and satisfied with their involvement – This is no easy task!  The task becomes even more difficult when (not if) the company experiences difficult times.  The CEO is expected to navigate these potentially troubled waters, but their Board will be onboard with them.

There are a few general points, listed below, that may help a CEO in establishing a healthy relationship with their Board.

Board Composition

The Articles of Incorporation or the Operating Agreement will specify the makeup of the Board of Directors. When a company is first formed, it is not uncommon for the entrepreneur, now the CEO, fill in their names for all required positions such as President, Secretary, and Director to comply with State or Federal reporting requirements.  During this period and as the company begins to take form, board meetings may be small, unofficial gatherings of a few outside advisors, a mentor, and a few key individuals from the company.  This arrangement may continue as a few smaller investors, perhaps friends and family investors, become involved.  At some point when “professional” Angel investors and certainly when Venture Capital investors become involved, the rules change; a formal Board of Directors is formed.  Boards are most often made up of an odd number of voting directors to avoid any voting ties – which rarely occur.  Private company boards commonly have five or seven directors.  Public Company boards have more, and Non-Profit organizations can have dozens of directors.

Each board will develop its own personality based upon its size and the personalities of the individual members.  Although, in theory, all Board Members have equal status, the financial investors (Angels or VCs) have more implicit power than others due to their financial stake in the outcome of the company.  The tongue-in-cheek Golden Rule applies: “He who has the gold, makes the rules.”  Other Inside or Outside Board Members, as discussed in article 7.010404, “Board of Directors,” are likely to follow the financial investor member’s desires recognizing their power and influence that they have in terms of future funding and potential exists.  As a company raises more capital, some new investors may join the Board through a different class of stock.  Based on the investment terms, they may have class rights that can wield enormous power.  Certain board decisions, for example, may require each class of stock to approve a specific action.  So, one Board Member, representing one class of stock could stymie a proposed action. No one benefits from a dysfunctional board.  Board Members usually go out of their way to avoid any board conflicts.  A separate article, 7.020103, discusses some of the potential areas of conflict that can occur.

It is always beneficial to include Outside Directors, who have specific market experience that is applicable to the company.  Companies rise and fall based on the market demand for their offerings.  Outside Directors, with no financial interest in the company, can provide unbiased assessments of the company, their competitive position, their tactics, and most importantly, the viability of the company’s long-term strategy.

It is important that some (most) of the Board Members have experience with the trials and tribulations associated with small, private companies.  The issues that they face are dramatically different than those of larger, more mature companies. 

Board Expansion

When boards are expanded, usually due to another round of financing, the first few meetings may be different than previous meetings.  A new dynamic may develop between the Board Members.  New members may be very quiet while they try to assess “What is really going on” now that they are part of the team.  Existing Board Members may try to act “tough” or overly involved, and virtually everyone will want to “have their say” about issues.  The new dynamics will quickly be established, and a degree of normalcy will quickly set in. 

Make Allies through Trust

Although it sounds obvious, the CEO must go out of their way to make allies with the Board as an entity, and each member individually.  If a sense of ill feelings or hostilities with or between any members begins to appear, quick and decisive action needs to be taken to understand the underlying root cause and to resolve it.  Above all, the CEO must develop a mutual level of trust between themselves and each Board Member.  Nothing else matters if trust is not present.  The process of building trust is remarkably easy:  Do what you say you will do.  When targets are missed, openly acknowledge the fact before others somehow “discover” them on their own.  No company, especially new companies, meet all of their milestones and forecasts consistently.  Board Members clearly understand missteps and setbacks.  The CEO’s honest assessment of the company, shared with the Board, is critical.  Article 7.020303, discusses this issue.

BoD Member Time Allocation

Although CEOs have a single focus on the operation and success of the company, Board Members do not have that luxury.  Even “retired” Board Members have other commitments and do not spend full time working with or thinking about the company.  Board Members may be CEOs or senior executives of their own companies, primarily focused on their issues.  Financial investors, with the highest stake in the company, probably have the least amount of time to allocate to the company.  As an example, a venture partner can, realistically, be involved with a maximum of ten companies at any given time.  Available time will be the partner’s biggest constraint.  As a partner’s portfolio turns over, they must constantly be looking for new investment opportunities and make them at a rate of two or three per year.  Based upon the types of investments and the level of involvement that a partner may choose (or be required) to have, the ten-company involvement level may be overstated.  

Venture capital investor, with several portfolio companies under their supervision, will also be actively investigating other potential investments, working with their colleagues on some of their deals, staying abreast of industry activities, and maintaining their contact network.  With these commitments, an investor can allocate a maximum of one to two days per month to any one company.  Except for board meetings, this time will come in small increments usually in short weekly phone call updates and emails.  The CEO should not be surprised if they have a hard time contacting and receiving responses from investors in real-time.  Although it is hard to accept, the fact is that their company and its issues are only of small concern (one of ten companies) to the investor.  Board Members are committed to the company’s success but must also share their time with many others as well.  

Help and Support

CEOs often are often reluctant to ask Board Members for help or guidance in certain key areas.  Asking for help is a sign of strength, not weakness.  The (new) CEO cannot possibly have all of the answers, and no one expects them to have them.  With the experience of the Board Members, their contacts, and their access to other resources, they can be a tremendous help.  It is important to be very specific with requests.  Board Members (especially venture capitalists) are incredibly busy with little time to speculate about what is really needed.  Also, most of them are heavily results driven and do not like to fail (do any of us?).  Direct requests to the most appropriate members of the Board.  Also, do not be afraid of telling them the date that you need an answer.  Remember, Board Members want the company to be successful.  Asking for help to achieve this goal is totally within the CEO’s bound of responsibility and will be welcomed.

CEO Focus Trap

Chapter 2.04 of this collection discusses Principle 4:  Provide an Acceptable Return to All Investors.  In that chapter four groups of investors are discussed. They are, in rank order, 1) Employees, 2) Business Partners, 3) Customers, and 4) Investors.  It is easy to assume that financial investors control the fate of the company.  However, without successful relationships with the first three investor groups, the company will not succeed. It is easy for a CEO to take the first three investor groups for granted and focus their attention on the financial investors instead.  Further, during Board Meetings, it is easy for the CEO to focus only on the financial investors.  Even continuous eye contact with the financial investors will not go unnoted by the other Board Members.  All of us have egos and want to be treated with Dignity and Respect (Principle Two), treat all Board Members accordingly.

Employee BoD Perceptions

The only thing faster than the speed of light is the speed of rumors in a company!  Perhaps this statement is overstated, but one thing is certain, rumors will be ever-present.  Immediately before, and certainly, immediately after a board meeting, rumors will fly.  Of course, positive rumors have a very short life, while negative rumors seem to last a long time and grow without bound.  CEOs should take the rumor mill into account and regularly and timely meet with the company or key managers and leaders to quash rumors and share factual data as soon as possible.  Even a CEO’s frown observed by others, perhaps caused by spilling some coffee, may be assumed to be caused by bad news from the Board.

 

Article Number : 7.020102   

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