The Board Of Directors

One of my preferred blog related to VC topics  is AVC. In this blog Fred Wilson started an interesting series called MBA Mondays. In this series he describes the startup world from a frontend (VC) and a backend (Management team) perspective. In particular there are several posts related to board of directors.

In the following points I’ll resume his view:

  • Role and Responsibilities: The Board of Directors is the governing body for a company. All major decisions will need to be ratified by the Board. However, the Board should not run a company. That is the role of the CEO and his/her senior management team. The Board’s job is to make sure the right team is at the helm, not to be at the helm themselves. The company works for the market (and I am using the word market in all of its meanings) and the Board and the management team work for the company. There are many CEOs who want to manage their Board. That is a mistake in my opinion. A great Board manages itself and treats the CEO as a peer and gives the CEO’s opinion great weight. But a great Board is not a rubber stamp. Boards should not be controlled by the founder, the CEO, or the largest shareholder. For a Board to do its job, it must represent all stakeholders’ interests, not just one stakeholder’s interest
  • Selecting, Electing & Evolving: boards evolve. If we consider the case of Twitter in the first year it was one investor and two founders and a founding team member (4). In the second year it was two investors, two founders and a founding team member (5). In the third year it was three investors, two founders, and two senior team members (7). In the fourth year, it was three investors, two founders, a CEO, and three independents (9). And now it is one investor, two founders, a CEO, and three independents (7). Many of these changes in the Twitter board happened at the time of financings. One of the most important provision to negotiate as an investor is in fact a board seat
  • The Board Chair: the Board Chair runs the Board Of Directors. The Board Chair should be on the nominating committee and should probably run that committee, but is not necessary to be on the audit and compensation committees, is sufficient to know what they are discussing. Typically founding CEO will also carry the Chairman title, but this role is important only for more than 5 members’ boards. The best fit for the chair is an independent director who takes on the role of helping the CEO manages the Board. The CEO runs the business.
  • Board Chemistry: When you are building a Board, you must think about chemistry as much as you think about it when you hire a team. You want to have a Board that can work well together. Once build you need to maintain the momentum with dinners before or after the meetings, or annual Board off sites where the group spends an entire 24 hours together
  • Board Meetings: A Board cannot be effective if it doesn’t get together frequently. Some Boards meet monthly, or twice a quarter. Board meetings should be discussions. They should be interactive. They should have some structure. But they should not have too much structure. There should not be too many topics. I think three or four are good. One or two can be tactical items. Board meetings should last two to three hours. I think two hours is too short. But more than three hours of intense discussion will turn most brains to mush. Some techniques for effective meetings: 1) the first is that the Board deck should be sent out three or four days in advance and it should include all the important financial and operational results for the Board to consume in advance of the meeting, 2) the CEO puts up a list of the three or four things that are “keeping me up at night” at the start of each meeting, 3) have an executive session at the end of the meeting. This is when the Board meets without the CEO and team in the room and has a discussion of the meeting and what the key takeaways are. After the executive session ends, the CEO should either be invited back to have a debrief on the executive session. Boards should not miss this opportunity to provide feedback and CEOs should demand it of them
  • Board Committees: the goal of the board is providing strategic advice, accountability, and feedback to the CEO and the management team, moreover the Board is required to provide oversight on the Company’s financial statements, the Company’s compensation plans, and the ongoing maintenance of the Board. Committees should be created for more than 5 person boards. The audit committee provides oversight of the CFO function, the auditors, and related matters (which might include tax compliance, SEC compliance, etc.). The compensation committee provides oversight of the Company’s compensation plans, including equity compensation, and also is directly involved in setting the compensation of the CEO and often the senior management team. One of the compensation committee’s most important jobs is to help a company create, manage, and evolve its equity compensation plans. That can include restricted stock for founders and early employees at the start of a company, it can include an option plan, and it can include a restricted stock plan for public companies or restricted stock units for late stage private and public companies. The third and final most common Board committee is the Governance Committee. This committee is responsible for recruiting and nominating new directors, identifying directors who should leave the board and asking them to leave, setting the board meeting schedule, and a host of other “self governing” issues for a Board. A good setup is to have three person Board committees, with one chair and two other members. Board committees should meet regularly. These meetings are often done before the main board meeting
  • Guest Posts: Following some suggestions from Scott Kurnit: 1) Your best friend should be on the Board, and 2) No one who works in the company other than the CEO should be on the Board, and Matt Blumberg: 1) they are prepared and keep commitments, 2) they speak their minds, 3) they build independent relationships, 4) they are resource rich, 5) they are strategically engaged but operationally distant

In conclusion the board of director should have 2 main roles: 1) strategic, empowering the CEO to define the long term route for the company, giving to him an higher view of the business, 2) operational, defining a set of procedures to guarantee that the company actions are in line with the stock holder interests. For this reason if I try to visualize CEO-Board interaction, I found that the legend of the centuries by Magritte, is a nice representation: a small chair representing the CEO, on top of a bigger chair representing the board.

Now that we know the functions of the board, would be interesting to find how boards is companies like Google, LinkedIn or Apple have been evolving in time, and why.

Do you know any good source to find board evolutions information for Internet companies? Have you discovered some index that rates boards?

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