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Evolution of Board

A business evolves through many stages as it grows from a startup towards the various plateaus that measure success. As the business evolves, so should the CEO and the leadership team. New roles are added, more senior hires are brought in, people are asked to leave the business, many times even the CEO changes in favor of someone who has the prior experience to take the business through its next plateau.

What about the Board of Directors? Often stacked with the original investors and one or more Founders, Board seats are not easily changed in the same way as the CEO's role or that of the leadership team. The Board needs to evolve along with the business but often does not, given the intransigent nature in which founding Boards are formed.

Strategic versus Working Board

Perhaps the first and most important choice for the CEO to decide is what type of Board is expected. A working Board is one that heavily focuses on operational goals. The assumption being that the CEO is not necessarily experienced to set out the appropriate annual objectives or necessarily know how to manage them as it is a first-time experience. A working Board can be very useful to first-time CEO, but care must be taken to make sure the Board does not effectively become the management team for the Company, something that is hard to unwind as experience is gained.

A strategic Board is one that would mostly focus on the strategic goals of the Company looking out over a multi-year horizon. The Board would not necessarily focus on the operational aspects of the business (aside from required governance issues). Choosing a strategic style of Board presumes the CEO and the management team can fully handle day-to-day operations and related decision making. It also presumes the Board is composed of appropriately experienced Directors to offer valid strategic guidance to the business.

In either case, the Board and the CEO should be discussing what the overall intent is for the Board so everyone is clear on how the two will work together to achieve overall success.

The Starting Board

The first Board members are often a combination of one or two of the founding employees and an investor (assuming the Company is not self-funded). The primary role of the Board is to provide oversight on behalf of shareholders, but it is often the case that early Boards largely ignore this aspect of their role. The Company is still just starting out, there is a small pot of money to manage, a handful of employees and likely only a handful of customers or prospects to talk about. The perception is that there is little to review on a formal basis, little point in establishing corporate bureaucracy and no need to meet frequently. What's missing here is that this is actually a great time to practice the roles and functions of the Board. You can focus on issues that prepare the Company for its path to success and be ready to make tough decisions having explored alternatives outside of the heat of a moment. Equally important is to get all the early Board formalities out of the way, like stock option planning, compensation standards, resolutions for banking and signing authority, etc.

To take advantage of this early stage, a time when things are somewhat quiet, the Board members have to be willing to treat issues with a serious and formal nature. Practice setting firm agendas for meetings, establishing the templates for reporting information from the management team (e.g. sales updates, expense and revenue waterfalls, etc). If the Board is made up of first-time Board members (e.g. the founders only), get someone involved as an Advisor who can guide the Board through what its mandate is all about (see Board Meetings for some examples).

Independent Board Members

The first step in evolving the starting Board is to find one or more independent Board members. Independent normally means they are not an investor in the Company nor hold an active operating role in the business. The best choice is to find someone who has experienced the challenges the Company is likely to face over its next two or three years. This is often someone who was or is a CEO or who may have lead a large department in a successful company. The choice is very similar to how you might round out the management team -- finding someone to complement the strengths and weaknesses of the other Board members. If the Board is one founder and two investors with primarily a financial management background, the value of an independent Board member with relevant operational experience is very high and often necessary to achieve success.

A common approach is to ask the independent Board member to represent the common shareholders. This mainly means they vote on relevant issues with an eye to make sure the employees best interests are protected -- in some ways, like a union leader without the obstinance unions often display. The investors on the Board normally vote with an eye to protect their investments and not necessarily the best interests of the management team or the Company employees. Conflicts can arise for sure, for which unfortunately ownership percentages tend to be the only way ties are broken -- something the investors often hold in majority.

Finding an independent Board member is not always easy, especially if you are looking for someone from within your target market who has an active operational role in their full-time job. You may find that some recruiting companies service this need and can help find an independent Board member for you. Like any full-time hire, make sure you fully define what types of experiences you are looking for, what you believe the duties and responsibilities should be (including amount of time likely to spent related to Board activities) and make sure you carry out a formal interview cycle. Choosing a Board member is an important decision, not one you want to have to revisit too often.

Oh yes, don't forget to define a length of term for each Board position, this provides a formal opening to change out Board members as the Company evolves -- which is the theme of this section.

New Investors as Board Members

New investment of any significant size often results in new Board members - i's often a condition of the investment. What this really means is you should include in your evaluation of a new investor what they can contribute to the Board. You may want their money, but if they have nothing to contribute through their operational or industry experiences, business networks or other skills, you may want to look elsewhere for investment money. Once you take it, you are often stuck with them as a Board member for the duration of your Company, which can hinder its overall success if they can't keep pace with the needs of the business.

A new investor is often focused on certain business stages, investing when they think the business is ready for the growth their investment can support. This usually signals the business has reached an important plateau and is ready to move forward to challenge for the next. When this happens, all Board positions should be reviewed and where possible, changes should be made coincident with closing the investment. Perhaps all the original investors holding Board seats fall under a single Board seat, the new investor gets a seat, the CEO and perhaps an independent. There is often little value in having a handful of investors with only financial experience sitting on a Board as they create a great deal of redundant oversight in one area of company operations and little in others.

Renewing Strategy

If your business needs to change direction -- to pivot away from failures towards better opportunities, pivot the Board with it. If you business is reaching 3 or 4 years of success, it is likely reaching the end of the founding strategy and is in need of creating a new one that can leverage the success at hand. In either case, you may not only need fresh blood on the leadership team but also on your Board.

Board members often can't be fired the way an employee can. They need to resign on their own -- or be voted off the Board by the other Board members. If you are in a situation where a Board member will not step down on their own, you likely have other problems to deal with -- but nonetheless, the role of the Board is to oversee the needs of all the investors, so taking the strong position of voting someone off the Board may be what is necessary.

If you are pivoting or renewing a strategy, the Board should be intricately involved. In an ideal situation, you have an Advisor or candidate Board member who is familiar with the new direction or plateau being targeted..An interesting choice exists in terms of how much you come up with the new strategy on your own, as you might have when founding the Company, or how much you jointly do it with select Board members. In either case, keep in mind that you are doing this in the context of a running business -- be clear with everyone of what is being explored, what the inputs and outputs are and the timelines that key decisions need to be made. Don't get caught languishing making decisions because the decision makers are not up-to-speed on what they need to fulfill their duties with the right insight.

Conflict

What do you do when the Board is not providing value? How do you handle conflict when the Board is trying to influence company strategy but the management team feels they are wrong? Conflict between the CEO (or management team) and Board often stem from the following:

It's likely the case that most CEO's see the Board as an obstacle to success. In fact, a well organized Board with clear objectives can provide great value to the CEO and the management team regardless of their level of prior experience. If you find yourself on the wrong side of critical issues, seek out a qualified 3rd party to join a few Board meetings to help present what would likely sound like a more objective opinion to right the situation.

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