In the exciting (yet challenging) world of launching startups, maintaining a strong and diverse board of directors (BOD) can often mean the difference between smooth sailing and disaster.
If you're an investor (or perhaps even more pertinently, if you're the CEO of the startup), then it's absolutely in your best interest to evaluate the composition and expertise of your launching board.
Of course, evaluating a board of directors is no small feat. And if you've never done it before, you may be asking yourself:
“What am I supposed to look for?”
Well, in this post, we're going to help you answer that question. Let’s dive into it.
Understanding the Basics - The Board of Directors
A basic board of directors is essentially a group of individuals who are elected by the shareholders to govern the company and protect the interests of the shareholders and stakeholders.
Their primary role is to oversee the activities of the company.
They do this by providing strategic direction, oversight, and governance.
Their end goal should always be the long term success of the company.
And for startups, putting together a well-composed board is both challenging and crucial.
Having a well composed board to help you run your startup is a lot like having a high tech navigation system fitted to your ship.
Without it, you might run into every single invisible iceberg that awaits you on your path.
But with it, you can avoid these shipwrecks and (more) safely make your way to the dock of ‘long term success.’
What Does It Take for a Board of Directors to Be Effective?
There are a number of things you'll want to look for as an investor or CEO when evaluating the composition of your board.
Skills and Experience
Ideally, a board of directors will boast a diverse mix of skills and experiences relevant to not only the industry, but also the stage of growth of the startup.
For best results, you'll want board members who represent such strategic areas of knowledge as finance, technology, operations, marketing, and legal affairs.
Diversity
Diversity is crucial for any modern startup. And to be honest, this isn't just about gender or ethnicity (though those things are often very important as well).
A diverse board should represent a collection of members whose perspectives, backgrounds, and experiences will lend to fostering the type of creativity, innovation, and broader understanding the market will demand of the startup.
Startup environments in this day and age are increasingly complex—and understanding how to effectively navigate issues of diversity is going to be more crucial than ever.
Independence
As a general rule, it's a good idea to appoint independent directors to your board.
Independent directors are essentially board members who aren't a part of the company's executive team.
The benefit here is that independent directors can help to provide unbiased oversight. They can also help to mitigate conflicts of interest that may go on within the executive team. They can also offer fresh perspectives and challenge the status quo.
Learn about establishing a solid governance framework in our article on Corporate Governance for Startups: How to Implement.
Strong Industry Connections
Regardless of the specific nature of the industry of your startup, it will be crucial to maintain board members who are well-connected in that particular industry.
Strong industry connections can pave the way to new company partnerships, investors, and customers.
Networks will also undoubtedly be instrumental in helping you to accelerate growth in the early phases of your startup.
You know what they say—it’s not ‘what you know,’ it’s ‘who you know.’
And this absolutely also rings true for the board of directors.
Why Do Startups Need to Evaluate the Composition of Their Board of Directors?
There are a number of reasons for this. Here are some of the more ‘pertinent’ examples:
Strategic Alignment
Every startup is going to launch with a strategy. Then, over time, that strategy is going to pivot.
As the company grows, its needs are going to evolve—and having a board of directors who can provide the kind of support and strategic direction that the company will need in order to weather these early storms is going to be crucial.
Explore how strategic planning can help manage conflicts in The Role of the Board in Strategic Planning.
Risk Management
Every startup is going to face a complicated amalgamation of risks.
Market volatility, regulatory challenges, and even cash flow and profit loss issues could (and probably will) all serve as possible landmines on the path of success.
A well composed board can help to identify potential risks early on, and can also assist the CEO in developing strategies to mitigate them.
Fundraising Success
In the future, your startup is likely going to need to raise more capital to grow and expand.
But here's the thing about investors:
Smart investors will always look for strong governance when deciding where to place their hard earned cash.
If your board is well composed and robust, you’ll boost investor confidence and attract the kinds of high quality investors that your startup wants to work with.
Operational Efficiency
Board members who understand the unique challenges of the startup’s industry can offer practical advice and mentorship to help the startup streamline its processes and operations—thus empowering it to achieve milestones faster and with greater consistency.
Long Term Vision
Every successful startup is going to require a long term vision that extends beyond its short term goals.
A board that maintains a long term perspective on the company's growth can help to fuel this vision and make decisions that will lead the company toward longevity.
By contrast, a board that isn't operating with a long term vision might make decisions that seem profitable in the moment, but that will cripple the startup on its long term voyage to sustainability.
What Can the CEO Do If They Don’t Believe the Board Composition Is Adequate?
As an investor, discussing your concerns with the CEO may be the best first step.
If you are the CEO, however, then the first step might be to evaluate the current board composition and determine whether there are any holes.
Thankfully, there are a few steps you can take if you feel that your board composition may be lacking.
First of all, you can communicate your concerns. Discussing the issue with current board members could serve to highlight the gaps. At this point, changes could be proposed and/or additions suggested to close the gaps.
This might mean identifying potential candidates who possess the necessary skills and experience, and then providing a rationale for your recommendations.
Seeking external advice from advisors or consultants who specialize in board governance could also be a fantastic way to start moving in the right direction. If you don't feel completely at ease with the composition of your board, this could be the key to gaining some clarity.
You can also engage with shareholders and elicit their support for board changes if they need to be made.
Other options could include leveraging board committees to address specific gaps, and to create a succession planning process for board members to ensure that any future appointments will align with the company's evolving needs.
Chairman vs. CEO: Defining the Roles
Understanding the lines of responsibility that separate these two positions is crucial to avoid ‘blurring the lines’ between board responsibilities and the functional duties of the executive team.
The chairman serves as the leader of the board. Their goal is to ensure that the board operates effectively and that their decisions align with the company's strategic goals.
The CEO, by contrast, manages the day to day operations of the startup and implements the board's strategic directives.
If you are serving as the CEO of a startup, then maintaining a clear delineation of roles with the chairman of the board can really help to ensure smooth governance and prevent power struggles.
Do Board Members Get Paid in Startups?
In most startups, board members don't receive any direct compensation, especially in the early stages.
Alternatively, they may receive equity or stock options as a form of remuneration.
This is sometimes aimed to keep their interests aligned with the company’s long term success.
Simply put, board members who have a stake in the company's future are far more likely to make decisions that will align with progress as the startup moves forward, faces challenges, and evolves/grows.
Stakeholder vs. Shareholder: Who Does the Board Serve?
Shareholders own shares in the company. Thus, they tend to be primarily concerned with the ‘financial returns’ granted by the startup’s success.
The term ‘stakeholder,’ however, is used to describe anyone who is in any way affected by the company’s actions.
Thus, the term ‘stakeholder’ could also be used to describe employees, customers, suppliers, and even the greater communities who are impacted by the success (or lack of success) of the company.
A proper board composition will ensure that the interests of both the stakeholders and the shareholders are taken into account—not just the shareholders.
This leads to ethical business practices and more sustainable business growth in the long term.
For more on maintaining ethical standards, read our guide on Ethics and Integrity Considerations in Board of Directors.
Conclusion
The truth of the matter is that a proper and diverse board composition is really a prerequisite requirement for success.
While it may technically be possible for a startup to achieve success without a well composed and diverse board, every startup is going to maximally benefit from a board that is not only experienced in the relevant industry, but that also boasts the kinds of skills, diversity, and industry connections required to help move that startup from conception to future phases of growth and success.
Thus, a properly composed board is actually a fairly fundamental cornerstone of startup growth.
