Founders: Here’s how to build an effective board

As an investor in high growth businesses, I’ve sat on many a board, and in my experience one of the key factors in a young company’s success is the way it knits together a strong team of directors. Many a startup has veered off course by overpopulating its board with investors — or overpopulating it in general. Others have run into problems by failing to find the right chairperson or independent directors. Striking the right balance is never easy, but there are a few guidelines founders can follow to increase their chances of success. Here are the top 10 things to keep in mind:

1. Having the right chairperson is all important.

I don’t think many CEOs like to acknowledge this, but actually the chairman or woman sits right at the top of the company. Clearly they don’t run the business on a day-to-day basis, but they do make many of the major decisions, which makes the relationship between the CEO and the chair critical. Some people think the chairperson just turns up once a month, but in my experience they are probably spending a day a week in conversation with the CEO, some of the executive team, and other board members, often deep-diving into a particular area of concern or opportunity.

2. A great chairperson will be able to drive a decision through a divided board.

As long as a chair has the trust of the board members, they will (almost always) be able to build consensus when a board is split.

3. They also run a tight ship.

The best type of chairperson goes around the boardroom table, ensures everyone’s been heard, summarizes the situation with clarity and – crucially — runs board meetings on time, whilst ensuring the key topics are fully discussed. If those sound like straightforward things, they rarely are. I’ve seen founding CEOs perform the chair’s role and get absolutely bogged down because the investor/directors start asking a bunch of questions that take them off-agenda. Understandably, founding CEOs often feel like they have to kowtow to their investors. But the great thing about a high quality independent chairperson is that they don’t feel beholden, which frees them up to run a tight ship and cover the topics more thoroughly.

4. Independent directors are critical, too, and the best way to find them is through personal networks.

By “personal networks,” I mean both those of the company’s investor base and those of the executive team and non-exec directors. If you start pulling all those strands together, you end up with quite a big network. If that doesn’t work, there is no harm in launching a proper search and select process. Head hunters are adept at finding great independent directors, and you can be very specific about what you’re looking for, depending on the strengths and weaknesses of the board at that moment.

5. Ideally there should be no more than eight people on any board.

On rare occasions, boards can work with 10 people, but they are the exceptions. In my experience, eight people or more just gets tough. How, for instance, do you allow everyone to have a voice? In terms of composition, I’d always want the CEO on the board, and probably the CFO. Other executives like the sales, marketing, and technical leads (CTO) can come in and present to the board, but you’re not asking them to attend every meeting. So you end up with two, maybe three, executives and four or five independent directors and investors.

6. Investors on boards are like martinis. The first one’s great; the second is fine too; but three are more than enough.

My experience is that many founders, when they take on a VC or PE investment, forget or overlook the fact that we’re running a business too. Of course, they understand that in principle, but they often don’t take into account how it’s going to impact the way we look at their company. For example, most funds have a 10-year life cycle, so understanding where a fund is in its life cycle is important as it can define exit horizons. (If, say, this is year six or seven of a fund, then clearly that investor is looking at a three or four year journey at most.) Investors know how much other investors on the board have in reserve, what they’re going to do when the next fundraising round comes up, and how they’re likely to behave when an acquisition becomes likely, and so on. So with two or three investors around the boardroom table, alignment can be easily reached. But once you get to five, six, or more investors, all with competing agendas, you can become entangled in a mess.

7. In an ideal world, boards should meet face-to-face six times a year.

You really have to do quarterly board meetings at an absolute minimum. Then you’re going to have to do another two meetings around forecasting for the year ahead and strategy discussion. So the likelihood is that six is your minimum, and in all probability you’ll end up at eight, because there are always a couple of dial-ins on urgent matters.

8. Executive teams shouldn’t be wasting hours of their time preparing slide decks before board meetings.

Far better for executives to spend their (limited) time summarizing what they’re already looking at when they run the business on a day-to-day basis and reporting it up to the board.

9. The entire board should meet for dinner either before or after the board meeting.

It doesn’t have to be every time, but talking informally gives you a feel for the social fabric of the board, the interpersonal relationships and dynamics that can prove invaluable when the meeting gets going.

10. Boards should be fluid and evolve as a company grows.

Businesses need different directors at each stage of their growth. When you’re a startup, your main challenge is that you’re unknown. You’ve got ideas, but you’re without revenue and customers, so you need highly creative people on your board who’ve done a ton of startup work, have a network of engineers, and have marketing and PR contacts. Fast-forward a number of years, where you’re pre-IPO, and simply because of the nature of going public, you will want to have people on your board who understand what it’s like to run a business of probably a thousand people or more, and who understand the organizational structure you need around that. You’ve got to start morphing into a pre-IPO board at a pretty consistent pace, probably over a seven- to 10-year period. So a non-executive director, for example, has to recognize that there will come a point when they’ll need to make way for someone else. And as long as they’re clear about that on the way in, then there are no surprises later on.

Laurence Garrett is a partner at Highland Europe. He represents Highland Europe on the boards of Intersec, Social Point, and NewVoiceMedia, and is involved with the investments in Brandwatch, eGym, Malwarebytes, Matchesfashion.com, and Talentsoft. He was previously a partner with 3i Group, where he was responsible for investments such as CSR (IPO), UbiNetics (acquired by Aeroflex and CSR), Trigenix (acquired by Qualcomm), Insensys (acquired by Moog and Schlumberger), Ezurio (acquired by Laird), and Icera Semiconductor (acquired by Nvidia). Independently, he was an active board member of BlueGnome, which was acquired in September 2012 by Illumina Inc.