This is part 2 of a two-part series on how startups can set up their governance structure. For part 1 of this series, head on over here. 

 

Investor board nominees is a complicated subject and requires special attention. Although in theory, these nominees, once appointed to a company’s board of directors, owe their fiduciary responsibility to the corporation under Canadian law, in practice that is often not the case, especially when the investor group is a venture capital (VC) firm.

I like to advocate to a founder to ask an investor group to nominate several  potential board representatives. Then the company has the opportunity to interview these individuals and select the person who is most aligned in skills and knowledge for your business. Your company is not a training ground for some young staff of a VC Firm; therefore, you have to ensure you are in control of this process (you are driving the bus).

In Brad Feld’s new book Startup Boards, Getting The Most out of Your Board of Directors, I like his suggestion for breaking board meetings into three discrete sections as follows:

Administration (30 minutes): Board overhead, resolutions, administration and questions about the board package.

Discussion (up to 2 hours): Discussion on up to five topics. The five topics should fit on one slide or be written on the white board. The CEO is responsible for time boxing the discussion, or if he needs help, he should ask the lead director to do this. This should be a discussion – you’ve got your board in the room – so use it to help you go deeper on the specific topic you are trying to figure out. These topics can be on anything, but his experience is that the more more precise the the context is, the richer the discussion. Feld prefers for the full leadership team to be in the meeting for this part and I agree with him. However, it is the prerogative of the CEO to follow this advice or not.

Executive Session (30 minutes): CEO and board only. Here the board can give feedback specifically to the CEO, and other things the CEO wants to discuss separately from the management team can be covered. At the end, the CEO leaves and lets the board have some time alone, while the lead director checks in if there is any feedback the board would like to give the CEO.

I recently read a missive complaining of the waste of time board meetings were and how they were just an opportunity for management to dump information onto the investors. At the same time, the commentator said he had attended over 150 board meetings. As a director, it is his obligation and duty to change that environment for the success and well-being of the corporation for which we as directors owe our fiduciary duty. The focus for the board should and must be the creation and execution of strategy and the forward direction of the company. Anything or anyone who detracts from that should be cast aside.

Most often when I see failed governance, the result is often a failed investment. More often, I see investors conscious of the governance structure of the company in assessing what is the likelihood that this CEO is working to get both a return of capital and a return on capital for this investment. It has occurred to me that as directors, we should ask these questions: What has been the board’s most significant contribution to the company over the past year? And how do we make the board more effective?

By way of disclosure, I am the managing director of Jaguar Capital, an advisory practice in governance, financial structuring and financial management. We are hired by many companies to assist them with their governance structures and to manage their advisory boards and boards of directors. I consult and give presentations on these topics for both early and growth stage companies.

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