Entrepreneurs and founders of innovative technology companies are often thrust into the world of governance. Unfortunately, this is largely by happenstance or as a result of the requirement of the terms of a financing. As shown by BDC’s 2014 research, 76 per cent of private corporations in Canada neither have an advisory board or a board of directors. Anecdotally, most technology growth stage entrepreneurs give very little attention to governance until it is forced upon them by a venture capitalist or angel investor.
Why is this process often neglected?
Entrepreneurs are passionate about their company’s vision. Finding the right board member who shares a similar thinking and strategic direction can be a difficult and tedious process. However, when a technology company achieves effective good governance, it should be celebrated. Most entrepreneurs who achieve this “holy grail” for their company will have added confidence in their ability to execute on their mission and strategy. A February 2016 report by McKinsey and Company reported that 69 per cent of effective boards cited being able to effectively adjust strategies regularly and that 36 per cent of corporate boards cited that their board of directors had a very high impact on long term value creation. Having an experienced board that can provide strategic direction to day-to-day operations is vital to the building of a tech company, regardless of its stage of growth.
It is important to note that, as the report states, “private companies are not simply miniature versions of large companies.” This is a common misconception that fails to outline many of the financial and legal ramifications during the company’s lifecycle, including its board. For example, “the majority of Canada’s Start-up’s face major transition points when they expand with debt, seek capital or catch the attention of potential acquirers.” This is where the sage advice of experienced board members meets its ultimate test.
There are few experiences that can have as wide a range of outcomes on the spectrum, from total nightmare to self-fulfilling achievement, as sitting on a board of directors. When one has the privilege to serve on a good board it is a pleasant, educational, and a rewarding experience. When the opposite is true, it can be exasperating, energy draining, and very frustrating. I have personally enjoyed the former and attempted to turn around the latter with varying degrees of success.
The roles and expectations of board members have changed dramatically in recent years. Recently I heard of a case where the board of a tech company deliberated over an offer to sell the company for only two hours. This is not acceptable due diligence for a group of directors charged with governing a company. Rightfully the company’s directors were successfully sued.
Here are some of the characteristics I find to be common in a good board of technology companies.
1) Great leadership
In most organizations I have been a part of – whether it was a public corporation or the private companies I serve on the boards of – I’ve always found that strong leadership leads to a well-run company and a well-functioning board. Consequently, the most pertinent causes of a dysfunctional board – a lack of cooperation and respect among its members – tends to be a lack of leadership. With a confident and mature CEO, there will usually be a strong lead director or chair of the board who ensures that there is a strong “Tone at the Top”. This leadership creates trust between management and board members, in addition to providing a healthy environment for all stakeholders. Both of these positions must be filled with well-meaning and strong individuals of integral character. If not, the leadership on the board must be instrumental in weeding out unqualified board members and those board members who are disruptive or unprepared. Some may need coaching and others may need to be plainly relieved of their board duties. Finding the right leadership can be a tedious process, but is instrumental in building long-term success for a company.
2) Strategically minded
An organization whose CEO, chair, directors, and management are aligned is most often the organization that will have a strong and successful board. Board members tend to say they make their biggest contribution on strategy, whether it is a start-up, a charity or a Fortune 500 company. When the board is holding the CEO accountable for this strategic direction and the directors are not getting their fingers, or worse, noses into the weeds or micro-operations of the company, the best chance of success exists. I have often experienced boards where the director(s) lack governance experience and education. Often times, they will compensate for this by getting into the minutiae and minor details of the organization’s operations. When directors are mature, experienced, educated and confident in their board roles, the resulting board is often well-functioning.
3) Board meeting organization
The boardroom meeting is the formal place where the board exercises its duties and responsibilities. Directors must be prepared and those meetings must be well planned and effective to ensure that the board delivers on its mandate to the company. This is where the constructive partnership between management and the directors is on display. A well-managed board meeting goes a long way to producing effective results. David Dobson, a professor in managing growing enterprises at Stanford University, mentions that “if you leave those board meetings consistently prepared to do something differently because you learned something from the board meeting, that’s the mark of a good board”. A board meeting agenda is required for ultimate productivity; it should include a clear purpose and schedule that helps directors understand why they are there. Administrative or routine matters can be dealt with in a “Consent Agenda”, which is provided in the meeting’s pre-reading. Sending out a quarterly survey on how meetings are executed and complete an annual board performance assessment helps ensure the board remains current to the company’s needs.
A well-functioning board requires diversity of thought, experience, gender, and culture. Although strategic alignment is important, if all of the board members think and act alike, their decisions will reflect their lack of diversity. This doesn’t only mean culture and gender; well-run boards also reflect diversity of age, experience, and industry.
This includes complementary skills such as: risk management, channel distribution, sales, marketing, human resources, compensation, information technology, finance, fundraising, and industry vertical knowledge. Brad Parry, an experienced tech company director and partner at DCB Investment Partners, indicates “the most imperative ingredient for a well-functioning board is alignment. And not simply between the board and the Executive team, but amongst the board itself. If there is strategic misalignment or if personal agendas take lead, the odds of the venture to succeeding are greatly diminished”.
A board needs to be clear about duties, roles and responsibilities of its directors in the recruiting process to ensure that applicant’s expectations and the company are aligned.
5) Time commitment
The days are over when a board member could hold down 10 or 15 board roles. As an individual board member, you have to be committed to the agenda and work of the board you sit on. Effective board members spend an average of 41 days per year on board tasks and it is clear that this is a considerable commitment. A board member should have the time and schedule flexibility to be able to attend between five and nine board meetings and another five committee meetings a year and be substantially prepared for those meetings by reading the pre-meeting materials. This isn’t, however, always the case. Many boards are composed of directors who act distant and detached. A director cannot deliberate and participate in a discussion without being prepared. In the case of a large bank board, the suggested time commitment is half of a full-time career position. Even if you are on the board of a growth stage private company that is raising financing or being acquired, the time commitment can be substantial for extended periods of time. Therefore, to ensure your board is high functioning, you require board members who have the proper amount of time and schedule flexibility to discharge their responsibilities properly. Any good board member wants to add value; but time dedication is vital.
6) Strong committee structure
A high functioning board will have strong committees with effective leadership. Committees will do the heavy lifting on specific board work that will include committees such as: audit, compensation, governance and risk. Depending on the need and complexity of the company, there will be committees for: IT, cyber security, investment, finance and merger and acquisitions when required. The directors will be confident in discharging their duties when they are presented with well-framed reports from the committees of the board.
7) Conflict of interest
As a member of the board of directors of a private company, or any Canadian corporation for that matter, you owe your fiduciary duty to the corporation, not just to the stakeholder or investor that nominated you for the board. This is something that is lost on many investor nominee directors. Notwithstanding your fiduciary duty, directors have to work to balance conflicts of interest, if any, and act fairly to seek equilibrium between them. Conflicts of interest are situations where directors may make decisions based on personal gain or gain of a specific stakeholder, rather than the best interest of the corporation. Conflict of interest is not about what is illegal or immoral; it is about what is not in the best interest of the company, the company’s shareholders, employees and other stakeholders. As a level of comfort, I often say if you are comfortable with it being printed on the front page of The Globe and Mail, then a conflict of interest test is usually met.
8) Directors who leave their egos at the door
Boards that consist of directors who have the company or organization foremost in their minds, without having to prove themselves, most often make the best contribution to the company. These characteristics are most often present in confident, seasoned executives who have accumulated several years of board experience. All directors need to have their interests aligned with the company and in addition, there needs to be a cultural fit with the business of the company. When there is the existence of venture capital investor appointed directors, these directors need to be focused on the strategic direction of the company. That is often not the case and as a result, it detracts from having a high functioning board. Putting together the right mix of directors remains the largest challenge for any private company that wants an effective and high performing board.
As you’ve seen, there are many components and characteristics that are crucial towards constructing a successful technology company board. Many privately-owned companies should consider adopting key elements of corporate governance simply because it will be good for business. When these characteristics exist, whether it is in a tech startup or multi-billion-dollar company, participation in a high functioning board of directors will be both a rewarding and educational experience.