Board of Directors Capacity for Startups: A Lean Approach

During the startup stage founders are primarily focused on what is immediately in front of them and have little time or patience for considering what might need to be done to build capacity among the members of the board of directors.  While this is not surprising, founders should be aware of the following key areas where the board can, and should be expect to, make a valuable contribution to the success of the organization:

Accounting and Legal. While founders are often more interested in identifying board members with “industry” experience, it is important not to ignore accounting and legal considerations.  One or more of the board members should be assigned audit and legal responsibilities and should be expected to focus on several key areas including accounting policies, internal controls, financial reporting practices, legal and regulatory compliance and the company’s policies and procedures for ethical business conduct.  The members should oversee the employment of the company’s independent accountants and the preparation and audit of the company’s financial statements; provide oversight on the external reporting process and the adequacy of the company’s internal controls; and review the scope of the other activities of the independent accountants and the activities of the company’s internal auditors.  In discharging their duties, the board members should develop and maintain a regular line of communication with company’s financial management and internal and external auditors.  None of the board members involved with audit-related activities or issues should be an officer or employee of the company.

Compensation and Benefits. Another important, and often sensitive area, for founders is compensation, their own and the salary and other benefits that will need to be offered to put together the talent necessary for the startup to succeed with its business model. Board members assigned responsibility for compensation matters should focus on establishing executive compensation policies that are consistent with corporate objectives and strategies and recommending to the board compensation for the CEO and other members of the executive team.  These members should also work with the executive team regarding recommendations for grants to managers and employees under the company’s stock compensation plans and should also be involved in discussion regarding modifications and additions to the company’s compensation plans taking into account market conditions and actions by competitors. One of the most important, albeit delicate, roles of the board members working on compensation issues is reviewing the performance of the CEO and other executives.  None of the board members working on compensation issues should be an officer or employee of the company.

Management Development. While there are certainly founders of startups with substantial management experience, management development is an important area in which board members, particularly those who have their own careers as CEOs, can contribute.  Board members focusing on management development, who logically may be the same members responsible for compensation matters, should be involved in the design and implementation of organizational management development programs and the review of recommendations for changes in the senior manager positions.  In addition, members should work with the CEO on recruiting and organizational culture programs that will bring and maintain appropriate diversity into the company’s mission and workplace.

Governance. While the founders will certainly want to retain a voice on the board, if not outright control, inevitably there will be a need for outside directors, either because investors demand it or the skill sets of the founders are simply too limited to fill all of the areas in which directors must be versed in.  One or more members should focus on governance, which includes making recommendations regarding nominees for election to the board and various committees of the board based on established guidelines and appropriate and necessary policies and procedures to ensure that the board operates efficiently and effectively. These board members should also take the lead in educating new board members and ensuring that there is a process in place to measure the performance of board members on a regular basis.

Sustainability and Social Responsibility. Every board member should be prioritizing the strategies and activities necessary to create sustainable business; however, given that every corporation, regardless of sustainability, needs to have board members specializing in other areas, it makes sense to have some of the members invest their time on sustainability and social responsibility issues to ensure that the company is developing and implementing appropriate policies and procedures that provide support for the company’s sustainable growth mission.  These members should have experience in key areas such as stakeholder engagement and sustainability reporting and bring a network of connections to experts who can guide the corporation in setting up the appropriate governance structure for sustainability.

Strategy and Technology. Several members of the board should focus on strategy and technology and should be involved in regular reviews of the company’s strategic direction in its major business segments and the impact that new technologies is likely to have on the company.  With regard to technology, board members should have a solid understanding of the company’s technical relationships, including relationships with academic institutions and public sector research facilities, and the adequacy of the company’s technical resources (including its human resources).  These activities are key to success and companies are advised to recruit board members with appropriate technical education and experience.

Finance. Board members focusing on finance should be involved in regular reviews of the company’s financial posture including utilization of funds, capital structure and outside financing proposals.  Finance is always important; however, for a startup it is absolutely mission critical to keep a close watch on cash flow and to make sure that the company becomes and remains well positioned to seek capital from investors and/or commercial lenders.  Finance responsibilities may be taken on by the board members handling accounting and legal.

While larger companies often have an executive committee at the board level that is given limited authority to act for the board between meetings on matters already approved in principle by the board, startup boards should not rely too heavily on smaller groups because all of the issues at that stage are important and require input from the entire board.  Exceptions may be made for specific matters assigned by the full board from time to time.  The immediacy of so many issues for a startup means that board members must be prepared to commit substantial time to their various roles, particularly when there are gaps in experience among the founders and other members of the executive team.

Many startups prefer to operate with small boards, often no more than three members.  This is understandable and startups may fill in experience and skills gaps among board members with advisers that can provide talent in some of the areas mentioned above.  If an adviser is brought on for a relatively narrow and time-limited project, such as helping the founders nurture specific customer relationships, the activities of that adviser should nonetheless be placed within one of the topical areas mentioned above such as strategy and technology so that there is an orderly understanding of what the company is doing with respect to key strategic issues such as customer development, research and development, production, and sales and marketing.  It is important for at least one of the non-employee directors to have an understanding of the roles of the various advisers since advisers are often recruited from the founders’ networks.  In turn, if an adviser is recommended by a non-employee director, that director should take responsibility for ensuring that a good working relationship develops between the adviser and the relevant members of the executive team.

This article is based on material available in “Governance: A Guide for Sustainable Entrepreneurs”, which is part of a larger library of resources for sustainable entrepreneurs on Entrepreneurship available from the Sustainable Entrepreneurship Project here.  Keep up with the activities of the Project by connecting with Alan Gutterman, the Project’s Founding Director, on LinkedIn and following him on Twitter and on Facebook.

 

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