This is the third installment of an eight article series focused on helping early stage investors coach founders on building the best board dynamics they can.
Investors and CEOs alike know that managing an early stage board is about making the best of a situation that cannot be fully controlled. We’ve talked about hacks for planning and running the best meetings possible. Let’s focus on expectations for directors themselves. As board members, investors and advisors to the CEO, it’s important to understand what should be expected of the board in terms of behavior and what roles directors can play to help the company grow.
Directors’ Responsibilities and Duties
Friendly though they may be, the directors are not there to befriend the CEO. All corporate directors have basic legal responsibilities they must attend to:
- Determining the adequacy of financial resources
- Approving annual budgets
- Corporate policy setting and enforcement
- Evaluation (and replacement) of the CEO
- Ensuring adequate reporting to shareholders.
In discharging these responsibilities, directors are required by law to observe three basic fiduciary responsibilities. First is the Duty of Care: a board member must exercise good business judgment and use ordinary care and prudence in their guidance of the business. Second, there is a Duty of Loyalty: directors must put the company’s interests ahead of their own and should keep in mind that any breach of confidentiality or conflict of interest violates this duty of loyalty. Third, directors are universally believed to have Duty of Good Faith: countless legal decisions have held that directors must act with candor and genuinely beneficial motives.
If the above legal duties were all a director did, I suppose there would be some virtue, but not much value. Fortunately, good directors bring far more to the table than just legal baby-sitting. The best directors can help the company across eight different areas:
1. Strategic Advice. Good directors bring a broader perspective that can be very helpful for the CEO who can “lose the forest for the trees” of daily operational activity. Many directors have tremendous business experience and can serve as a sounding board and source of strategic direction.
2. Customer and Partner Introductions. Strong directors bring a rich network of connections that should be useful in connecting to potential customers, partners, analysts, journalists, service providers, and more.
3. Time-Saving Operational Advice. Because many directors have “been there and done that,” they can provide tremendous value in finding short cuts and preventing constant reinvention of the wheel with routine operational matters like setting up payroll, finding office space, dealing with investors, and the daily ins-and-outs of running a business.
4. Recruiting. Experienced directors not only have a large network of connections to help find talent, they should also have deep experience in evaluation and hiring which should allow startups to hire better people faster than by trial and error.
5. Risk Management. Seasoned directors will insist that stage-appropriate financial controls are in place and that communications between the board and the financial/accounting providers does not lapse. They will also insist on regular circulation of the right financials to directors and investors. This not a lot of fun for many CEOs, but is a vitally important discipline the board should provide.
6. Fundraising. Many directors, especially investor-directors, are experienced and connected in the fundraising world and can provide extremely valuable guidance on the who, what, when and how aspects of raising additional rounds of capital.
7. CEO Evaluation. Good directors will be the first to point out when a CEO is struggling with his or her job, and can be extraordinarily helpful with coaching and advice, including the selection and hiring of an official CEO coach if the situation calls for it. It should also be said that directors are the ones who will kick off the process of transitioning the CEO into a different role if the situation requires it.
8. Driving a Successful Exit. Even if directors are not all large investors themselves, they represent the investors and are responsible for maximizing value for shareholders. Thus directors have the motivation, and typically the experience and connections, to help the company on its path toward eventual liquidity for shareholders.
Not every director will be strong in every category, but working together, the board should be able to provide ample value to cover these important areas. It is important to advise the CEO that when building or working with a board, some thought should be given to how the board stacks up across these categories and the board should be held accountable for value-add, just as the CEO is held accountable for performance.
Now that we’ve covered the expectations of board conduct and responsibilities, next we will look at ways to deal with some problem behaviors so that a company gets the value-add it needs.
To learn more about working with boards, download this free eBook today Director's Guidebook: How to be an Effective Board Director in Early Stage Companies or purchase our books at Amazon.com.