CHAPTER THIRTY-NINE
SERVING ON OTHER BOARDS
One of the best things you can do as a CEO and board member of your own company is to serve on another company's board of directors. There's nothing like a real-life counterpoint to make you take a step back and think about how to build and run an effective board. Find something—another startup, a nonprofit, your high school or college alumni association—to join as a board member. Watch and learn how other leaders lead and how other boards present materials, run meetings and discuss thorny issues. You might have the bandwidth to do one or two of these but probably not more.
THE BASICS OF SERVING ON OTHER BOARDS
First prize is to serve on the board of directors of a company that looks generally like yours, though probably smaller or earlier stage. Second prize is to serve on another noncorporate organization's board of directors or board of trustees. Third prize, though still quite relevant, is to serve on another organization's advisory board.
You can add a lot to another board and organization based on your experience, which is unique and powerful. The best advice I can give you is that you should do two things as you sit on another board.
Be the board member that you want on your own board. Be honest and direct. Be constructive but don't hold back. Do your homework, come prepared for meetings and pay attention.
Don't hesitate to vet the organization and board before you join it and don't hesitate to quit if you can't have an impact and aren't learning anything from the experience.
Your time is incredibly scarce and valuable—and if it's not well spent, there's no reason to be polite and stick with something where no one is getting real value.
If you are asked to serve on an outside board of directors or even an advisory board, make sure you are interested in the subject matter of the company or that you have a good reason to want to spend time with the entrepreneur or the other board members for other reasons. Don't be afraid to say no if these conditions aren't met. It's your time—no reason to be too altruistic.
Clarify your time commitment up front and try to get some form of compensation for your effort, whether a modest option grant (size totally depends on the time commitment) or or the ability to invest in the company.
Be sure to let your own board know. Ask for permission if the business you're advising is at all related to your company and get the permission in writing for your own HR file (yes, you have one of those, too, as your company grows!).
Finally, follow through on your commitment to the entrepreneur and resign from the board if you can't.
Return Path Board Member and Postini and Authentic8 Co-founder Scott Petry on Serving on Other Boards
Two-time entrepreneur Scott Petry applies everything he learned from his first company Postini (acquired by Google in 2007), to his current work as co-founder of Authentic8. Better yet, he can apply everything he's learned from the numerous boards he's served on. The key is choosing the right boards and applying the right level of commitment to them.
Having another operating executive on your board can bring a meaningful alternate perspective to a group often dominated by financial investors. As a CEO, the other side of the coin might be even more beneficial: sitting on outside boards gives you a perspective that is not available elsewhere. Where else would you be able to see such a melting pot of personality and perspective, to be exposed to so many situations and to be part of collaborative problem solving?
Each company that I'm involved with is different and thus exposes me to a wide range of situations, challenges and solutions. Moreover, seeing how other teams deal with their board has helped me both as a board member and as a CEO working with others.
Growing companies face a common set of scalability issues: product, market, scaling, fundraising, and so on. Each company also has its own unique challenges. These can be market driven, cultural, financial, technical—whatever. As a board member, you get a front-row seat as management works through these issues. Even if they aren't problems your business may face, you can learn a lot by seeing teams acknowledge and respond to challenges.
As with any communal activity, boards are heavily influenced by personality. As a board member, you're exposed to personalities working in concert and working through conflict. While almost universally uncomfortable, working through conflict can provide the most meaningful lessons. I've seen situations where management and the board might as well be speaking different languages; I've seen strong personalities try to shove their position down others' throats; and I've seen meeker personalities follow the passive-aggressive script to the letter. Regardless of the situation, boards ultimately need to unify and act.
Being involved with different boards has given me a more general perspective as well. I've learned that not every board member's ego is calibrated equivalently and not every member has the same expectations of the company. Certainly, each board member wants the company to succeed but each measures success differently. Some board members may be looking to return funds to their LPs. Others might focus on high-visibility company metrics as a way to buttress their own or their firm's reputation. Others might be participating as a way to keep connected to bright people or solve hard problems through innovative means. Individual motivations are all over the map. That variance in objective can be the source of frustration and conflict between board members and management—and a source of learning for other CEOs. Where else could you see these situations play out in real time? Where else could you participate in resolving them?
As a CEO, I take what I learn in other boards and apply the lessons to myself. Am I really hearing what the board is saying? Am I communicating to the board in a way to ensure that I'm being heard? Are we focusing on what is most important? Given what I know about the motivations of the members, is another approach in order? Have I seen this situation before and how would another CEO have handled it?
Participating in outside boards gives the CEO a perspective that is not available elsewhere. It's like a front-row seat in a graduate lab class on entrepreneurship. You're exposed to the best and the worst of group dynamics. You can dramatically improve your skills by applying these lessons to the way you work with your board.
Scott Petry, Co-founder, Postini and Authentic8
SUBSTANCE OR STYLE?
I had an interesting conversation the other day with a friend who sits on a couple of boards, as do I. We ended up in a conversation about some challenges one of his boards is having with their CEO and the question to some extent boiled down to this: a board is responsible for hiring/firing the CEO and for being the guardians of shareholder value but what does a board do when it doesn't like the CEO's style?
The biggest challenge I've had over the years sitting on other boards is trying to figure out the line of proper governance between being a director and being a CEO. My natural instinct is to speak up, to define and solve problems. That's not necessarily the right role for an outside director who is there to help guide management (and, sure, ultimately hire and fire management).
There are lots of different kinds of CEOs and corporate cultures. Some are command-and-control, others are more open, flat and transparent. I like to think I and Return Path are the latter and of course my bias is that that kind of culture leads to a more successful company. I've worked in environments that are the former and while less fun and more stressful, they can also produce very successful outcomes for shareholders and for employees as well.
So what do you do as a board member if you don't like the way a CEO operates, even if the company is doing well? Here are some specific questions, which probably fall on a spectrum:
- Is it grounds for removal if you think the company could be doing better with a different style leader at the helm? Probably not.
- Is it fair to expect a leader to change his or her style just because the board doesn't like it? Less certain but also probably not.
- Is it fair to give a warning or threaten removal if the CEO's style begins to impact performance, say, by driving out key employees or stifling innovation? Probably.
- Is it fair to give feedback and coaching? Absolutely.
I find myself very conflicted on the topic. I certainly wouldn't want to work in an organization again that had what I consider to be a negative, pace-setting environment but is it the board's role to shape the culture of a company? Is that just style, or is it substance?
Union Square Ventures Managing Director Fred Wilson on How Managing Startup Boards of Directors Change over Time
Fred has been a Return Path investor and adviser since the beginning and his blog, A VC, was one of the things that inspired me to start blogging in 2004. In more than three decades as a VC, Fred has watched dozens of boards evolve from Series A to exit.
Every company should have a board of directors. At the start it can simply be a one-person board consisting of the founder. It should not stay that way for long: if you're your own board, you won't get any of the benefits that come from having a board. These benefits include but are not limited to advice, counsel, relationships, experience, and accountability.
The shareholders elect the board of directors. There is usually a nominating entity that puts directors up for election by the shareholders. If the founder controls the company, then he or she is usually that nominating entity.
I am a fan of a three-person board early on in a company's life. I generally recommend that founders put themselves on the board along with two other people they trust and respect. The election of directors in this scenario is simply a matter of the controlling shareholder voting them in.
This situation changes a bit when investors get involved. If the founder retains control, then the situation does not have to change. The founder can still nominate and elect the directors he or she wants on the board. However, investors can and will negotiate for a board seat in some situations. This is less common for angel investors and more common for venture capital investors.
The way investors negotiate for a board seat is usually via something called a shareholders' agreement. This is an agreement between all the shareholders of the company. It contains a bunch of provisions but one of the provisions can be an agreement that the shareholders of the company will vote for a representative of a certain investor in the election of the board of directors. The representative can even be named specifically. For many of the boards I am on, this is how my seat is elected. For venture capital investments, this is a very typical provision.
Adding an investor director does not mean that the founder loses control of the board. It can remain a three-person board with one investor director and two founder directors. Or the board can be expanded to five and the investors can take one or two seats and the founder can control the rest. These two situations are common scenarios when the founders control the company.
As a company moves from founder control to investor control, the notion of an independent director crops up. An independent director is a director who does not represent either the founder or the investors. I am a big fan of independent directors and like to see them on the boards I am on. Boards that are full of vested interests are not good boards. The more independent-minded the board becomes, the better it usually is.
When the founder loses control of the company (usually by selling a majority of the stock to investors), it does not mean the investors should control the board. In fact, I would argue that an investor-controlled board is the worst possible situation. Investors usually have a narrow set of interests that involve how much money they are going to make (or lose) on their investment. It is the rare investor who takes a broader and more holistic view of the company. So while investor directors are a necessary evil in many companies, they should not dominate or control the board. The founder should control the board in a company he or she controls and independent directors should control a board where the founder does not control the company.
When and if a company goes public, the shareholders' agreement will terminate and public company governance standards will dictate how a board is selected and elected. There will most likely be a committee of the board that is called the nominating committee. That committee will select a slate of directors that will be put up for election by all the shareholders of the company at the annual meeting. Most public company boards have staggered board terms such that a subset of the board is elected every year. Three-year and four-year terms are most common.
It is possible for the shareholders to put up an alternative slate. In theory, this approach could be used in both private and public companies but in reality it is almost entirely limited to public companies. This will be perceived as a hostile move by most companies and they will fight the alternative slate of directors. This “alternative slate” approach is most commonly taken by “activist investors” who take a meaningful minority stake in a public company and agitate for changes in the board, management and strategic direction of the company. It can also be used in a hostile takeover effort. It is rare for an alternative slate to take control of a company but it is fairly common for a new director or two to get elected in this way.
Boards should evolve. Boards should recruit new members on a regular basis. Board members should have term limits. I like the four-year term. I've been on boards for much longer. I'm in my thirteenth year on one board and my eleventh on another. These are not ideal situations but they involve companies I invested in while I was with my prior venture capital firm and I have a responsibility to my partners and the founders to see these situations through.
A much better example is Twitter, where I was the first outside director, taking a board seat when Twitter was formed in the spinout from Obvious and USV made its initial investment. Over time, Twitter added several investor directors and then started adding independent directors. By last fall, Twitter had the opportunity to create a board with two founders, a CEO, three independent directors and one investor director. As a shareholder, that sounded like the right mix to me and I voluntarily stepped down along with my friend Bijan, who had led the second round of investment.
The point of the Twitter story is that boards evolve. In the first year, it was me and two founders and a founding team member. In the second year, it was me and Bijan, two founders and a founding team member. In the third year, it was three investors, two founders and two senior team members. In the fourth year, it was three investors, two founders, a CEO and three independents. Now it is one investor, two founders, a CEO and three independents. Many of these changes in the Twitter board happened at the time of financings. That is typical of a venture-backed company.
In summary, the shareholders elect the board. That is the essential truth in every company. How they elect the directors can be very different from company to company. For public companies, it is largely the same for all. In private companies, you get what you negotiate for, so negotiate the board provisions carefully. They are important.
Most important, build a great board. They are not that common. You owe it to your company to do that for it.
Fred Wilson, Managing Director, Union Square Ventures