The key to building an effective board is creating alignment among board members who possess a diverse set of skills and experiences while having a common set of values and objectives that complement the company’s greatest needs. Remember, as we covered in The Four Cs of Good Governance, an effective board is rooted in culture, and that extends beyond the company’s management team and employees to include the directors themselves. For growth-stage companies, we recommend having five to seven directors. A board director’s role may vary depending on the type of director he/she is, as well as the committees on which he/she serves. The list of typical board roles includes: Chairperson of the Board or Lead Director: Ideally, the chairperson or lead director of the board is not the CEO nor founder, but rather an independent board member. We recommend that portfolio companies appoint a chairperson or lead director who has previously served on multiple boards as CEO and/or board chair. The board chair: Sets the agenda, timing, and tone for board meetingsIs the primary, but not sole, point of contact between the CEO and the boardFlags key board decisions, documenting resolutionsEnsures alignment between investors and management and drives discussion to gain alignment when uncertainLeads annual CEO and board member evaluation processesEvaluates strengths or gaps in skills and abilities of all board membersAssesses board friction, addressing any dysfunction or misalignment, and leading any recruitment/change of board membersDoes not have direct reports from managementIn coordination with the CEO, works directly with C-level executives to provide leverage and experienceAssists in forming committees of the board and provides feedback on committee effectivenessWorks closely with CEO and management team on strategic initiatives such as capital formation, M&A, exit process, etc.Leads executive session of the full board, distills feedback, and coordinates communication with the CEOChief Executive Officer: The CEO is the manager of the day-to-day activities of the company and, ultimately, the person responsible for the success of the overall organization. The CEO oversees all operations, sales and marketing, finance, and product and technology business activities to ensure they produce the desired results and are consistent with the overall company strategy and mission. The CEO: Develops company strategy, financial plans, and annual budget for board approvalLeads board presentations, including the creation of opportunities for other managers to present so the board can get to know more of the management teamProposes annual objectives and incentives for management and salesLeads recruitment efforts for top talent, including independent board membersCommunicates regularly with board members outside of board meetings (to avoid surprises)Distributes board materials in advance of all board meetingsSolicits feedback from executive sessions, and informally from board members pre/post meetingSends out monthly flash reports with financials/key performance indicators to all board membersIndependent Director: Independent directors are the most common type of board member. These directors are not CEOs nor active members of management and are important for sharing relevant industry and operating expertise, evaluating decisions, negotiating M&A transactions, and driving alignment when there may be a conflict of interest among the financial investors. We often refer independent directors from our network who have operating experience at a senior executive level that is relevant to the company’s stage, sector, and business model, and may even fill certain experience gaps of the CEO. It is common for an independent director to serve as chairperson of the audit committee, compensation committee, or other special committees as needed.There is often a debate about whether investors are Independent. Often, investors (see below) have the right to appoint one or more board seats per their Investor Rights Agreement, which could be held by the investor and/or someone from the investor’s network. Regardless, all independent directors, whether appointed by the investors or not, have a fiduciary responsibility to all shareholders. For clarity, directors do not represent the investment firm that nominated them. An independent director: Builds trusted relationships with the CEO, serving as a mentor and sounding boardInfuses market and customer perspectives into board meeting discussionsMakes appropriate partner and customer introductionsUtilizes their network for talent sourcing and service provider referralsFosters teamwork among board membersServes as an unbiased perspective in assessments of personnel, company competitiveness, and overall potential of the businessActively participates in executive sessions, distilling feedback and communicating to the CEODirector (Investor): A director may be nominated by a venture capital or private equity firm; however, these Directors always have a fiduciary duty to the company. A director has all the responsibilities and roles of an Independent Director above, plusCommunicates investor perspective to ensure alignment on valuation, exit timing, follow-on strategies, key tripwires, and milestonesShares expectations with the CEO and co-investors during diligence processes, driving goal alignment prior to closing new financing roundsAssists in educating new directors on governance and responsibilitiesLeverages the firm’s portfolio experience and network to accelerate company executionRecruits and refers executive team candidatesLeverages relationships with service providers to maximize the value of the companyBoard Observer: Board observers can play an important role in the boardroom, offering valuable insights without holding voting rights. They are typically representatives of major investors or stakeholders, who seek to stay informed and involved in the company’s strategic direction and operational performance. Although not official board members, board observers contribute to the governance process by providing feedback, raising questions, and offering perspectives based on their knowledge and experience. The Board Observer: Establishes and sustains open lines of communication with the board and management teamRaises pertinent questions and provides feedback during board discussions, helping to shape strategic decisionsHelps ensure that the board considers a wide range of viewpoints and potential impacts when making decisionsSupports the board in understanding the viewpoints and interests of key stakeholdersMonitors company performance, alerting the board to potential risks and opportunities and helping to drive proactive managementEncourages open and honest discussions in the boardroom, fostering a culture of transparencyHelps committees stay aligned with the broader strategic goals of the companyDesigning and building an effective board of directors is a strategic imperative for growth-stage companies, and every board member plays a significant role in the company’s success. Whether through the guidance of a seasoned chairperson, the insights of independent directors, or the unique contributions of board observers, a well-structured and engaged board provides invaluable support in navigating challenges, seizing opportunities, and driving the company toward its long-term goals. If you’re wondering what to consider when filling these crucial board seats, check out 5 Things to Look for When Recruiting New Board Directors.
