Many closely held companies don’t have a functioning board at all. Investor-backed private companies usually have boards, but many are dysfunctional, neither helping management perform at higher levels nor managing risk.
Why is it so hard? Because boards don’t work in isolation—they are part of the leadership infrastructure of a company, which is the set of leaders & leadership processes that create stability and predictability. The team known as the board, plus the C-suite team suite makes up the top leadership of a company. The behavior and duties of each team circumscribe the behaviors and duties of the other. Many different blends of the allocation of duties and behaviors exist, both perceived and in reality. One such common, yet corrosive blend is the controllers (board) vs. the reckless (management).
Most private companies started small when a board was less necessary, but with growth and perhaps an increased number of owners, must establish a board to represent the owners and to assist management. Similarly, as companies grow into midsized, the management team becomes bigger and more seasoned and interacts with the board in different ways.
Boards for closely-held companies (usually led by a CEO who is also a controlling owner) tend to exemplify one end of the spectrum of allocation of duties/behaviors and this article about ISSI is noteworthy (read article here).
Boards for investor-controlled companies (commonly venture capital and private equity funded firms) tend to exemplify the other end of the spectrum of allocation of duties/behaviors. Read about the chairperson’s approach to the board that governed venture-backed traffic app company Waze (read Forbes article here) that sold in June, 2013 to Google for a billion dollars.
The most effective boards typically exhibit six crucial attributes.
Alignment
Misalignment is the seed of many intractable board problems. It may be that individual board members don’t agree on the ideal strategy for the company because they have different objectives (i.e. quick exit vs. long-term value appreciation), or the management of the firm may have an objective that is different from the board’s. Misalignment means that no matter what, there will be dissention in the leadership. For example, even a high performing company may have board problems if ownership wants short term liquidity instead. Management and the board must hold sufficient discussions and debate essential until all parties are in full agreement as to the go-forward strategies. If the board is aligned but management is not, a change of management is in order. If the board can’t find alignment within its ranks, buying out the dissenting shareholder may be the only option.
Clarity & Discipline
The board is a vehicle for holding management accountable to their plans. Yet many, many private firms don’t plan well, and aren’t clear about what success looks like. The board and management must be disciplined about understanding the market, analyzing it, then making clear plans and forecasts for the firm. Only then can the board hold management accountable, and even then, the board must have discipline in how it meets, what information it must receive (and when), and how it interacts with management. Sloppiness opens the door for politics and inaction.
A results focus
Ideally, a private company board isn’t so much about control or rules, but instead about the results we commit ourselves to delivering. Every board member should have a focus, and clarity about the value they are to provide. Is it for connections? For leadership support? Auditing? Marketplace knowledge? Likewise, management must be held accountable for results. Bad results mean we must change—either strategies or leaders. The goal of board member or management must never be to retain the seat. The goal of the board member is never to represent his or her own ownership interest. It is always to achieve the stated result as approved by the board and agreed to by management.
Leadership
Everyone on the board must be, and act like a leader. While board members might have tasks like auditing, compensations analysis or hiring/firing of the CEO, the truth is that they must support the health and growth of the organization through leader-like behavior and actions. Bullying the CEO, demanding reports and information, gossip/politicking and meddling into the responsibilities of others are undercutting and destructive behaviors. Both boards and management must have clear boundaries to their authority and actions, and respect those boundaries. Further, board members should share a passion for the mission of the organization.
Adaptive
Private company boards are not a one size fits all. They must be adapted to the stage and size of the company, and to the conditions under which the company finds itself. A new board for a smaller closely held company dominated by one controlling owner would be very different from a high-growth, series C, VC backed board. The way the board operates for a stable, healthy, financially strong, well-managed company would be very different from a turnaround with struggling management that is missing its targets. The board’s approach to governance must be fitted to the needs of the company.
Earned Trust
The majority of midsized company CEOs (who have a board) don’t trust many of their board members, worrying that any vulnerability will be an excuse for termination or more meddling. Likewise, most boards think their first obligation is protecting shareholders from reckless or self-aggrandizing actions by management. Mutual suspicion is a terrible culture from which to lead a company. In contrast, a board must be constructed where each member of the board and each member of the C suite has earned the trust of the others. While trust isn’t presumed at the start of the relationship (mistrust isn’t presumed either), over time the actions and results of each person prove they can be trusted. Trust between boards and top management begets openness and transparency, leading to powerful teamwork.
