Last week I facilitated a discussion of Governance with a Master of Entrepreneurship class. Before the class, I sat over a leisurely lunch reviewing my notes. I felt uneasy, and realised that I wasn’t comfortable about what I was about to say. So I explored the source of my discomfort.
The problem was simple. I had prepared a strong case for good governance in start-up companies, and clearly identified the differences between governing young companies and governing more established ventures. But I had glossed over the biggest ‘real world’ issue …. Most start-ups I’ve come across would have been better off without a Board than with the Boards they assembled. It’s hard to promote something which is theoretically valuable but which has so often proven to be useless or even harmful to the start-up.
Yet, the most successful start-ups I’ve worked with ALL had effective Boards. I revisited what I was planning to say. It had to be less about why a Board was necessary, and more about how to get an effective one.
A founder who is focused on getting the product ready and getting early customers typically spends little time choosing a Board. The entrepreneur often takes people based on availability and general credentials rather than because of what they will bring to this specific business. Thus, the founder finds Board members from the three most easily accessible groups:
Although each source can provide great directors, they can just as easily deliver people who are not appropriate to the start-up.
Friends and family are often engaged because they have been successful in their own businesses, are enthusiastic, and are free. I have often had to sort out Boards where well-meaning Uncle George has brought his farming skills to the Board of a high-tech company, only to discover that the skills which built the $25M farming business are less helpful than he thought.
Professional advisors, including accountants, lawyers, consultants, and business establishment specialists typically have very appealing skills when a Board is being assembled and, because they surround the embryonic company, they seem to be logical choices as directors. However, being a great accountant does not automatically qualify you to serve on a Board, even with the explicit role of ‘keeping an eye on the numbers’. A Board member must be there to move the business forward, not just to stop the founder making silly financial decisions (the accountant can do that in his/her advisory capacity).
Professional directors are an appealing bunch from a start-up’s point of view. They bring credibility through having sat on many Boards, and they often bring great connections for the company as well as mature governance skills. Unfortunately, many professional directors have little start-up experience, and become hand-brakes on the company as they try to treat it like a corporate business. I have also often seen them treat the start-ups disrespectfully, arriving at Board meetings without having read their papers. Although I can understand how it’s hard to come from the Board of a $100m company to the Board of a start-up and take it seriously, it’s still not appropriate (either ethically or legally) to give the start-up less than full attention.
When I get involved with a struggling start-up Board, they may have had a few energetic meetings, but the energy has now gone. Uncle George calls in half an hour before the meeting to say he’s busy today and to go on without him. The accountant has become obsessed with the lack of good information and is requesting more reports. The professional director, who has taken the Chairman role, sweeps into the meeting right on start time, opens his papers and says, “Now then, let’s see what this one’s all about.”
The founder wants to talk about strategy. The accountant mentions the reports. The Chairman looks patronisingly over his spectacles at the founder and says, “I know you’re in a hurry, but you’ve engaged a Board to ensure we do it right. Let’s get these reports sorted.”
After a few such meetings, the founder has probably started running the business alone (one founder said that he kept the Board meetings going because it looked good to investors, but “these idiots” never have anything useful to say.”).
The cure for this problem is to start by working out what skills, experience, and contacts the company needs from its directors, and not to start recruiting directors until it is clear what is required from them. As directors are recruited, the expectations regarding director contributions can be spelt out clearly, and non-performance can then be identified quickly in future. Most of the directors will probably still come from the three easily-available sources, but they will take their roles more seriously if their level of accountability is agreed up front, and they will be better suited for the role if selected for start-up governance skills rather than for other credentials.
I was invited to the Board of a start-up which became successful. The founder, in his capacity as controlling shareholder, took me for a coffee and explained exactly what he wanted from me. Apart from generic governance skills, the founder wanted me to help him achieve particular goals (including managing Board structure). I agreed and, in exchange, extracted a commitment from him that he would accept the Board’s instruction, in his role as CEO. He could sack us at the AGM, but the Board was the final decision place until then. Board meetings were productive because everyone understood what was required of them and everyone treated the company as respectfully as they treated governance of larger entities.
When I had finished lunch, I went to the Master of Entrepreneurship class with much greater clarity about the need to focus on the way to assemble an effective Board rather than on whether Boards are necessary.