BUILDING AND MANAGING AN EFFECTIVE BOARD — Summary

 

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NEW YORK, New York — The third NetForum meeting took place on January 23rd, 2013.  The discussion centered around the topic of “Building and Managing an Effective Board.”  This is a much different question and challenge for a private company funded by VCs or a strategic investor than it is for a public company.  What one can expect from board members appointed by an investor varies greatly, from full engagement or intrusiveness to minimal support or indifference.  Yet, this is the group required by law to manage the company. Partners at Willkie Farr & Gallagher, Serge Benchetrit and Gordon Caplan, joined the meeting to share some of their experiences advising Boards.

Clearly, the management-Board relationship is one of the foundational elements of a venture/PE-funded enterprise. It is one fraught with potential conflicts, definitely, but also a source of support that management teams can leverage. It was not surprising then to hear many members speak critically of Board experiences they’ve had while at the same time say “but I really like my Board.” In the course of the discussion, a number of themes emerged:
  • The Board by law manages the company but is not involved in the day to day. The CEO’s job is to figure things out and tell the Board to support what he or she wants to do, not to ask what he or she should do. At the same time, having a good relationship with individual Board members to sound ideas is a good thing.
  • At times of pivot, the Board is not a source of creativity. If a CEO has to ask his or her Board for ideas about what to do next, that CEO’s days are numbered. The Board hired the CEO to drive the business, not to ask for the directions…
  • Board meetings are a significant strain on a small company’s resources. Yet, many members felt they were a good thing as they forced the management team to step back, re-examine what they were doing and have to justify their actions.
  • Companies may need different types of Board members over their lifecycle. Ideally, a Board would evolve in line with the company’s progress to address its evolving needs. This may in fact happen in the Angel to VC transition phase but rarely happens later.
  • First time CEOs or inexperienced ones don’t know how to select their investors based on the quality of the Board members that would join the company. But if possible, CEOs should create a market for their equity to allow themselves a choice of Board members, and favor those firms that would put members with industry expertise, previous experience in the field or with similar companies and industry contacts on the Board. Unfortunately, this does not happen as often as it should, with the Board seat going to the sourcing partner instead of the person in the firm with the most relevant experience.
  • Independent board members are often a valuable addition to a Board, and help add a disinterested viewpoint to the Board discussions.
  • Strategic investors are often less concerned with value creation as with the ability of the firm to provide a good service that meets their needs. This is a source of conflicts.
  • There are differences between how East Coast and West Coast investors operate and thus act as Board members. East Coast Board members are more operations/number oriented, while West Coast Board members are more “big picture” and strategy oriented. It was posited that this may be related to the observed fact that there are more below-the-radar, profitable mid-market companies in East Coast portfolios (more single and doubles, less zeroes and home runs), while West Coast portfolios are littered with failures and home runs.