Building a Board from Scratch
Greg Warnock, Partner Fund I, vSpring Capital
Few decisions in the life of a company are as important to its long-term success as the nature and composition of its board of directors. A good board adds depth, intelligence, contacts, and resources to the enterprise. But how does a first-time CEO identify, establish, recruit, and use a board of directors to maximum effect?
Here is one process that may be helpful to entrepreneurs interested in establishing a board of directors for their growth companies.
Envision your board and its directors. To build anything, you must first imagine what it will look like. So what kinds of people make a good board and can help an entrepreneur and growth company thrive?
- diverse and complementary personal networks and skills
- responsibility and commitment to shareholders and other company stakeholders
- knowledge of the company and its specific industry
- strategic vision and problem-solving experiences
- networks and contacts to recruit needed personnel and other resources for the company
- good work ethic, personality fit, and team-building focus.
Build to your and your company's vision. Create the environment in which board members will serve. For example, establish clear policies on issues such as board structure, recruiting, compensation, evaluation, and removal.
The board should have an odd number of members, to prevent deadlock. Three is too few for a good diverse network, so it’s better to start with five. Choose them for diversity of opinion, contacts, and resources.
In addition, directors should come from outside the company. Employees and family members are not good choices - they won't challenge or expand your ideas. On the other hand, don't use industry "superstars" that have little-to-no time to serve.
Board members need to be compensated. Some companies pay a "meeting fee," but if you want an active board, it may be better to pay a monthly or quarterly fee plus expenses. One-time options in the range of 0.25 percent to 0.5 percent of outstanding company stock, refreshed for financing dilution and splits, are typical. These options generally vest over a period of three to five years. Most companies also provide errors and omissions insurance for their directors.
A board needs a chairperson; perhaps it should not be the entrepreneur or CEO. The chair manages the board while the CEO runs the company. The chair should get more compensation than the other directors -but not a lot more. The chair sets the meeting schedule, controls agendas, manages committees, and makes sure that members' meeting time is used wisely (minimal history reports, maximum exploratory discussion time).
Consider term limits or other mechanisms to ensure a healthy rate of board turnover. Boards should change over time to meet the needs of the company. Inactive members need to be retired – both to maintain morale and make room for new blood. Current board members can help build and maintain a list of potential candidates.
Recruit and train the initial board. Good boards are built on personal relationships, and CEOs need people with whom they can work easily. Directors should be excited about the opportunity to serve in a company and with each other. If not, keep looking. Look for people with the skills and contacts to help you meet your milestones over the next eighteen to twenty-four months. Use your network to find board candidates.
Examine the boards of other companies in your industry, especially public companies. As an entrepreneur running a growth company, you may not uncover a list of available names, but you'll get ideas where to look. Look at prominent businesspeople in your community - sitting CEOs of other companies often make great board members.
Analyze retired regulators or others familiar with your industry. Talk with your attorneys, accountants, investors, and other consultants. If you don't have a relationship with candidates you're interested in recruiting, make sure you get a "warm introduction."
Once you have a list of candidates, prioritize them. Be aware that some candidates can help attract others. Starting at the top of your ordered list, invite each candidate by sharing your vision and plans for the board. Find out whether they have the interest and the time to serve. Also, ask about any possible conflicts of interest that may not be apparent and if they know other candidates you should consider.
Of course, not every invitation will be accepted. Win or lose, re-prioritize your list in light of new information, and keep going. Soon you will have a board that shares your vision and enthusiasm.
Use the board "early and often." Like muscles, boards atrophy if they are not used. Meet regularly even when scheduling is difficult. As CEO, make sure to get board materials out early so directors have time to think about and assess the issues raised. Make a list of your most important issues, and have the board address them in their priority order (which may differ from yours). And as issues arise between meetings, communicate with directors frequently.
Building a good board of directors from scratch can be the best decision an entrepreneur makes for their company, adding both value and long-term success.
© 2006 Greg Warnock. All rights reserved.