Five Ways to Build an Effective Board and Accelerate Scaling Up
Strong boards play an important role beyond governance, by providing key experience, perspective and access to individual board members' personal networks
An effective board can be transformational for a growth business, particularly when it is in scale-up mode. Yet, when it comes to building and managing the board, for many founders it is often an afterthought.
When, in a study, 70 startups in Australia were asked about their board, only half (55 per cent) of founders said they would choose the same board again, if they had the choice. It wouldn't be too surprising to see this result mirroring across the world.
So, how should founders approach creating a board? The challenge is that startup boards require a different approach and face unique responsibilities and challenges compared with the boards of larger and more established organizations. There is also a much smaller talent pool of people with relevant experience in successfully exiting and/or scaling globally.
Here are five tips for entrepreneurs to consider when building a board:
Have a Formal Recruitment Process
Most startup board members tend to be informal appointments, which can obviously limit both the effectiveness and diversity of boards. In fact, of the startups that were part of the above study, most did not have a formal process to appoint board members but instead find board members among the founder's private and personal networks and referral by investors and other board members.
This can get insular and become an echo chamber if everyone is within the same tight networks, and key skills may also be missed. With a strategic recruitment approach, any knowledge gaps in the current board can be identified, with potential candidates proactively approached.
Appoint Independent Directors
Currently, there's an independence gap on startup boards, with only one in four of the Australian startups studied having an independent non-executive director. Even for startups that have raised a Series C funding round, 40 per cent still did not have an independent director on their board.
In contrast, 92 per cent of startups reported having investors on their board, which can become problematic. Although having investors directly helps to secure follow-on funding and ensures alignment of interest with other investors, the downside is that investors are not "professional directors" – they may not have traditional executive backgrounds or have established, grown or scaled a business before.
Conflicts of interest can also arise when investors' interests no longer align with the founder's and business' long-term needs. Startups need to move away from shareholder boards to boards that can offer more governance and independent guidance. Likewise, having the founder in the dual role of chair and CEO is problematic, because you are rooting governance in one person.
Strive for More Diversity
Although women-led businesses are one of the fastest growing segments of entrepreneurship, only 38 per cent of the startups studied had female members. Research identifies that women are not being referred to for board roles due to the lack of women in venture capital (VC) and investment roles. This is something that VCs are working hard to change.
But diversity also extends beyond gender to age, culture and thought. As globalization and the shifting demographics of markets and the workforce make startups more dependent on diversity, a board built on homogenous relationships has the inherent risk of insularity.
Diverse ways of thinking are vital to ensuring a board can support the CEO in viewing things from different angles, helping them to develop stronger risk and growth strategies. The broader the perspective, the better the quality of a final decision.
Ensure an Optimal Size
Startup company boards are generally compact compared to the boards of longer-established organizations. On average, startup companies have four members sitting on their formal board of directors, while advisory panels have an average of three members.
When it comes to the ideal size of a board, there is a need to balance diversity of opinion with the ability to reach consensus. Generally, five directors are seen as being able to offer sufficient diversity of opinion and breadth of experience.
It's important to plan ahead as board building is cyclical. Over time, boards benefit from new input and a flow of fresh ideas. Some directors are best suited for very stage companies, whereas others have more to offer listed companies. Each director needs to know their own limits. They need to think about the skills around the table and the stage at which the business is at.
While there may be a narrower talent pool for startups, and not the luxury of changing out as frequently as larger companies, it's still advisable to set maximum terms for directors.
Boards can play an important role beyond governance, by helping startups scale through providing key experience, perspective and access to individual board members' personal networks. Founders who have the right support around them are far more likely to succeed than those who don't, and boards, formed well, can have a transformational impact.