Monday, October 02, 2006

The Startup Board of Directors

I have noticed that investors are requiring independent directors to be added to the boards of their portfolio companies at progressively earlier stages. I agree with the philosophy, but think it's right up there in the overly optimistic category with expecting a startup to complete a sale to a large enterprise in under 2 months.

For a variety of reasons, many companies find their independent directors using the "some guy" approach - they choose some guy their investor knows without much consideration. This is not necessarily a bad thing, but my goal on this blog is to provide tools for you. Here is a subset of best practices that the Society of Corporate Secretaries and Governance Professionals recommends to public companies:

  • Identifying the Right Candidate: Start by inventorying the skill set of your current slate of directors, including their areas of expertise (financial, technology marketing). Decide what skills and experience are required to complement the current board’s skills. While “access point to customers” is not a skill, many early stage boards select independent directors who can assist with this business milestone.

  • Agree on general attributes any candidate should have. Typical ones are: Experience, expertise, and willingness to devote the necessary time, commitment to the company’s vision and purpose.

  • Practical issues : Is the candidate available for regularly scheduled board meetings? One of my clients recruited a very high profile director who had terrific insights into the business and the market it addressed. Unfortunately, he attended the majority of meetings telephonically, and the company's ability to tap into his expertise became limited.

  • Is the candidate serving on the board of a competitor? While Canadian law does not prohibit director “interlocks” between competing companies, it nonetheless raises appearance of conflict, impropriety, and should be avoided. This is an ongoing issue that boards must monitor; in markets that are fragmented, it is more likely that some players will become competitors as they morph their business models to survive consolidation and shakeout.

Orientation. Once the new director is on board, the company must ensure that he/she given orientation. At a minimum, this should include briefing materials on company’s governance structure, D&O insurance, and financial statements. Even "some guy" can't do the job if he/she does not understand the rights your investors have negotiated.

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