Three Tips to Ensure Good Boards Don't Get It Wrong

David Nevas . September 25, 2014

When stories of business failure and missteps hit the newswire, there is often a thread traced back to the board and their guidance (or lack thereof) to the company.

We sometimes hear reports that a board was dysfunctional, or deeply misguiding in its decision-making. Perhaps this is because certain board members 'phone it in', and or maybe certain board members have put their own interests in front of the company's interests. I prefer to believe that this is more of the exception, as the reality is that the vast majority of board members are smart, rational, and committed to fulfilling their fiduciary and ethical duties. So, how is it that good boards “get it wrong” from time to time?

We invited an esteemed panel of executives and board members to bring some clarity to this issue of When Good Boards Get it Wrong at last week's Edison Director College.  The reasons why (perfectly good boards can get it wrong) stem from the fact that decisions often occur in gray areas. There are no pre-defined set of instructions for how to act, and the judgment of each individual board member is integral.  

Panel1

I had the pleasure of moderating this panel and wanted to share the following three tips to help founders "get it right" when it counts the most. You can watch the full session on YouTube.

1. Don’t Get in the Way.  

We opened the panel soliciting real examples of where our panelists have seen things go wrong. One key insight was that boards often get it wrong when they are making decisions about the wrong things. Magnetic CEO James Green commented that operating decisions should be left to the operators, and boards (especially those comprised of former operators) need to restrain their natural urge to put their hands on the wheel.

Further to the point, Bain Capital Ventures' Matt Harris noted, “Boards advise, they don’t mandate. They influence decision-making through compensation and consequences, not by dictating action.” The keyword here is advise. I think things that are obvious to people who spend 24/7 running the business are often lost on the board. We heard from the panel that attempting to make decisions based on the information flow of a quarterly board meeting is almost certain to lead you astray.

As a board member, the best you can do is challenge the management team’s thinking and help them examine a decision from all angles – but don’t get in the way of them making that decision. Once the course has been set, do all you can to help them achieve success – or at the very least stay out of the way.

 

 

2. Keep Your Ego in Check and Use Your Best Judgement. 

How do we improve decision making? Another theme that emerged was that even when boards are making the right types of decisions, not all board members have a deep enough understanding of the business to exercise good judgement. Ask questions if you don’t understand, and take time with the CEO or other executives outside of the board meeting to ensure you fully appreciate the nuances of a decision.

There is no place for ego or pride on the board; any issue that rises to the level of a board decision is critical to the company, so don’t be afraid to ask “dumb” questions, or have the management team walk you through all the dimensions of an issue. Make sure you have a full understanding.

On the flip side, if you are the CEO and recognize that a board member does not have the proper depth of understanding, you must proactively engage and educate them. We heard a similar theme in Harvard Business School Professor Noam Wasserman's keynote - to get comfortable addressing any "elephants in the room." LogMeIn COO Bill Wagner also stressed the importance and effectiveness of establishing 'decision frameworks' with your board to and address any 'elephants' ahead of time.  If they are unwilling to spend the time to stay up-to-date on the business or any issues at hand, you may ultimately need to ask them to step down and replace them with directors that will. 

 

3. Encourage Independence.

And finally, the panel also highlighted conflicts inherent when having multiple fiduciary duties. I posed a question to the panel, "What are some of the underlying/structural issues that cause things to go awry, and how can we as board members or CEOs anticipate and mitigate them?" Alignment was one answer. Board members can sometimes find themselves in situations where their fiduciary duty to all shareholders of the company can be in direct conflict with their duties to their own investors. Incentives for investors don't always align with the decisions that are in the company’s best interest.

Matt Harris had much to say on the topic. "Usually they're aligned...and occasionally the're not aligned - when funds get into particular situations that skew incentives relative to a particular company outcome. And I think it's the most vital moment for an independent to look at that landscape, look at how people are voting, and if necessary, take investor directors aside and say: You need to be honest with which hat you're wearing with this vote." To Matt's point, this gets even more challenging through multiple series of financing with different classes of investors on the board, all with their own potential fiduciary conflict. In these types of circumstances, being a good board member is a skill.

The best way to avoid this type of situation is to ensure the board strikes the balance between investor shareholders and independents. When conflicting situations arise, independents can be relied upon to render opinions in the best interest of the company and help investors navigate their competing fiduciary responsibilities. Since independents lack this fiduciary conflict, they can give the entire board a 'true north' on what is in the best interests of all shareholders. In fact, overweighting a board with independent directors (versus investor directors) can be a great way to make sure the board steers clearly through these sorts of murky waters.

While there is no easy, silver-bullet solution, the above tips should help increase the odds of “getting it right” when it matters the most. Remember, a great board is the result of having great board members who are qualified, balanced, and who use good judgement.  Ask yourself, what is it that makes you a great board member?

SHARE
RECENT ARTICLES
News
News
Blog
.blog-hero { min-height: 241px !important; }