Handbook for New Board Members

Craft your unique position on a high-functioning corporate board.

I have served as a director on several dozen boards and found that effective, high functioning boards are rare, but when achieved — contribute enormously to the success of the business, and offer an extremely rewarding personal experience. Unfortunately, I’ve also seen, first hand that a poorly run board also contributes enormously in their own ways… and many boards are poorly run.

I’ve made a personal commitment to do everything I can to create and sustain high functioning boards and to consciously exit those that don’t have the capacity to evolve or excel. If you’re new to the job of being a board member, this overview will help you understand the role and what a high functioning board looks like.

At Inovia Capital’s last CEO summit, one session that most engaged our fifty-odd CEOs in attendance was a discussion I moderated with the lead director and the CEO of Solium (TSX:SUM), wherein we explored our direct experiences on the topic. In this case, Solium, during my tenure, had a high functioning board that dealt with numerous high-stakes situations including a CEO transition and the contemplation of transformative acquisitions and ultimate sale of the business at over $1Bn — a highly unusual premium to the already strong current public valuation. From my experience with Solium and other boards over the past thirty years, here are a few of the things I’ve learned;

Find The Right People

A board of directors’ first and most important job is the CEO. The board is directly and solely responsible for hiring, evaluating, managing — and if necessary, replacing the CEO. This gives rise to a raft of issues which are both poorly understood and dealt with by many boards (note the many subjects and points below). Helping the CEO architect, recruit, retain, reflect on, evaluate, and develop their executive team is an integral part of the board’s role. Taken together, these functions should constitute the largest portion of time spent as a board member. As we will see, fulfilling this role requires building strong relationships across the executive team and board, not just with the CEO.

Craft The Right Strategy.

Unlike job one, the board is not responsible for the strategy of a company. This is management’s role. A great board will be key in facilitating strategy development. The board’s primary role is to test that strategy by looking at it through the unique lens of members’ distinct experiences to help management see blind-spots, anticipate second-order consequences and weigh risks in a broader context. Although things can happen very quickly in early-stage startups, thus necessitating constant conversations about strategy, I’ve found it’s helpful to have one of the four quarterly board meetings focus more deeply on strategy in an extended session, frequently away from company offices to encourage that shift of mindset required for management to work “on” rather than “in” the business. Long-term thinking can be overlooked, yet transformative for early-stage companies.

Don’t Delegate “Upwards”

Supporting the CEO in key decisions doesn’t mean that the board makes those decisions. It means listening carefully, asking a few questions to ensure a full understanding, and thinking about how to leverage your network and share experiences to help the CEO select the best path forward. Measure your words carefully, using the filter of saying what’s useful, not what’s right. You’re part of a supporting cast now, not the star. I see too many board members feed their egos by ranting endlessly on their views without regard for this basic principle. This ultimately serves no one, but is a learned and earned skill. On the one hand, a board member needs an unfettered, candid view of everything that is happening to form perspectives and opinions. But the use of that is not to make decisions for the CEO, but simply to provide perspective and insight for the CEO to make better decisions, and the language used in conveying input is critically important on both sides. The CEO is responsible for results, not the board.

Paperwork Comes Last

Aside from a brief formality of ensuring the right people are in the room and armed with the right material and the right agenda, the first minutes of a board meeting are best spent on the CEO update, not governance. Taking 15–30 minutes to do this “in camera”–with only the CEO– provides an opportunity for the CEO to set the table and alert the board to any key topics that they should be sensitive to in the subsequent discussion. In a startup board, the record-keeping ie signing minutes, approving this quarter’s ESOP grant, blessing the executive officer roster, auditing of financials, controls, and processes still need to be done, but are really not the main job, nor the primary source of a board’s value. In a public company, this balance may, of course, be different from an early-stage company.

Skip the Flip

Once you’ve established everyone has read the slides and made notes as to their questions and comments, take a leap and skip the slide flip. Have each executive summarize in one minute their view on a key slide that presents Objectives and Key Results (OKRs are discussed more below), ask for questions, and identify a topic for strategic discussion. This will shift the balance of the time spent from going down historical rabbit holes (“what happened?”) to apply those learnings to forward-looking strategy (“what will we do?”). Optimizing for the pace of learning is a key success factor in startups, and one of my simple metrics of board maturity is time spent talking about the future > time spent talking about the past. As a specific example, I often find that early-stage companies get caught up in a lot of time spent on financial results not because they’re inherently complex or because of the business issues involved, but because there isn’t yet a clear and commonly understood way of stating the numbers. Get these KPIs figured out early and if a necessary delegate to an audit committee to wrestle with this offline before the board meeting.

Culture Starts at the Top

Great board and CEO understand that culture starts with the behaviour exhibited by the CEO. Accountability, transparency, trust, humility and openness to new ideas only have meaning in action. One way successful CEOs exemplify these values is by using the board calendar to set a cadence in managing their team. They have their team present updates rather than doing it for them, focus on one or two areas of the business, in any given meeting, to benefit from watching the board’s interaction directly with that executive, and to facilitate surfacing fresh insights about that business area. A CEO that has let go of the need to “give the right answer” and who demonstrates the self-confidence to not step on direct reports in addressing difficult topics is maturing as a leader. A great board contributes to a high performing culture in the business with three behaviours:

1) applaud pace of learning, thought process, clarity, and continuity of results reporting and impact on strategy evolution,

2) celebrate the right question while allowing executives to be responsible for the strategy they choose, and,

3) encourage accountability by nonjudgmentally acknowledging the challenges of closing gaps between actual results and plan, and, as any manager does, seek the clarity of who is responsible for what by when.

Diversity is Essential

Directors and investors increasingly act on the evidence that teams diverse in experience, ethnicity, gender and on other dimensions, consistently make better decisions than a group of like minded folks. Some investors, including my partnership at Inovia, put that belief in writing when backing an entrepreneur, to ensure there is an alignment on its priority from the board down. A great board pokes at an executive team that lacks diversity and involves itself in CXO search processes to help make sure the CEO knows “what great looks like” by introducing outperforming executives filling a similar role at other companies and by discussing the short list and making interviews to both assess and sell top candidates, a top schedule priority. I regularly do executive interviews at the drop of a hat in the evening and on weekends — this is an important part of the job description! And when a search firm presents a short list of candidates without diversity, we propose another search firm that has a track record of coming up with candidates rather than excuses.

Continuity is Key

A typical startup board cadence is quarterly, with a mid-quarter phone update. For the sanity of all involved, it’s good practice to report on results from commits made last quarter and make a set of forecasts for the next quarter with a consistent set of KPIs (key performance indicators). It shouldn’t be necessary to refer back to the prior quarter’s deck to see what forecasts were made. Great companies use OKRs, which I encourage for all businesses. Have all board members read Measure what Matters if they aren’t familiar with OKRs. The smart CEO will use board preparation as a management cadence to have exec team members prepare their quarterly summaries in sync with this and then regroup with their team after the board meeting to discuss feedback and any resulting changes in direction. The first board meeting after a series A investment is frequently a refinement on the “pitch deck” which couldn’t be further from what’s needed to get value from a board. Align quickly on the KPIs that will be used as leading indicators of success then be disciplined about measuring against those.

Distribute Materials Late

I frequently hear board members ask for the materials to be distributed a week before the meeting. I disagree. For early-stage companies, in particular, they’ll simply be out of date. I prefer to receive the board package between 24 and 48 hours before the meeting and am not offended if the CEO saves their update until we meet in person, as long as all the factual material was included in the briefing materials sent ahead of time. In any event, board members need to spend a couple of hours reviewing the material to be prepared. This strikes the right balance between being “real-time” and providing adequate time to fully absorb and reflect on the package. I’ll make notes with questions I want to ask when reviewing the material ahead of time, and occasionally send questions ahead of time by email that I want resolved but usually, I find it works fine to bring them up during the meeting in part because I find other board members often have the same questions.

Get the Independent Quickly

I am continually blown away by how much having a current operating executive from another company adds to the board dynamic. Having people with real, current and relevant operating experience is essential to a well functioning board. When I’m part of well functioning boards that don’t *yet* have one — generally those with all investors that have operating backgrounds themselves, I still ask the question, “why wouldn’t we recruit a great independent sooner than later”.

Appoint a Secretary

There isn’t much for a secretary to do beyond take minutes and schedule meetings at the earliest stage companies. Some companies will have council attend meetings, which I don’t generally find to be a worthwhile expenditure unless an M&A conversation or other tricky governance situation is on the table. A CFO is usually the ideal person to take minutes. Minutes should be minimal, identifying that the board addressed such-and-such topic, that the committees reported, but without any narrative of the topics themselves beyond action items and the actual resolutions made.

Hold Committee Meetings

Even in a typical five-person series A board, it is helpful to appoint an audit and HR committee, each led by a non-management person. Committees should meet before each board meeting, the audit committee with the CFO. Ideally, this is in person before the board meeting but can often be done by phone. It’s worthwhile for the audit chair to meet with the firm auditor for coffee at the start and once per year even if at early stages they are only providing a review engagement rather than full audit. The audit committee can go into greater detail on financial statements, ensuring an understanding of the levers that affect cash runway and optionality to support budget approval conversations at the board. The HR committee can champion the CEO compensation discussion, ensuring that sensitive topics are dealt with respectfully yet transparently, and provide a recommendation to the board on adjustments.

Financials Aren’t Tricky

Financial statements must be clearly presented with a comparison of actuals to budget, and if necessary, to an intervening forecast as well as period comparisons (typically just this quarter over the same quarter the prior year). Actuals dating back a reasonable period and today’s forecast moving forward ideally four quarters need to be presented for discussion as well.

It’s Tough to Make Predictions

As Yogi Berra said, “it’s tough to make predictions, especially about the future.” A hallmark of any successful business is the ability to forecast, and that journey from early customer wins to a repeatable sales engine should be a process that’s understood by all on the board. How are we doing at designing and implementing a sustainable business? Single wins and losses are important to celebrate and learn from, but understanding the business as a system — like a set of interrelated machines operating — is what allows scale. The board is the place to interpret events in the broader context of building the business as a valuable and durable asset.

Address the Elephant

Hopefully, the bulk of board time has been set aside for discussion of a few key topics after updates are reviewed. This is the point at which the real meeting begins. Does the hockey stick forecast defy gravity with no credible explanation for the future being different from the past? Does the CEO gush confidence while avoiding the inconvenient detail that they will run out of cash in 5 months? Do we believe customers love the product yet the numbers say they are leaving in droves? Is a pattern of key executive turnover emerging that no one wants to talk about? Are the founders at loggerheads, jeopardizing the business? Has the competitive landscape fundamentally changed while no one asks whether the current strategy still fits? A key test of a high functioning board is the ability to surface hard conversations in a respectful way that yields constructive outcomes. Challenging ideas, not people.

It’s hard. But if you don’t figure this out, you’ll be assured front row seats to a spectacular crash. This is important. Sometimes an intervention is required, an offline conversation to nudge eyes open a bit wider. But if the above cultural ideals are in place, it generally is safe to raise difficult topics in the broader board without people becoming positional. I’ve personally found it helpful to frame concerns as questions to understand a scenario rather than focusing on the “likelihood of an outcome”. Open-ended questions may help, for instance,

• “Help me understand the drivers of this change in new booking rates vs what we’re seeing right now”, or,
• “This looks like an impressive uptick in new revenue growth we’re forecasting for the coming months… would it make sense to have a check-in mid-quarter to ensure we’re on track?”, or,
• “I know it’s hard to forecast… is there anything the board can do to help ensure success on this? I want to focus on that successful outcome, and I do also think it’s also worth a moment to understand what our plans would be if we don’t see results developing as we expect at the mid-quarter check-in”.

Focus Forward, Not Backwards

It can be tempting to spend a lot of time going into endless detail on what has happened over the past quarter. This is only helpful to the extent that it reflects accountability and informs future change; it should be pretty well covered in writing and absorbed by the board before the meeting starts. A few clarifying questions should be all that’s required on any one topic before getting to the more important discussion of those one or two key things that really matter. I’ve found that the effectiveness of a board correlates pretty highly to the % of time used in the board meeting discussing the future, versus the past.

Have Dinner With the Management Team

Ensuring informal time ahead of a board meeting is important to build relationships and trust. People cannot be vulnerable unless there is trust, and while a single dinner isn’t a silver bullet to get there, it is a necessary ingredient! Encouraging one on one time for exec team and board members facilitate a 360° perspective on key topics and support board members providing more useful, in-context input. The board meeting itself should be long enough to not feel too rushed, for a series A company this is typically four hours, with dinner the night before so that there is some reflection time.

When Should a Board Member Be Fired?

I have found that attending a board meeting by video conference is a poor substitute because there just isn’t full engagement. Meetings should be scheduled at minimum one year out and if a board member needs to miss more than one in person meeting in a given year, or comes without having fully reflected on the material more than once, make it the chair’s job to have a one on one conversation about that seat being filled by someone else that can commit to making the job a priority. If the seat is an investor right, suggest that an independent would better serve the company’s needs in conjunction with an observer right for the investor to meet its oversight needs. Having a board position poorly filled brings down overall accountability for performance.

Observers observe

Have you ever noticed that a small group of people all leaned in on a topic can make progress much faster than a larger group where it’s easy for a couple people to drift off on email and suddenly that magic energy is lost? Demanding for 100% engagement is worth it. Frequently investors, especially strategic investors will negotiate a right to include an observer in board meetings, and the role of these observers can be unclear. In some cases, boards are small and observers are invited to participate as if they were full board members, which is fine if that is discussed and understood. But as a rule, I find that boards are more effective when observers actually sit back from the board table, as the presence of additional people reduces the focus and accountability of the team. We especially try to follow this rule when a second VC team member is joining. It can be super helpful to the company if a VC brings a second team member to observe as they will look for ways to help the company and can assist the partner in contributing resources of the firm where appropriate. Observers may be on the phone or sit in the room away from the table and should be circumspect with comments unless asked for input on a topic. This can require a bit of education and expectation setting, for example, if a strategic observer is joining as a first-time board member and wants to spend a lot of time discussing industry events without an understanding of the board’s best use of time. Doing the right thing doesn’t always mean being “liked” for my behaviour at the moment.

Was This a Good Use of Time?

I frequently ask the CEO at the end of a board agenda, “did we make good use of our time today?” Boards need to be accountable for performance, and this starts with asking a simple question. Because the highest leverage of a board changes as a company grows, this should be an evolving discussion.

Never Skip the In-Camera

Novice boards will dismiss the opportunity to meet without the CEO present, fearing that doing so will signal some lack of confidence or concern about her performance. Worse yet, I’ve seen insecure CEOs discourage this incredibly valuable use of time and even neglect to invite feedback on the board meetings. Having a fulsome discussion with the chair or lead independent direction going around the room to collect thoughts from each board member without management present an essential ingredient to getting value from a board. One of the topics explored should be the CEO’s growth trajectory, strengths and weaknesses as part of aligning on feedback to be provided through a single person. A board that functions as a group of individuals providing disparate advice to the CEO can be destructive.

Investor and Board Member Are Separate Jobs

A great VC board member is able to leave their investor hat at the door and understands the fiduciary responsibilities of being a board member. A board member is responsible to the corporation, which is sometimes at odds with an individual investor’s interests. In any event, it can be confusing to a CEO if an investor board member isn’t clear about which hat is being worn at a given time. I have developed a habit of being very clear that I’m coming to the board meeting as a board member. If a conversation comes up, for example, “would the fund I represent invest in an upcoming round?”, I’ll defer that to a separate time and place. We recently had this happen in a board, where I suggested we schedule an investor call to ensure the CEO had a clear understanding of where key investors stood. In another situation, I felt it useful to appoint one of my partners to speak on behalf of my firm regarding our investor interests so as to not be in conflict as a board member. Respectfully identifying potential conflicts of interest enables the right conversation to happen.

Be On Another Board

If you are a founder, it’s likely that your own board is the first time you’ve had the job of being a board member. At Inovia, we encourage founders once their business has reached a certain stage, to look for one outside board to join with an entrepreneur that is beginning to go through some of the same challenges they’ve now conquered. Sitting on the other side of a board table has multiple benefits for both parties.

Do Your Homework

We’re all busy people and it happens that sometimes we aren’t prepared — but that’s no excuse. “Shawn”, the chair cut me off mid-sentence, “that topic was already covered in the briefing email the CEO sent out”. He was curt, direct and absolutely right in his implication that I had no business wasting the board’s time with a repeat just because I hadn’t fully considered the briefing material before the call. I was especially embarrassed because I’m generally the one coaxing management along with, “we don’t have time to read the slides again, we’ve all done our homework let’s get right to the challenge you would like us to soundboard with you.” I also make a point of singling out other board members when I’m chairing to ensure we get fulsome and thoughtful input from every board member. Getting singled out for an opinion on a topic you didn’t come prepared with a view on only happens once! It was a humbling moment to be called up short when I was the one this time — but also heartwarming to feel that we had achieved a higher standard for ourselves around this board table. I was in the right room.

This material was developed from entirely shared experiences in which a community of over a hundred co-board members has participated. A few folks deserve special mention, including all of my Solium board colleagues, who have been uniquely thoughtful, selfless and professional in their pursuit of excellence as a team.