Leading Companies Online Magazine Archives
Managing a Board
By Ray Smilor, Beyster Institute Executive Director
What happens when a company stops performing—when projections are missed for several quarters, sales drop off precipitously, orders stop coming in or expenses continuously outstrip revenues? Often, heads roll. And, if the entrepreneur does not have a controlling interest in the enterprise, then his or her head is likely to roll first.
This happened to a friend of mine who started a medical-device company. Returning from a vacation in Jamaica, he learned that the board of directors had replaced him as president, named him "Chief Scientist" and hired a new CEO. To say the least, he was shocked. But he should not have been completely surprised. The company was progressing more slowly than he had told investors it would. He was having a hard time delegating. He was slow to bring in new talent.
The board had decided that under his leadership the company was not progressing satisfactorily, that it had outgrown his ability to manage it and that a change needed to be made. So they brought in a professional manager with experience in growth companies, and shaped a new—and what they believed to be more appropriate—role for the entrepreneur. In situations like this, entrepreneurs, like my friend, risk being kicked up or out of their enterprises.
A Board's Great Moment
To be effective, members of a company's board of directors must fulfill three obligations, according to Steve Lazarus, an outstanding venture capitalist who heads Arch Venture Partners and serves on the boards of several growth companies. He maintains that a board member must have
- a duty to care, that is, to do the work required to fully understand the issues of the company
- a duty of loyalty, that is, to act in a way that serves the best interests of all the shareholders
- a fiduciary duty, that is, to take responsibility to ensure the legal and ethical operation of the business.
In this context, the great moment in the life of a board—when it has the fate of a company most directly in its hands—is when it decides to hire or fire the CEO. This involves deciding whether the CEO can move the company to the next level of growth and success.
Boards of directors may replace or "kick out" founders who fail to perform as expected, so as to get companies back on track. To make the best of a difficult situation, good boards make their expectations explicit, are upfront with the entrepreneur and seek to minimize surprise. But it is not uncommon for a board to act, apparently on the spur of the moment, to initiate a radical change in the structure and operation of a company.
In other cases, boards may seek to restructure the role of the entrepreneur—to "kick up" the founder, as in the case of the Chief Scientist. The board thus seeks to retain the entrepreneur's vision and energy while removing him or her from operational responsibility. This can be good for the entrepreneur as well as the company, but it doesn't mean that the change comes easily, for either the entrepreneur or the board.
Telltale Signs of Trouble
There may be advance indications that a board is losing confidence in an entrepreneur's skills. Telltale signs include
- "pre-board" meetings without the entrepreneur, to discuss company issues
- new board members brought on without consulting the entrepreneur
- increasing questions about why the company is not hitting its projections
- talk about succession planning.
Entrepreneurs are often oblivious to these signals. They may be so tied up trying to run the day-to-day aspects of the business that they never notice the board's increasing concern and their own widening distance from the members.
How to Hang In
What can an entrepreneur do to avoid being kicked up or out? There are two alternatives. First, you can retain control of the company. By tapping your own money, growing internally and using the capital of family, friends and private investors—who usually ask for less equity than venture capitalists—you may be able to get the money you need to grow without giving up control of the enterprise.
If maintaining control of the company is not possible, then you must understand that a shift in control has taken place. You will be expected to meet or exceed financial projections. Just as important, leadership of the company now includes managing your board as well as other aspects of the enterprise.
Proactive Management
Entrepreneurs who avoid being kicked up or out of their companies take a proactive approach in managing their boards. To be proactive, here are some actions you can take:
- Conduct your own due diligence on every board member. Learn their strengths and weaknesses, and especially their particular areas of expertise.
- Build trust by avoiding surprises. Keep board members informed of important developments in the company and, especially, brief them personally on any bad news. Don't wait for regularly scheduled board meetings to convey information. Contact members by phone.
- Talk to your directors individually to solicit their opinions and to understand their unique concerns and issues. Build a personal relationship with each board member.
Every effective entrepreneur has a voice in selecting board members, maintains good lines of communication with them, finds ways to learn and grow as a manager of an expanding enterprise and seeks and heeds good advice. If you do that, then you can continue to work effectively with a board and maintain your role as the leader of the company.
©2008 The Beyster Institute and its authors and their entities. All rights reserved.
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