Shoot for the moonWith the right board, the sky’s no limit

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Shoot for the moon

Americas Strategic Growth Markets Leader, Ernst & Young

“Having the right people on your board is critical to success — not just at the beginning or at the end, but all the way through the process of rapid growth to market leader.”

Herb Engert

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For the CEO of a high-growth company, the question is simple:

as you shoot for the moon, whom do you want with you in

the command module? Ideally, you want a knowledgeable,

diverse team, including a committed and talented board of

directors, that can bring operational experience and a variety

of viewpoints to guide your journey.

A veteran, active and diverse board is a critical factor in the successful expansion of a

company. Board members can be an invaluable reservoir of expertise and experiences.

Founders/CEOs can leverage those qualities to serve as a sounding board for key

decisions. A board can help provide discipline as well as advice to management and

reputational value.

As corporate governance has evolved, the role of board director has transformed from

its former honorary status. Board directors play an active part in shaping the direction

of a company. Their task is more complex than in the past. They have a duty to the

company that, if the company goes public, matures into greater responsibility to a

broader group of shareholders. The role requires real time and real commitment.

The right board helps management make the right decisions, which translate into

companies should consider assembling a board of directors sooner rather than later,

an investment that will pay dividends all along the company’s journey. In the pages that

follow, we’ll discuss why and how you should make that investment, and we’ll offer leading

practices and tips from successful entrepreneurs and investors who’ve done this right.

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“Board members can provide insightful guidance and lend credibility to a new management team.”

Americas IPO Leader, Ernst & Young

Jackie Kelley

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Before you start, it’s time for

Do you have a business background — from previous corporate roles or as a serial

entrepreneur? If not, but you have developed a great idea and need help making it into a commercial success, consider turning to other founding investors and seasoned CEOs with business experience for aid in building your board.

There are three key questions to ask when considering the composition of

What experiences and expertise do I need?What do I need the board to do?Whom should I pursue?

The questions overlap. The response

others and will also vary depending on where your company is along the path to

generation market leader. In each case, one question should be in the back of your mind. As Kay Koplovitz, Chairman and CEO of Koplovitz & Co. LLC and

“Where do you want the company to be

In the emerging stage, the board of

advising the CEO/founder, branding the new company and networking. Ideally, the board should supplement the CEO’s knowledge. Directors should bring the experience that the CEO (and others on the founding team) might lack, whether

critical to sound growth. Their skills should also complement the CEO’s. For instance, if the founder is an inventor, he or she should look for directors with proven business skills. If your company has been growing by leaps and bounds and hiring accordingly, a director with deep experience in human resources can help

retaining and rewarding the top talent you will need to compete for skills and grow successfully.

The ideal director has a strong sense of how lonely it can be at the top — and the experience to weigh in at crucial points in the company’s growth.1 He or she expects some bumps in the road and accepts the potential for failure. As Lars Bjork, CEO,

Qlik Technologies Inc., notes, failures often

who have experienced failure and success

At the same time, potential investors will also be looking at whom you’re able to bring on board. It’s important to strike a

look for luminaries and visionaries, people who have a personal brand that can be extended to help grow the company. On the other hand, you need people who have the time to take on the job.2 The board can also be an important source of contacts with potential customers and sources of supply. For instance, if you’re looking to sell your company’s product in stores, a director with connections in the retail sector can help broker the right conversations to get your product on the shelves.

Building the right board

Tom McDonnell

CEO, Ewing Marion Kauffman Foundation

cockpitfrom the

In defense of micromanagementAccording to the literature, boards are there to oversee and interact, not

know for sure what the business does. It gives you a little bit of insight into

the executives in management. It’s actually a pretty good idea.

You can always back off from micromanagement once you know the ins and

outs of what is going on. Don’t look at this as just showing up every month;

take whatever background you have and say, what can I be most productive

looking at? Go down and see what they are doing. Then you can step back

and say, “I see no issue” or “One of those things you’re doing won’t work.”

You’re selecting the kind of board you want to help you manage. Why lose

the perspectives that can help you make good decisions?

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Keep in mind the board should be the place where you can turn for advice and perspectives you otherwise might not receive. Family ties — or familiarity — are not a plus. Generally, you’ll want to assemble your board with people you need, rather than people you already know. And you don’t want people who will say “yes” to all of your ideas; rather, you’re looking for people who will constructively challenge your assumptions and help provide new ideas as well as rigor and discipline to your thought process.

In the process, you’re looking to build a board that has the right kind of camaraderie — where people get along but are willing to speak their minds. The key, says Lorrie Norrington of Norrington Advisory Services, is making sure “that

going to strike the balance between being contrarian, but at the same time, they’re going to be able to work with other people and check their ego at the door.”

In the rapid-growth stage, the investors you attract typically will take a seat

arrangement. Consider evaluating potential investors for the expertise they offer the company. Look for people who will be constructive at the director level. And although your new board members’ networks will come in handy, bear in mind that your new investing directors might have less operating experience than you do, says Brad Feld, Managing Director, Foundry Group. “Assuming this, focus your energy on getting other CEOs on your board who have more experience than you,” he suggests.

That kind of operational experience is vital, because management is going to be

work on becoming a supplier of choice for their most valuable customers, managing expansion and securing the capital they need to move to the next level — being a next-generation market leader. At that stage, they focus on working effectively

Going public? Walk the walk.

across global networks, balancing entrepreneurial spirit with corporate culture and optimizing their capital structure — and, as Bjork notes, their boards focus on moving management toward process improvement, risk management and overall best practices in corporate governance.

preparing to go public, Ernst & Young Americas IPO Leader Jackie Kelley says,

“Start walking the walk.” It’s a leading

a public company 12–24 months ahead of an IPO. For your board of directors, that means moving to a more formalized structure and building the committees you need, typically including the audit committee, the compensation committee and the governance and/or nominating committee. Each committee should have a formal meeting cadence, a charter and a set of responsibilities that is well understood by every board member.

When a company anticipates an IPO, the may choose to leave the board, thereby

party directors, including those required by Securities and Exchange Commission regulations. These directors ideally should have the expertise and connections you need, as well as experience sitting on a public company board.

If the company chooses to go public, statutory requirements become key. Each public company board must have a majority of independent members.

The audit committee must be composed of at least three independent members,

turns to oversight of risk management and compliance requirements — keeping the company out of the papers.

Your board should feature operating experience in the company’s functional areas. The directors should have a record of service on public company boards as well as the right kind of connections to take the company to the next level. And at this stage, the dynamics of the board become even more important. A board

provide actionable advice and guidance. If the board doesn’t get along, that’s a matter

on the business or its CEO/founder.

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“Focus your energy on getting other

CEOs on your board who have

more experience than you.”

Managing Director, Foundry Group

Brad Feld

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It’s best to think of building your board as a core responsibility.3 Accordingly, you should take the time and effort to research each potential member as you would a candidate for your senior

executive team.4 Consider compensation carefully as well; it often comes in the form of equity and is frequently tied to the size of the company. As we’ve already discussed, the skills and experience your board needs will change as your company grows; so, too, will the ideal board size. In the emerging stage, a small board is ideal — some have just three directors, but

matured, the board should consist of 7 to 12 members.

Getting the board composition right

Here are some logical places to focus your

se your network to nd candidates Your connections include people who know what your company is trying to do — and, perhaps, what you need in a board member.

Examine boards of others in the same industry If the people serving on those boards don’t have the time to take on another commitment, consider using them as examples in your search. Take

they do their jobs.

Consider retired partners of professional ser ices rms They’re likely to have extensive experience — and a habit of looking at the issues from an independent point of view.

Look at sitting or recently retired CEOs of other successful companies You’ll want to build operating experience into your board.

Look to your own supply chain, both downstream and upstream Your

run companies — and directors and executives of those companies will have some understanding of and interest in your business, even if it’s from a limited perspective.

Executi e search rms Many search

board recruitment.

Prioriti e di ersity In building your board, consider diversity as a way of bringing a broad range of perspectives to bear on all decisions.

But how do you attract, and retain, the talent that makes your board an asset to the company? It helps to know who you’re looking for — to keep the skills, expertise and experience you need to round out

can be key; his or her appointment not only makes a statement but can also help attract other senior board members.

In emerging companies, the founder/CEO is often responsible for making sure the board has the right talent. But as the board evolves and matures, it should take over this function. At a minimum, the board should develop and regularly update a list of potential candidates. As the board builds a committee structure, a nominating committee can play a role. You should also consider outside, independent vetting of potential candidates by third

It’s also a useful exercise to look at the position from the prospective director’s point of view. The job takes time and effort; how do you make it worth his or her time? Director candidates are looking for opportunities too — opportunities to network, to gain new experiences and perhaps above all to be a part of an exciting, innovative business. They’re looking to make a difference.

The ideal director brings expertise, but not to the point of overspecialization. Each should have the ability to contribute to board dialogue on broader issues. More

“I have never gone on a board unless I was willing to buy the stock before I went on the board.”

CEO, Ewing Marion Kauffman Foundation

Tom McDonnell

Action items

The art of selection

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Diversity improves resultsDiversity in skill sets, experience, expertise and viewpoints can lead to a stronger, more effective board. A diverse board is more likely to

challenge the status quo and to think about things in a different way — two very useful traits in today’s rapidly evolving business world.

Change in the boardroom tends to occur incrementally, as our Getting on board report notes.5 But as you build your board, bear in mind

that diversity pays off. In terms of gender, recent research shows companies with woman directors outperform those without.

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15

10

5

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In a ranking of companies based on the average number of woman directors from 2004 to 2008, companies in the top quartile outperformed those in the bottom quartile by 26%.

Average growth

14%16%

10%12%

Return on equity

Companies with women on board

Companies without women on board

Over the past six years, companies with women on the board showed better average growth (14% vs. 10%) and a higher return on equity (16% vs. 12%).

than one CEO has lamented about directors who are brilliant but narrowly focused. Look for informal as well as formal skills — don’t be fooled into thinking that a candidate’s resume represents the sum total of his or her skills and value to the board.

Directors can also bring valuable insights and an independent perspective when issues arise between members of the management team or between management and outside parties such as major customers and suppliers. Directors

with different life experiences are more likely to approach the issues before the board from a fresh perspective. They’re more likely to challenge established thinking and the status quo.

Diversity on the board can also help management better understand a diverse customer base — as veteran director Norrington puts it, “Make sure people who are living the experience of your customers are at your table.” A diverse board can help advise a company that’s venturing

into a new market. And a diverse board can be a valuable resource when it comes to

and in diversity supplier situations.

But keeping your business philosophy and strategy consistent matters, as McDonnell points out. “Once you’ve achieved that diversity,” he notes, “you have to have a homogenous board from a standpoint of where the business is going, what its business lines are and what are the metrics for that business.”

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Attracting the right board members is key, but knowing when to change the composition of the board is equally important. Just as

your company will evolve and mature over time, so too should its board — not only in terms of the number of directors, but also in terms of the skill sets and experiences your company needs.

Accordingly, a board seat should not be viewed as a permanent position. Gradual turnover on a board should generally be viewed as desirable and healthy, especially in industries where market conditions and trends change rapidly. Some companies opt for term limits for their directors, with the terms staggered to ensure continuity and institutional memory. One leading practice is to hold annual elections. But even more important, the board should be involved in an ongoing and dynamic

with the company’s outside counsel aggregating and reporting the results. And as the National Venture Capital Association notes, every transition is a

composition.6 Change is inevitable — but it isn’t a good idea to wait until it’s required.

The size of the board does tend to grow as a company matures, but be wary of the perils of addition without subtraction. Bringing in new blood without bidding farewell to others might be the path of least resistance, but it can make a board unwieldy and limit its ability to

falling out between the “old guard” and the “new kids on the block.” Regular turnover on the board can be unsettling, but it’s generally in the company’s best interest.

Knowing when to say goodbye

Develop a skills matrix for board compositiondirection, the challenges it faces, and regulatory and industry developments.

Take a critical look at lengthy tenures through the lens of independence and evolving business challenges.

Consider evolving committee and board leadership needs

Establish, and enhance, written director quali cations that align with the business and the corporate strategy. Include these standards in bylaws and corporate governance policies as appropriate.

Consider annual director election results, where applicable, as well as engagement by investors.

Prioriti e diversity

Action items

The art of director rotation

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“As you take your company through phases of growth,

the board’s role will change — and its

composition should change too.”

Americas Director, Entrepreneur Of The Year®,

Ernst & Young LLP

Bryan Pearce

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The ideal board is composed of directors who can work well together and who are willing to make the commitment needed to support and advise the CEO.

Communication is the key to a smoothly functioning board, starting at the beginning of a director’s association with the company.

Set expectations at the start about duties and roles as well as the time commitment required. A written statement that clearly outlines what the CEO is required to bring before the board is essential.7 And, very importantly, to glean full value from these seasoned executives, CEOs should

relationship with each director based on transparency and trust.8 That way, when you need help on a pressing issue, you can turn to the director with knowledge and expertise on the topic for advice without

The board in action

fear of repercussion, whether during a meeting or on a special call. As Kay Koplovitz notes, it should be okay to say,

“I don’t know the answer to this. I need some input.”

Your directors should come to board

“Rather than consuming the meeting time by sitting back and being reported to, the board members should have read the information in advance and come prepared to help support the management

are on the CEO’s mind,” he points out.

One way to make the most of the board’s time is to circulate the proposed agenda in advance, seeking input on possible topics. If every agenda item is on the table before the meeting starts, it’s easier for directors to engage in meaningful discussion.

In the early stages, the board should be prepared to meet once a month and to discuss operational as well as strategic issues.9 At this stage of growth, sessions tend to be informal and “more like working sessions than actual meetings,” Feld says. “As companies grow and become larger, more formality creeps into the process.”

From the beginning, the interaction should be open and honest. A continuous dialogue between management and the board is best — and can be handled through email updates if needed. If the lines of communication are always open and the directors do their homework, there should be few surprises at board meetings.

“We don’t look at seeking advice as a weakness at all. We look at it as a strength.”

Kay KoplovitzChairman and CEO,

Koplovitz & Co , LLC

“I think the most critical thing to have a good functioning board is to have dialogue, the discussion,” Koplovitz says.

“Because what you really want as a CEO is the input, the advice, the dialogue

problems.”

At all stages of growth, boards should be

Bjork notes.

Clear and effective communication

between the board and management is a

Put it on the calendar Establish a structure for interactions with the board.

Plan ahead Build an inclusive agenda for your meetings, and follow it.

Think quality, not quantity Your directors are likely to be busy people. Give them the information they need in as succinct a form as possible. One

email with agenda topics and concise summations.

Don t go by the book Encourage directors to read the “board book” before the meeting — saving their valuable meeting time for urgent issues and opportunities.

Get around more Hold board meetings at various company locations to give the directors a better sense of the company’s operations.

Action items

The power of communication

cockpitfrom the

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Brad Feld

Managing Director, Foundry Group

I’ve been on many boards where one or more of the

board members felt like it was appropriate to circle back

with substantive issues after the board meeting. This

often started as a series of phone calls to the board

members about something that came up in the meeting.

behaviors a board member can have. The board needs to

function as a team, and it needs to run closed loop.

One simple approach for dealing with this is to have

30 minutes of the meeting. First, you handle any

outstanding administrative issues that haven’t been

resolved or voted on. Then, all management team

members leave the room other than the CEO. At this

point, the board has a closed session with just the

CEO. After this, the CEO leaves the room and the

board has another closed session without the CEO. In

this session, the lead director (which every company

should have) asks each board member one by one if

there are any outstanding issues to discuss. If anyone

brings something up, it is discussed. At the end, the lead

director summarizes what he is going to communicate

back to the CEO about the closed session. The board

meeting adjourns, and the lead director sits and has a

private conversation with the CEO.

This often results in a very short set of closed sessions,

but occasionally something sensitive and important

comes up that didn’t surface during the open part of

the meeting. Dealing with it in real time, as a board,

is powerful.

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Endnotes1 Vicki Marion, “Bringing Experience to the Board,” Entrepreneurship.org

website

2 Greg Warnock, “Building a Board from Scratch,” Entrepreneurship.org website,

scratch.aspx, accessed 8 March 2013.

3 Jackie Kelley and Diane Larsen, “Be serious and smart in building your board,” Directors & Boards, October 2009.

4 Jeff DeCoux, “Fast Growth Needs a Firm Foundation,” Entrepreneurship.org website

5 Getting on board: women join boards at higher rates, though progress comes slowly, Ernst & Young, 2012.

6 A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors, National Venture Capital Association Working Group on Director Accountability and Board Effectiveness, 2007.

7 Charles Mathews, “Developing Effective Board Procedures,” Entrepreneurship.org website

8 Mark McClain, “Make your company’s board matter,” Austin Business Journal, 8 February 2013.

9 Charles Mathews, “Developing Effective Board Procedures,” Entrepreneurship.org website

It’s all systems gochances of success — by giving credibility to an emerging enterprise, providing needed expertise as the organization expands, and offering perspective and guidance to a new market leader.

focus on the day to day as well as the guidance and discipline needed to balance growth and manage risk.

When it’s time to shoot for the moon, head there with all the acumen and experience you can gather by your side. You’ll have a smoother journey, and you’re more likely to enjoy the ride.

Mike Herrinton Americas Risk Leader, Ernst & Young LLP

Mik H i t

“Investors are paying much closer attention to how companies approach compliance and corporate governance.”

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any speci c matter, reference should be made to the appropriate advisor.

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