Shoot for the moon

With the right board,

the skys no limit
222222222
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
1
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
help enliven a ledqlinq company's brand: wellrespecLed direcLors add brand 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
beLLer resulLs reqardless ol Lhe company's sLaqe ol qrowLh. ConsequenLly, hiqhqrowLh
companies should consider assembling a board of directors sooner rather than later,
an investment that will pay dividends all along the companys journey. In the pages that
follow, well discuss why and how you should make that investment, and well offer leading
practices and tips from successful entrepreneurs and investors whove done this right.
2
Board members can
provide insightful
guidance and lend
credibility to a new
management team.
Americas IPO Leader,
Ernst & Young
Jackie Kelley
3
B
efore you start, its time for
an honesL sellassessmenL.
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
your board:
What experiences and
expertise do I need?
What do I need the board to do?
Whom should I pursue?
The questions overlap. The response
Lo one inluences Lhe answers Lo Lhe
others and will also vary depending on
where your company is along the path to
qrowLh: emerqinq, rapidqrowLh or nexL
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
lounder ol Lhe USA NeLwork, puLs iL:
Where do you want the company to be
lve years lrom now?"
In the emerging stage, the board of
direcLors has Lhree viLal roles Lo play:
advising the CEO/founder, branding the
new company and networking. Ideally,
the board should supplement the CEOs
knowledge. Directors should bring the
experience that the CEO (and others on
the founding team) might lack, whether
iL's specilc indusLry domain knowledqe,
companybuildinq experLise or specilc
knowhow in cerLain operaLional areas
critical to sound growth. Their skills should
also complement the CEOs. 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
you delne your sysLems lor aLLracLinq,
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 companys 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
equaLe Lo success down Lhe road: "1hose
who have experienced failure and success
can really advise hiqhqrowLh companies."
At the same time, potential investors will
also be looking at whom youre able to
bring on board. Its important to strike a
balance here: on Lhe one hand, you wanL Lo
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 youre looking to sell your
companys 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
cockpit from the
In defense of micromanagement
According to the literature, boards are there to oversee and interact, not
micromanaqe. BuL in earlysLaqe companies, a biL ol micromanaqinq leLs you
know for sure what the business does. It gives you a little bit of insight into
the executives in management. Its actually a pretty good idea.
You can always back off from micromanagement once you know the ins and
outs of what is going on. Dont 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 youre doing wont work.
Youre selecting the kind of board you want to help you manage. Why lose
the perspectives that can help you make good decisions?
4
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, youll want to
assemble your board with people you
need, rather than people you already
know. And you dont want people
who will say yes to all of your ideas;
rather, youre 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, youre 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
people are really qoinq Lo lL Lhey're
going to strike the balance between being
contrarian, but at the same time, theyre
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
on Lhe board as parL ol Lhe lnancinq
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
very, very busy. RapidqrowLh companies
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.
For Lhose rapidqrowLh companies
preparing to go public, Ernst & Young
Americas IPO Leader Jackie Kelley says,
Start walking the walk. Its a leading
pracLice lor prelPO companies Lo acL like
a public company 1224 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 remaininq earlysLaqe invesLors
may choose to leave the board, thereby
openinq seaLs lor independenL Lhird
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,
one ol whom musL be an SLCveriled
"lnancial experL." 1he locus ol Lhe board
turns to oversight of risk management
and compliance requirements keeping
the company out of the papers.
Your board should feature operating
experience in the companys 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
LhaL cannoL lnd consensus is less likely Lo
provide actionable advice and guidance. If
the board doesnt get along, thats a matter
ol public record and does noL relecL well
on the business or its CEO/founder.
5
Focus your energy
on getting other
CEOs on your
board who have
more experience
than you.
Managing Director,
Foundry Group
Brad Feld
6
I
ts 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 weve 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
lve is beLLer. By Lhe Lime a company has
matured, the board should consist of 7 to
12 members.
Getting the board
composition right
Here are some logical places to focus your
search lor Lhe riqhL direcLors:
Mse 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 dont have the time to take on
another commitment, consider using
them as examples in your search. Take
noLe ol Lheir qualilcaLions and how
they do their jobs.
Consider retired partners of
professional sernices rms& Theyre
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&
Youll want to build operating experience
into your board.
Look to your own supply chain, both
downstream and upstream& Your
suppliers are olLen successlul, well
run companies and directors and
executives of those companies will have
some understanding of and interest in
your business, even if its from a limited
perspective.
Executine search rms& Many search
lrms have pracLices LhaL locus on
board recruitment.
Prioritire dinersity& 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 youre
looking for to keep the skills, expertise
and experience you need to round out
your knowledqe and experience lrmly
in mind. 1he lrsL hiqherprolle direcLor
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
parLies such as execuLive search lrms.
Its also a useful exercise to look at the
position from the prospective directors
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. Theyre
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
7
Diversity improves results
Diversity 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 todays 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.
20
15
10
5
0
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 dont
be fooled into thinking that a candidates
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. Theyre
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 thats venturing
into a new market. And a diverse board can
be a valuable resource when it comes to
diversiLy in hirinq, in lnancinq alLernaLives
and in diversity supplier situations.
But keeping your business philosophy and
strategy consistent matters, as McDonnell
points out. Once youve 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.
8
A
ttracting 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
process ol sellassessmenL. 1he board
could pursue reqular sellevaluaLions,
with the companys outside counsel
aggregating and reporting the results.
And as the National Venture Capital
Association notes, every transition is a
qood Lime Lo relecL on Lhe board and iLs
composition.
6
Change is inevitable but it
isnt a good idea to wait until its 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
lnd consensus. AL worsL, iL can lead Lo a
falling out between the old guard and
the new kids on the block. Regular
turnover on the board can be unsettling,
but its generally in the companys
best interest.
Knowing when
to say goodbye
ParL ol lndinq Lhe riqhL board is beinq prepared lor Lurnover. Here are some Lips on
approachinq Lhe succession process:
Develop a skills matrix for board composition, relecLinq Lhe company's sLraLeqic
direction, 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 qualications 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.
Prioritire diversity&
Action items
The art of director rotation
9
As you take your
company through
phases of growth,
the boards role will
change and its
composition should
change too.
Americas Director,
Entrepreneur Of The Year

,
Ernst & Young LLP
Bryan Pearce
10
T
he 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 directors 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
Lake Lhe Lime Lo develop a oneonone
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 dont know the answer to this. I need
some input.
Your directors should come to board
meeLinqs wellprepared, Feld noLes.
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
Leam by addressinq specilc issues LhaL
are on the CEOs mind, he points out.
One way to make the most of the boards
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, its 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 dont look at
seeking advice as
a weakness at all.
We look at it as a
strength.
Kay Koplovitz
Chairman 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
LhaL helps you Lhink Lhrouqh Lhe dillculL
problems.
At all stages of growth, boards should be
"very much handson . buL noL handsin,"
Bjork notes.
Clear and effective communication
between the board and management is a
musL. Here are a lew Lips:
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
leadinq pracLice: send direcLors an
email with agenda topics and concise
summations.
Dont 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
companys operations.
Action items
The power of
communication
cockpit from the
11
Brad
Feld
Managing
Director,
Foundry Group
Don'L leL conlicLs lesLer
Resolve all conlicLs ouL loud and in Lhe board meeLinq.
Ive 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.
1his is one ol Lhe mosL desLrucLive and LimewasLinq
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
a simple endolboardmeeLinq process lor Lhe lnal
30 minutes of the meeting. First, you handle any
outstanding administrative issues that havent 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 didnt surface during the open part of
the meeting. Dealing with it in real time, as a board,
is powerful.
12
Endnotes
1 Vicki Marion, Bringing Experience to the Board, Entrepreneurship.org
website, hLLp://www.enLrepreneurship.orq/en/resourcecenLer/brinqinq
experienceLoLheboard.aspx, accessed 15 March 2013.
2 Greg Warnock, Building a Board from Scratch, Entrepreneurship.org website,
hLLp://www.enLrepreneurship.orq/en/resourcecenLer/buildinqaboardlrom
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, hLLp://www.enLrepreneurship.orq/en/resourcecenLer/lasLqrowLh
needsalrmloundaLion.aspx, accessed 5 March 2013.
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, hLLp://www.enLrepreneurship.orq/en/resourcecenLer/developinq
ellecLiveboardprocedures.aspx, accessed 8 March 2013.
8 Mark McClain, Make your companys board matter, Austin Business Journal,
8 February 2013.
9 Charles Mathews, Developing Effective Board Procedures, Entrepreneurship.
org website, hLLp://www.enLrepreneurship.orq/en/resourcecenLer/developinq
ellecLiveboardprocedures.aspx, accessed 8 March 2013.
Its all systems go
A wellconsLrucLed board Lakes Lime and ellorL, buL iL can qreaLly increase a hiqhqrowLh company's
chances 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.
A diverse, wellrounded board ol direcLors can provide lonqLerm perspecLive Lo balance manaqemenL's
focus on the day to day as well as the guidance and discipline needed to balance growth and manage risk.
When its time to shoot for the moon, head there with all the acumen and experience you can gather
by your side. Youll have a smoother journey, and youre 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.
13
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