It’s common for investors to secure their investments in a new company by requiring startups to create an outside seat for them on the board of directors. Is it in the best interests of an entrepreneur to accept such a proposition? It might be if the investor has a stellar track record for being innovative, progressive and strategic. Being well-connected to other investors, advisors and managers is another strong reason to consider adding an investor to the board. Beyond knowing lots of talented people, entrepreneurs should consider a new director’s reputation and how well they maintain relationships with others within their networks.
Understanding the Differences Between Boards of Directors and Advisory Boards
In a perfect world, the mix of board directors would provide all the expertise that an entrepreneur needs. The reality is that even the most talented and respected board members will need to seek outside expertise from time to time. It’s vitally important for the primary players in a startup to understand the differences between the board of directors and the advisory board and under which situations they might call on either of them.
Board directors are legally appointed positions that represent the best interests of the shareholders. Board directors have fiduciary duties to protect shareholders and other stakeholders. They are expected to hold high standards of ethical and financial behavior. The primary duties of board directors are strategizing and providing oversight. One of the primary ways that they fulfill their duties is by making sure that the company has a strong management team. The board of directors is also responsible for hiring and firing the CEO.
An advisory board has no legal or official responsibility. An advisory board comprises an unofficial group of mentors that helps the board solve problems and strategize. They stand by to fill gaps in expertise on an “as needed” basis. Board directors should take advantage of their expertise and resist the temptation to let them be figureheads only. Board directors should also be sure to follow through when advisory board members ask them for reports or other information after requesting help or advice.
What Expectations Should an Entrepreneur Expect From a Board of Directors?
Quality board members dedicate themselves to helping new companies grow and thrive. One of the most important challenges that board members have is fulfilling their board duties while being cognizant of staying in their own lane. Board directors will have specific areas of expertise, and they need to offer their input without stepping over management. Board directors offer value in other important ways. They use their vast networks of business connections to draw in other investors and experts to help the company prosper.
Establishing good communication channels is the best way for board directors to interface with managers without overstepping their roles. The board chair can be instrumental in setting some ground rules for how often to communicate with managers and the best method to communicate with them. Some people find phone calls or emails are the best way to communicate. Others prefer in-person meetings. At a minimum, board directors should hold quarterly meetings to discuss financial reports, challenges, future strategies and spending.
Distant relationships between board directors and managers often create uncomfortable surprises that are difficult for both parties to navigate. The easier you can make communication, the better it will be.
How Quality Boards Add Value to Shareholders
Managers perform varied duties related to product development, marketing, sales, operations and finance. The right mix of talent on a board of directors helps to detect when managers are spending too much time with busywork and not enough time following through with the company’s strategic plan. It is the responsibility of the board of directors to keep managers focused and productive. Board directors have to be willing to take action against uncooperative managers who fail to carry out the board’s plans.
This isn’t to say that board directors should quickly or automatically fire managers who aren’t meeting their expectations. A good working relationship between board directors and managers is an ongoing process where both parties track priorities during and in-between board meetings.
For example, board directors should be keenly aware of various cycles within the industry. Retail companies make most of their profits during the holiday season, and board directors plan for their prime sales period by planning well in advance for it. They have many decisions to make about managing stock, marketing, company culture and adding retail facilities in prime locations. They must also consider personnel issues like hiring seasonal staff and providing benefits and insurance for employees.
Taking Advantage of Board Director and Investor Networks
One of the best things about board directors is that they usually associate with a vast number of other board directors and investors. As your company prospers, they will naturally extend the good word to their personal and professional connections. They will also likely be aware of how to connect with the top talent in executive leadership, and have a pulse on the future of the industry.
Board directors will surely spread word of their involvement with your company. Their connections will almost certainly attract new investors. Valued board directors know how to help seal a deal with top-level investors and set the stage for future transactions.
Board directors will usually persuade their associates to try your products or services, which will open doors to new types of consumers. New connections in high places could help you establish credibility, and could potentially open the door for you to become partners with another major corporation. You want your brand to be the diamond that every top-level executive wears.
In addition to having connections in the world of investors, experienced board directors will know how to find the most sought-after managers and other experts. Some of them even employ their own headhunters and use their connections to find top talent in every field, including sales, marketing, technology, operations and cybersecurity.
Using Board Director Expertise to Manage External Market Forces
One of the things to consider in appointing the right mix of board directors is learning about their willingness to pay attention to external market forces and adapt strategies to respond to them.
Board directors often face unexpected issues in the marketplace like new technologies, changes in consumer behavior and regulatory changes. How will they respond if a hot, new competitive product comes on the scene?
Boards of startups need board directors who can talk expertly about issues like lines of business, business models, pricing strategies, investment strategies, product development and marketing strategies. Would your board directors be willing to take a 90-degree turn if board directors and managers jointly decided that it would be profitable to move in a new direction? These are the types of issues that separate a mundane board from an innovative board.
Most importantly, while it’s great to start with enthusiastic and expert board directors flanking the board table, it’s essential to know that your board directors will add value as your company becomes an industry staple.