In my experience as both an investor and interim CFO for private companies, I see three factors preventing boards from providing the support and direction their portfolio companies need to succeed.
The first is a lack of diversity. Despite recent progress, most boards still consist of gray-haired men with CEO and investment backgrounds. Second is a failure to communicate regularly, both among board members themselves and with a diverse group of company leaders. And finally, the size and composition of a board may not be the right fit for a given company. Bigger is rarely better.
Let’s look at what can go wrong and discuss ways to make boards function optimally for all involved.
Boards, as currently constructed, are falling prey to confirmation bias.
In a recent Deloitte inclusion survey, just 21% of U.S. C-suite executives (opens in new tab) say their boards have a culture of inclusivity. Data backs that up: Among Fortune 500 companies, as of 2019, women held about 26% of board seats, minority men, 13%. In large companies, the numbers are edging in the right direction, the Spencer Stuart Board Index shows (opens in new tab). But in my experience, smaller firms are still experiencing diversity issues, and that’s a major problem.
The board of directors has a fiduciary responsibility to shareholders to ensure corporate governance is properly maintained. Main duties include advising companies on senior leadership staffing, compensation and financing, and strategic direction. Given an increasingly diverse population that’s 51% female and 25% non-white, how do you expect a homogeneous board to successfully recommend actions that will lead to continued growth?
One of my experiences was with a well-funded company that had a clear female focus. The board, however, consisted until fairly recently exclusively of white males. You know how on Facebook, once your political or social stance is known, algorithms kick in and you see only content that reinforces your worldview? There was so little diversity of opinion that it was a true disservice — when everyone has the same opinion, healthy dialog dies.
In January, Goldman Sachs mandated (opens in new tab) that, starting this month, for the firm to take a company public, at least one member of the board must be female. Goldman CEO David Solomon said it plans to increase that number to two in 2021. While the merits of affirmative action are debatable, any and all efforts to increase gender equity are worth pursuing.
Racial diversity is an even tougher nut to crack. Again, the country’s largest firms are making strides, with 23% of new S&P 500 directors identifying as minorities; 10% of those are women of color.
My advice for CEOs is to push for the most diverse boards possible. It’s likely to pay off. McKinsey research shows that (opens in new tab), of 366 public companies surveyed, those in the top quartile for ethnic and racial diversity in management were 35% more likely to have financial returns above their industry mean.
People of different backgrounds bring experiences and mindsets that may open up alternative perspectives and strategies.
Boards of directors generally meet quarterly in person or, in the current environment, via videoconference. The company typically presents updates on business activity and puts strategic decisions on the agenda for discussion.
If that meeting is the first time your board is hearing important information, especially disappointing results, there has not been enough communication. Expect the entire call to be spent catching the board up on the current state of the business, leaving no time for forward-looking discussion.
The root cause is the second common mistake investors and board members make: Establishing a regular dialogue only with the CEO.
Look, CEOs tend to be optimistic by nature and are usually strong storytellers. Often, they convey an overly optimistic view of the business, hoping to impress investors. While it may seem like a smart idea to paint an upbeat picture and have the board feeling good, the result is a completely ineffective use of time.
If you are a board member, I recommend reaching out to a different department head each quarter to educate yourself on all corners of the business. CFOs, CMOs, HR leads, COOs — they all bring unique insights. Make sure the CEO has instructed team members to speak freely.
Board directors have connections and networks that can be brought to bear to address problems, and their expertise makes them excellent advisers and sounding boards. So don’t try to bury problems. If there’s an issue, bring it up promptly. Whether or not board members can help, they will at least appreciate the early notice. No one likes to be blindsided when it’s too late to do anything.
Companies with small boards, identified as those with eight to 10 members, outperformed their peers by 8.5 percentage points, while those with large boards of 12 to 14 members underperformed peers by 10.85 percentage points, according to a GMI Ratings study (opens in new tab).
Why? My take is that smaller boards enable directors to establish deeper relationships, encourage asking questions and increase the sense of ownership.
Boards get bloated for a number of reasons. Venture capital investors, for example, frequently push for representation to influence direction and have their opinions heard and agendas pursued. Most typically sit on a handful of boards in addition to holding executive positions and advising many other portfolio companies, so they may not devote as much time and attention as you’d like. But that doesn’t keep them from trying to dominate meetings.
When a board is small, it is critical that members have complementary strengths and that the composition evolves with a company’s growth, as different hurdles need to be overcome at different stages. Early on, you may need advice on how to structure sales compensation; later, expanding internationally is the challenge. More mature companies may need to construct a leadership succession plan or contemplate a move from license to subscription. These all require people with different backgrounds and experiences.
And temperaments matter. Most board members would be described as “Type A” — competitive, ambitious and extroverted. Combine too many Type A personalities on one board and it’s a recipe for a cut-throat environment where members are more interested in getting their points across than forwarding the company’s goals.
Whatever the board’s composition, it’s up to executives to make use of directors’ expertise by asking questions.
In Maria Konnikova’s The Biggest Bluff (opens in new tab), a psychological study as seen through the poker world, Konnikova’s friends urge her to ask poker legend Erik Seidel what he thinks of certain hands, and if he would do things differently. Seidel would consistently respond, “less certainty, more inquiry.”
In other words, ask more questions. Keep an open mind. There is no one singular right answer.
Just as in No-Limit Texas Hold’em, hands can be played multiple ways, with the biggest variables the size of the players’ chip stacks, their personalities and their playing styles. Companies will never have complete information on their competitors’ strategies and balance sheets, customers’ future proclivities or the economic environment in a year or 18 months. But you can ask questions and gather as much information as possible from many constituents before making decisions. That includes your board.
If you’re in a position to select directors, key character traits to look for are curiosity and an open mind.
A research study on decision-making conducted by Professor Kaitlin Wooley of Cornell University (opens in new tab) proves what any social media user suspects: People tend to avoid information that conflicts with their intuitive preference — that is, their opinion. More interesting is that avoidance is greater before a decision is made, when information is more relevant and valuable.
I surmise that many board members fit squarely into this mold. When conflicting information could contradict their opinions, they stop listening.
Then there’s simple disinterest. We all know board members who like to sweep into town for quarterly board meetings. After a nice dinner, some networking and a brief State of the Union from the CEO, they are quick to impart advice, less quick to ask questions or explore topics that were not proactively brought up.
The best board members are the ones who ask the most questions, not just of the CEO but of the CFO, division leaders and key employees. CEOs are pulled in so many directions by investors and customers, on top of internal meetings, that they may not have the true pulse of the company. At one firm where I was interim CFO, the high-profile CEO was traveling, presenting at conferences and meeting with investors so often that she had not been in the office for months. Many new employees had not even met her.
Prolific investors, namely VCs, also suffer from recency bias. Got a problem? A prior success is quickly put forward as the likely answer. Maybe it is, maybe it isn’t. As Seidel cautions when pressed by Konnikova on how he would play certain hands, “The answer is simple: There is no answer.”
While board members want to help and provide value, without asking questions and recognizing the nuances of the situation, even the most well-intentioned intervention may ultimately hurt. I have seen cases where board members, with tremendous certainty and confidence, set a CEO on a wild-goose chase. Whether done altruistically or to further their own agendas and networks, the time is still wasted.
Look for those who inquire constantly before imparting wisdom.
Limit the number of board members to the lowest number possible while maintaining a diversity of background, personality type and opinion. Push for broad racial and gender representation. Otherwise, while the board may be quite harmonious, it’s the living definition of confirmation bias at work.
The relationship between a board and senior management is often viewed somewhat contentiously. But if both sides dedicate time and resources outside of the normal quarterly cadence, the result can be a true partnership that leads to success.
Josh Burwick is an active private technology investor with a particular focus on software, Blockchain, e-commerce and sports betting technology. He has served as an interim CFO and advised on strategic fundraising for a variety of technology companies, ranging from Series A to Series D rounds.