“Should a small business have a board of directors?”
Short answer: Usually, yes.
Longer answer: Only if that board is built and optimized well.
When we first meet founders, we sometimes find that either they do not have a board, or they have an informal or advisory group composed of co-founders and personal advisors. While there may be collective wisdom among board members, many times this knowledge is under-utilized.
A well-constructed board can deliver guidance, best practices, and a more professional cadence to an organization. More importantly, boards help management teams navigate the complexities and pitfalls that riddle the path to success. We have watched successful boards thoughtfully counsel our portfolio companies during this difficult time, and thought that it would be helpful to share some best practices for building and optimizing a board.
Building a Board: Best Practices
Determine the proper size
A board is effective when it is large enough to create diversity of opinion – but not so large that it leads to inefficiency. A board of three people who are closely aligned, for example, may not create enough of a balanced or objective view when evaluating key decisions. A board of nine (for a small company) would likely be challenging to manage because responsibilities and accountability among members may be too distributed. The risk of groupthink also increases with board size, as one vocal member may unnaturally encourage silence among others; this effect is less likely on a smaller board.
For our portfolio companies that have less than $100M of revenue, on average, the board usually consists of five seats. When we compare the companies with five board members or less against those that have more than five board members, we find that the latter is on average twice as large (on a revenue basis).
This is not to say that large companies always need a large board. For example, Wyze Labs, a rapidly growing provider of home security solutions, has a board of only three members. It’s crucial to get the balance right: large enough to generate the wisdom of a (small) crowd, but small enough to keep everyone invested and objective. Based on what we have seen, building a board tends to be more of an art than a science.
Pick ‘winners’ for independent board members
I know; this might sound a little obvious. But too often we’ve seen founders select individuals to join a board because they’re friends or long-time personal advisors. Instead of only inviting familiar faces to the table, we encourage founders to pursue vocal, successful leaders with relevant industry experience and active personalities who want to lean in and help build your company.
When you’re searching for board members, don’t be afraid to reach for the stars! Founders are often pleasantly surprised at how willing former CEOs, executives and industry experts are to join smaller company boards. Many view it as a responsibility to help out younger companies. It never hurts to ask! We are on the verge of formally welcoming an industry stalwart to the board of Junk King, the nation’s top-rated junk removal and hauling company in our portfolio.
A diversity of professional backgrounds, races and genders will improve your board in concrete ways. The Women Matter report and the Diversity Matters report, authored by McKinsey, prove this empirically. Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to generate financial returns above their respective national industry medians. In the U.S., for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes (EBIT) rise 0.8 percent.
In addition to racial and ethnic diversity, gender diversity is important. According to Iris Bohnet, a behavioral economist at Harvard University, “The evidence is very strong that diverse teams outperform homogeneous teams, whether these are all-male or all-female teams. This occurs across all kinds of different dependent variables, from creative problem solving to analytical tasks to communication skills. Diversity helps because we have a complementarity of different perspectives, or what we call ‘collective intelligence.’ That’s just one of the key factors the business case for diversity builds on.”
Mondy Herndon, the CEO of Jolyn, a women-focused swimwear and activewear company, appreciates the diverse experiences her members bring to her board. She notes that “Tara Poseley, with a background in senior merchandising roles at Nike and Lululemon, has helped us to more efficiently architect and expand our product line.” She adds “Christy Taylor, who brings years of experience leading sales organizations at Nelson Professional Sales and Dey Labs, has helped us to structure our sales team to support the sales of these products. Because these women come to us with different experiences, we are not only able to support these distinct areas within the business, but also understand how each area can better work together to support the entire organization.”
Optimizing a Board: Four Best Practices
Focus board meetings on strategy
Don’t waste precious in-person (or these days, video conference) time with your board reviewing boilerplate financials. Try to handle that review separately and beforehand. Instead, spend the majority of board meetings on strategy. This is when a board is most powerful: they can help you step back and see the big picture and play devil’s advocate when you need it. They can also talk through corner cases and strategize on crisis responses. Use the allotted time to pool their expertise and elicit response efforts to pressing events such as navigating the COVID-19 pandemic as well as longer term brand and positioning questions. Ensure those strategic questions and materials are sent well in advance of any board meeting to ensure proper time for preparation and adjustments.
Joe Kudla, CEO of Vuori, a Southern California-inspired activewear brand, focuses his board nearly entirely on strategy. He emphasizes that, as a founder, you should, “Empower your board to help with key strategic decisions. Arm them with the right topics and materials, and then aim to bring the conversation back to those fundamental questions.”
Create an investor mentality via equity
Some companies ask board members to invest, but this happens rarely in our portfolio. Most companies offer equity via options. Board members of a GE-funded company may expect a small stipend to accompany equity, but are more incentivized by options or performance units. How much should you give? There is no perfect formula, but we commonly see anywhere from 10-40 basis points (0.10% to 0.40% of the company) with a 4-5 year vesting period.
Leverage your board’s network
Having a diverse board of directors composed of individuals from different professional backgrounds allows you to tap into their extended networks. With a board, you have direct access to a pool of experts in other fields including academics, engineering, operations and marketing. Define the needs, assign responsibilities and expected timing, and lean on your network.
Use your board to build mentoring relationships
At its core, building a good board is about getting the right people around you and your team. Interactions should extend beyond the boardroom (or virtual board meeting) – encourage your members to reach out to each other to develop one on one relationships. Schedule monthly calls with board members where you drive the agenda and let the dialogue drift beyond typical board conversations. Use these conversations to privately challenge or flesh out ideas that may not have been properly addressed as a group. Board members should have valuable perspectives on decision-making, team dynamics and long term thinking – unlocking this type of advice is paramount.
Yes, startups and small businesses should absolutely have boards of directors. But building and using a board effectively isn’t a light switch exercise. It takes planning, patience, and revision. These best practices are a starting point for setting companies up to succeed.