With a nod and a wink, a well-known venture capitalist said something that made my blood run cold.
I was at this closed-door meeting for founders of high octane new technology ventures to give a talk about the importance of establishing company boards. It was there that this renowned investor said smugly, "You should not have anyone on your board who isn't an investor or a friend."
He went on to say that only people who funded the start-up “will care enough” to help founders achieve their goals, whether it be acquisition, fast growth or becoming a public company. He added that only a friend “can side with you in a board fight if you really need it".
He’s wrong, on many levels. But he’s not alone. Many businesspeople, from founders to established executives to onlookers, misunderstand the role of boards and corporate governance, particularly for young companies. Early-stage ventures of all kinds often disregard the valuable role of questioning and dissent because they feel it gets in the way. Founders and executive teams sometimes chafe at the formality of board meetings during the sometimes frenzied rush to expand, since those gatherings require setting aside space and time to meet and walk through things logically.
But, in reality, these independent directors and the formality of board meetings can be key building blocks of successful businesses.
Many small companies don’t recognise the value of having independent board members — someone from the outside with no financial stake in the firm —as part of the boardroom mix. Any organisation benefits from having a board that isn’t made up entirely of insiders, asks hard questions, challenges assumptions and alerts leaders to potential missteps.
Getting it right from the start
It’s important to have one or two people from outside the organisation, even if it first appears they will just muddy the waters with their questions or demands.
Here’s why: without free thought, tough questions and counterweights, companies are destined to make disastrous mistakes born from incestuous, yes-man thinking. They are ordained to believe their own hype.
Independent members help create a dialectic atmosphere. They can even help make tough decisions about jettisoning people who demonstrate consistently poor judgement or ethical lapses, and they can act as a moderating influence if disagreements break out between investors and founders.
Early-stage companies need to think about integrating good board principles from the start. To build strong businesses with longevity, it is vital that entrepreneurs get the foundations right, and that best practices are part of their very DNA.
Of course, that doesn’t always seem easy. In the frenzy of product development, finding customers, hiring, and juggling other issues, the boardroom is one crucial area that is often overlooked. The thing is, if companies get the boardroom right from the start, it pays real dividends.
Even at an early stage, the discipline that comes with following the skeleton of corporate governance sets important precedents. Having regular board meetings, compiling the documents needed for those meetings, having people who ask challenging questions about both grounding and stargazing issues, and having independent non-invested, non-aligned directors involved, helps build strong organisations for the long term, no matter their size.
It is especially important at a time when early stage companies have big responsibilities around data privacy and personal safety. When there are people at the table who aren’t bound financially to the success of the firm or to your friendship, you will be asked harder questions about ethics and viability. While difficult in the moment, a new company can avert a lot of potential heartache with outside voices like this.
A place for investors in the room
Investors in these early stage ventures can and do bring a lot to the table – money, connections, wisdom, but when they are serving as board members, they are not independent. They come with an agenda, and rightly so: their job is to get the best return possible on their investment. At the same time, they are grappling with their own pressures like timing, fickle general partners, the balance and cadence of their portfolio, and more.
A capable boardroom must have executives, investors and independent members. Having a diverse group hash out important topics behind closed doors lets the company grow in a way that satisfies the wants, needs and desires of all parties in a mature and measured manner. Better that tough questions be asked in the relative safety of the closed-door boardroom than out in the cold, hard world.
Most importantly, and perhaps toughest to understand for the venture capitalist who made the comments at the gathering where I spoke, the exchanges in the boardroom are not about winning and losing. They are a means of seeing issues and pathways with greater clarity.
There is value in challenging preconceived ideas or notions outside of the echo chamber of people who work together day in and day out. What might have sounded like a great plan over an over- caffeinated midnight brainstorm, might not stand up in the cold light of day.
This can mean the difference between great success and disorganised chaos.
Lucy Marcus is an award winning writer, board chair and non-executive director of several organisations. She is also the CEO of Marcus Venture Consulting. Don’t miss another Above Board column by subscribing here. You can also follow Lucy on Twitter @lucymarcus.