Having a powerful board of directors can be intimidating. But don’t let these 4 toxic issues derail your meetings — or your business. Learn how to lead through difficult decisions.
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A company’s board of directors can be a valuable, business-enriching asset or a time-consuming, toxic liability. At their best, cohesive boards help entrepreneurs think bigger and smarter about growth. They know how to mentor entrepreneurs and ask constructive questions without offending management or other board members.
At their worst, dysfunctional boards can be combative, unproductive and dominated by one or two issues that don’t have the power to advance a company’s competitive position. Who suffers the most in this situation? The founding entrepreneur, of course.
Here are four issues that can trigger lasting board dysfunction — and how your leadership can help avert a meltdown.
1. Valuation expectations. What is success? Some board members might define success as building a company’s valuation up to $50 million, whereas others may define success well over $100 million. Higher valuation expectations require companies to pursue more aggressive business plans.
Of course, “aiming for the fences” home-run style also leads to more strikeouts at home plate. Because risk assessment is one of a board’s corporate governance obligations, board members who disagree with a company’s overall corporate strategy can always find weaknesses that might dominate and sidetrack board discussions.
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Conflicting expectations regarding a company’s business plan and growth objectives can also lead to uncertainties regarding a company’s true capital requirements, which is another hot topic that requires sign-off from the majority of the board. When boards can’t agree, entrepreneurs just can’t move their companies forward.
2. Exit timing. The most common way investors and founding entrepreneurs “harvest” their equity stake in a privately held company is through a sale to a competitor, other corporations or a private equity fund. Typically, investors want to get their funds back from startup and early-stage companies within five to seven years of funding.
However, when investors put money into companies near the end of their fund’s life, their board representatives tend to push management to explore exit opportunities ahead of schedule. Entrepreneurs can be caught off guard and unprepared to make a case for keeping a company on track for a delayed payday.
3. Add-on capital contributions. As too many founding entrepreneurs have learned during this recession, it’s dangerous to assume that existing investors will automatically step up to provide additional capital when a company needs it most. Some investors do reserve capital for “add-on” investments, but others don’t. Expect board-level fireworks when directors who represent investors decline to participate in an 11th-hour capital call.
4. Management team upgrades. One of the most gut-wrenching discussions at board meetings is sizing up the capabilities of “C-level” managers (CEOs, CFOs, CTOs, etc.) and their compensation packages. When boards become factionalized from disagreements on other strategic and capitalization issues, it’s easy for the board to focus on management personalities rather than performance. I’ve observed that when board members are unhappy, distracted or distrustful of other board members, they take it out on management and demand changes.
Fortunately there is a better way. Founding entrepreneurs have the most to gain by providing a higher level of confident leadership before, during and after board meetings. This means actively probing for areas of potential director discord on strategy, funding and issues that affect shareholder performance long before they ever reach a board-level blowup.
It’s understandable for first-time entrepreneurs to be intimidated at board meetings, especially if their directors represent high-powered investors or corporations. Their big mistake is deferring on too many issues or not seeking collaborative resolution on lingering matters outside of formal board meetings.
Entrepreneurs can also smooth board meeting discussions by giving all board members (not just a favorite few) the opportunity to learn about bold new strategic initiatives or operating problems long before a scheduled board meeting. More one-on-one discussions allow board members to fulfill their duties and ask questions in a more relaxed environment. Then, directors have the time to think of ways they can tap their own resources to help the company overcome potential obstacles with less risk.
Here’s one last tip for entrepreneurs who want to exert a higher level of leadership at their next board meeting. Ask all directors to put away their laptops and PDAs until a formal meeting break. Organize an agenda that deals with the company’s most pressing strategic, operating and financial issues first, rather than tedious routine administrative resolutions. Show your directors that you understand what matters most and know how to use their time to its highest value.