The three roles of private company boards

In my last post, I wrote about some red flags when choosing board members for early stage companies. Understanding the function of private company boards will help CEOs select the right members as well as help those board members to offer the right value. Here are the three roles that I think board members serve in private companies:

  1. Hire and fire CEOs (and this includes succession planning just in case): Who should captain the ship is the most important decision in the whole company, and the board is responsible for acting collectively to make those decisions. Most CEOs are members of the board, which complicates matters. As a board member, I am a big believer that I support the CEO until they are not the CEO. In other words, even if I am not sure the existing CEO is the best choice, I do not in any way undermine their authority. If I reach a point where I believe they need to go, then I must discuss the issue with the board as well as directly with the CEO (however unpleasant that may be). Don’t hide behind the rest of the board. If a board member believes the CEO should go but the rest of the board does not, then it is probably time for that board member to resign. Either way, the CEO is the CEO until they are not, and he or she should be treated with the appropriate level of respect.
  2. Approve major decisions that impact the company: A typical list would include things like corporate strategy, fundraising, acquisitions, the annual budget, and the hiring and firing of executive positions. I view this as an approval process. The CEO brings these issues to the board with his recommendation, and the board ratifies the direction. If the board does not approve, then the CEO should take the feedback and come back with a new proposal. I do not believe the board should be creating strategy or forcing other direction on the company.
  3. Act as a strategic consultant to the CEO: A good board spends 95 percent of their time doing this. Just like any good consultant, they spend a lot more time trying to ask the right questions rather than showing how smart they are by dictating answers. The CEO should feel comfortable calling board members anytime he wants to discuss an issue, without being worried that they will suddenly jump in and decree an answer. The good board member understands that the more he or she can do to build up the CEO, the more value the company’s stock will have in the long run. It is always best if the board can make the current CEO successful rather than think they can bring in some rock star CEO who will run the company much better. For small companies, it is almost impossible to attract good CEOs. Typically the reason the CEO is being replaced is that things are not going well, and there is limited runway on the current funding. No proven CEO is going to step into a situation like that. Boards should focus on making their existing CEO as strong as possible, because replacing a CEO is a failure of the board.

Running private companies is tough enough without having to deal with a poorly functioning board. Because it is such a critical decision, make sure you spend time up front vetting any potential board members. Where possible, I believe that board positions should be one-year appointments and only be renewed with the unanimous approval of the entire board. This way board members who aren’t helpful can easily be removed without a big fight. Best of luck with your board relations!

7 Responses to The three roles of private company boards

  1. I wonder if your statement about good board members (“… they spend a lot more time trying to ask the right questions rather than showing how smart they are by dictating answers.”) is one you would say about good CEOs also? And more generally, about good leaders?

    • Thanks for your note Andy. The answer from my perspective is a big yes. Humility is key trait for a successful CEO.

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September 19, 2014