Choosing Your First Independent Board Director: A Bold and Thoughtful Approach

I have been talking to several good private companies looking for external and independent board members for the first time. It is not an easy endeavor for the chairperson of the board or CEO, but it is worth it. 

Finding your first independent board director is crucial in building a successful business. It's not just about ticking off boxes and filling a seat - it's about finding the right person to help your company succeed. You need to be bold and thoughtful in your approach. Look closely at your executive team and identify the missing skills and strengths. Consider your long-term plans and the critical knowledge required to achieve your goals. And don't forget to consider the current stage of your business and its future evolution.

Independent board directors are more than just advisors. They are essential to driving your company's success by leveraging their professional perspectives, experience, and expertise. You must strategically and deliberately find the right independent director for your business. Don't settle for just anyone - find the perfect fit who will help take your company to the next level. Be bold in your approach, and find the right person to help your company succeed.

Before independent directors are brought on board, it is common to encounter situations such as an inactive board, one that merely exists "in name only," a board consisting entirely of family members, or an "all-insider" board comprising family members, non-family managers, and a few advisers to the business. However, the challenge lies in convincing these board members to step down and make way for new independent directors, who may be unfamiliar to them. While some family leaders prioritize the business and may directly request resignations, most prefer a more amicable solution that is family-friendly and easier to sell.

Governance is critical to every company.

Good governance is not just for public companies in today's business landscape. Private companies, including family businesses and startups, also recognize the importance of having an independent board member to improve their board's effectiveness. Why the shift? Some companies are preparing for the future, whether going public or considering a generational transition in family ownership. Others simply see the incremental value that outside directors bring. Companies are gaining valuable insights by reshaping their boards and introducing new faces outside of their familiar networks. Private companies that don't have outside directors are missing out on a valuable opportunity.

One of the key benefits of having independent board members is their different and diverse perspectives and their ability to augment the business owner's knowledge and expertise with their different backgrounds and experience. However, entrepreneurs are often strong-willed people, and the thought of having to answer to similarly strong-willed independent board members about the decisions they make for their businesses may not be appealing to them. Some entrepreneurs may also believe that the cost, time, and effort required for a board with independent members could be put to better use elsewhere in their businesses.

Despite these concerns, a growing number of privately-owned companies have opted to have boards with independent board members, believing that the perspectives and insights that they can bring to the company far outweigh any constraints. While some companies choose to include independent board members on their board of directors, most appoint them to a board of advisors.

As a private company grows, the owner's role and management processes will change. In smaller start-up companies, owners usually take a hands-on role, and organizational processes are informal. Since the owner is involved in most activities, they have first-hand knowledge of almost every aspect of the business. As the company grows, new people are added to the team, the owner's role becomes more of a manager, and the need for more formal processes, knowledge sharing, and delegation increases. Experienced board members can guide CEOs as their role changes and new approaches are implemented. They can also assist in developing a shorter- and longer-term strategic direction for the company.

An independent board member is crucial for private companies, family businesses, and startups. It provides different and diverse perspectives and augments the business owner's knowledge and expertise. As a company grows, new people are added to the team and the owner's role changes. Experienced board members can guide CEOs and offer assistance in developing a strategic direction for the company. Therefore, private companies should consider adding independent board members to their board of directors or advisors to improve their board's effectiveness and gain valuable insights.

Benefits for family-owned companies

 Family-owned businesses face unique challenges regarding succession planning, and adding an independent board member can help simplify the process. One of the biggest challenges in family-owned businesses is addressing succession, which involves balancing family and business concerns. Family members may have conflicting expectations about their roles in the industry, and the presence of a board can help simplify the process. The board can identify a successor based on merit rather than family position, removing personal issues from the process. The owner can then address family issues without them becoming mixed with succession.

Beyond succession planning, family-owned businesses can benefit from having a group of people with whom they can share ideas and perspectives. Independent board members can bring a different and broader range of perspectives than are typically found in a privately-held and family-owned business. They can also get knowledge and experience in areas that inside directors do not possess, fresh perspectives, and leverage their networks to benefit the business. Highly-qualified outside directors will challenge assumptions and bring an unbiased view that can be extremely valuable to those immersed in the company’s day-to-day. Having outside directors can also improve board practices and bring discipline to governance processes, instilling accountability and credibility with consumers, employees, investors, and other key stakeholders.

As a family-owned business grows, the owner’s role will change, and experienced board members can guide them as their role changes and new processes are implemented. They can also offer assistance in developing a shorter- and longer-term strategic direction for the company. While some family-owned businesses may be hesitant to answer to strong-willed independent board members, the perspectives and insights they can bring to the company far outweigh any constraints. Adding an independent board member can benefit family-owned businesses significantly and help them navigate their unique challenges.

Benefits for startups

Startups and pre-IPO companies are often composed of a combination of founders and venture capitalists (VCs) on their boards of directors. However, as the company grows and takes on additional financing rounds, the founder-to-investor ratio can quickly shift, potentially leading to VCs being overrepresented. This can result in decisions being made with short-term interests in mind and potentially misaligning with the company's best interests.

One solution to prevent such scenarios is by appointing an independent board member. This person serves as a tiebreaker and brings a different perspective to the board, helping to avoid groupthink and ensure that all interests are aligned with the company's long-term goals.

Having an odd number of board members is also essential to avoid tie votes and decision-making complications. As the number of board members increases with each funding round, the need for an independent board member becomes more critical to maintain an odd number of members and ensure effective decision-making.

Furthermore, independent directors can bring valuable expertise and networks to the company and offer advice on fundraising and strategic direction. They can also act as a sounding board for the CEO, providing objective feedback and challenging assumptions.

In conclusion, while it may be common for startups to have a board composed of founders and VCs, it is vital to consider adding an independent board member as the company grows. This can ensure a diverse perspective, promote effective decision-making, and align all interests with the company's long-term goals.

Selecting the Ideal Outside Director for Your Board

Choosing the right outside directors is a crucial decision for any board. To ensure that your board has the right mix of skills, experience, and diverse perspectives, it's essential to approach the process systematically. Here are some steps to consider: 

• Define your board's optimal composition - Consider your company's long-term strategy and identify the skills and experience required to support it. Determine other desirable attributes, such as director tenure, age, and diversity, and consider the skills needed for each committee. For example, an audit committee may require someone with a financial background.
• Evaluate your current board composition - Assess the skills and attributes of each current director, including any upcoming departures or committee transitions, to get a complete picture of your board's strengths and gaps. Consider using a board composition matrix to assist with this process.
• Prioritize the gaps - Identify the most critical missing skills or experience, and prioritize them to guide your director search.
• Launch the search - Create a director profile to guide the recruitment process. This profile should include details about the director's role, expectations, and the company's mission and vision. It can also include information about compensation to help candidates determine if the role is a good fit for them. Be sure to review the director profile with the entire board and use it as a tool to attract qualified outside candidates

When selecting an independent director for your startup, there are several essential qualities to look for. These individuals should be neutral, prioritizing the company's best interests above their agendas to ensure impartial decision-making and avoid conflicts of interest.

What you can expect from an independent board member

Finding someone who can provide valuable strategic advice and insights based on their relevant operational experience and industry expertise is also critical. This is particularly crucial in regulated industries, such as Fintech.

• Trust and time are equally important qualities to consider in an independent director. They should have the time to commit to your startup and build a long-term relationship with you and your executive team. Finding someone whose values align with yours is critical to building mutual respect and trust.
• An independent director with a strong network in your target market can help you expand your business, open new sales channels, and connect you with key service providers and potential hires.
• Mentorship and guidance are also essential qualities an independent director should possess, providing advice outside of formal board meetings to foster a healthier management team. Finally, consider social diversity as a critical element when filling out your board's skill gaps, in addition to professional diversity.

In short, selecting the right independent director for your startup can mean the difference between success and failure. So be bold, take your time, and make the right choice for your business's future.