When a business runs into challenging times, and the CEO is struggling with too few good options, it is time for fresh perspectives. This is when the board of directors needs to step up and help. In the world of venture and PE-backed companies, investments usually come with one important string attached — a seat on the corporate board of directors. I have written in the past about curating the board to ensure it is a competitive weapon. Unfortunately, if each institutional investor insists on a board seat, and if the company has had several rounds of funding, then the board tends to be over indexed on financial participants, rather than operators or industry experts. That is not to say that investor board members are unable to help. In fact, because they typically participate on the boards of several companies, they likely have been to this movie before and bring pattern recognition and experience to the table. But, in the context of curating the board, it is important to make sure there is room for independent board members. Typically, independents will have hands-on operating experience, or deep market knowledge that uniquely equips them to offer a creative perspective to assist the CEO.
Problems can arise when the turbulence the company is facing has to do with cash flow and funding. It is particularly challenging when funding rounds had different participants and terms. This is when the investor interests of different board members may overshadow their pure board-level interests. Each investor has unique fund dynamics that will influence how they guide the company. Early investors may be approaching the end of their fund’s lifecycle, and may be out of cash or unable to participate in a current investment round. Later investors may see this as an opportunity to step up and assume greater control, usually with the effect that it diminishes the value of the positions held by investors that are not able to participate.
In theory, board members have a responsibility to represent all of the shareholders and strive to maximize shareholder value. Unfortunately, when there are different classes of shares, there can be built-in conflicts driven by each board member’s holdings. These dynamics can cloud the picture and the perspective of investor-board members exactly when everyone on the board needs to firmly put on their board member hat and not their investor hat. This is also a time when the CEO may need the independent board members to become referees and peacemakers. Back to that topic of curating the board. When considering independents and who should be on the board, game out the possible future scenarios, and make sure you have independent voices on the board that will be able to help the CEO through those turbulent times when investors tend to go to their own corners. A little bit of distance provides perspective and opens the path to creativity, which is a great role for independent board members.