Often, when companies consider adding independent directors to their corporate board, the focus is on industry knowledge and rolodex. The thought is that the board member will be positioned to be more helpful for the management team if they are already familiar with the market and business, and may be able to make introductions or open doors for the business. Sometimes, the board goes looking for an industry celebrity who will lend credibility and gloss to the company. I often write about curating the board to make it a competitive weapon, and adding industry expertise could be considered a contributor to the company’s competitiveness.
On the contrary, for most earlier stage companies, I believe this is a hollow choice. The entire company is populated with people that are in the industry. In particular, the CEO and management team are deeply engaged in the industry. Making the primary focus of a board hire industry knowledge is the wrong emphasis. There is already plenty of industry expertise to go around. In fact, adding an industry ‘expert’ to the board can be counter productive. It is the CEO’s job to lead the company, and an expert on the board can create conflict and confusion among board members and the leadership team. The board’s primary role is to support the CEO and leadership team to build a successful company, not to drive the boat.
Taking the argument to the extreme, when board members are not well versed in the market and industry, it forces the CEO to ‘teach’ them. Teaching will require the CEO to clearly articulate the business and the strategy. An engaged board will ask clarifying and probing questions that will help the CEO simplify the message. By exercising curiosity, board members will grow their understanding. Bringing their experiences in other businesses to the table will enable board members to express different perspectives that may uncover opportunities.
What early stage companies tend to need the most from the independent seat(s) is operational experience. When the company takes on institutional capital, it inevitably comes with a requirement that the investors get board seats. Investor board members can be great at guiding the company forward, but too often the individuals got to where they are by being great investors, spotting potentially great companies and ideas, and making wise investment decisions. They often ‘grew up’ learning to be great investors, not necessarily hands-on operators. They have excellent pattern recognition skills, and a wealth of experience across a portfolio of companies about choosing strategies and avoiding pitfalls, but not so much experience with the operational challenges of building culture and operating processes.
It is relatively easy to spot weaknesses in the performance of a company, and investor board members are usually quick to point them out and suggest personnel changes. However, most CEOs are well aware of the weak links on their management team and throughout the organization. The board can provide a nudge to act, but acting requires more than just firing someone. An experienced operator is more likely to grasp the challenges of actually making changes and the need to keep the organization humming through the changes. Adding an experienced operator to the board creates a bridge between the CEO and leadership team’s challenges, and the investor board members nudge to make changes quickly. An experienced operator brings a certain zen calmness to the perceived urgency and rush to judgement that often comes from institutional investor board members. Operators tend to take a more holistic view of the operational challenges and can assist the CEO as a thought partner to navigate the nuances of making changes.
In my personal experiences as a CEO I found my board members who were former (or present) operators to be my partners to work through the issues my institutional board members saw as black and white decisions. As an independent board member, I have often worked with CEOs to thread the needle of change, and to help calm the drumbeat from the institutional board members. The independent can help translate from CEO to investor and vice versa. Experienced operators have their own pattern recognition skills, and actually have empathy for the leadership team because they have walked a mile in their shoes. I have seen investors correctly identify hidden issues, and CEOs resist the input as meddling, and in fact as a CEO I often felt this way. As a board member, I have been able to spot that resistance and help the CEO to overcome their blindspots to better understand the ‘harsh’ reality being presented by investors, while at the same time helping the institutional board members to understand the mindset of the CEO. Stage-appropriate operator experience in an independent board member, in my opinion, is the most valuable attribute to look for when adding a new member to the board.
Not all operational experience is equal, so it is important to find an individual with relevant experience. If the company is fundamentally a software business, then operational experience leading a software business is a starting point. Next, the business model of the company is important. Is it a company that sells directly or through a channel. Is it selling enterprise solutions B2B or a consumer product. Is it serving a domestic market or an international market. Is it a business or analytical application, or is it a deep technical application. If the independent is not coming with a background in the company’s market or industry, have they demonstrated curiosity and the ability to dive in and learn new markets. For investor board members and the CEO, it is also important to seek an independent with experience operating with institutional investors - someone that has been to this rodeo more than once and understands the pressures the institutional investors feel. Finding operational experience that can be applied and can be helpful is fundamental, and the CEO needs to be comfortable that the potential candidate is able to help, and is not joining as a threat or a drag.
Some level of industry and market knowledge may well be helpful, but my point is that it should not be the primary criteria for evaluating potential board candidates. As companies grow and mature, the board needs to grow with them, which will mean that curating the board as a competitive weapon may require changes at later stages. Curating the independent position(s) with industry contacts may become very useful as the company matures and potentially seeks an exit, but in the earlier stages, it is much less important.