How boards can add value to startups and their CEOs

How boards can add value to startups and their CEOs

IT IS well known throughout the small and medium-sized business sector that the majority of new companies fail within their first few years. Many startups, in their race to scale up and hunt for investor funds, overlook the dynamics between their directors and their chief executive officer (CEO), and fail as a result. A cohesive relationship between the CEO and directors is essential for a startup to grow. But it starts with CEOs understanding their role vis-à-vis the board and vice versa, and for the company to strike a balance between the two power centres.

Startup CEOs are commonly also the founders of the company; they are often the "face" - spokesmen and key salesmen of their company. They are often obsessed with their vision and may refuse to entertain alternative views. Their narrow focus may be mistaken as relentless ambition and drive by potential investors who assume directorships of the startups, giving rise to conflict later on.

However, to successfully grow the business, a CEO needs to have an open mind. He (or she) should be ready to admit that he does not know everything, and that the board is there to advise and assist on legal, financial, corporate and other matters that he may not have too much experience with.

Advice given may not be advice taken unless there is trust and rapport. A good director is aware of the CEO's needs, allowing the CEO to let his guard down and be open to suggestions and recommendations.

To add value to a CEO, "directors need to be interested in getting the board to do the best job it can to promote the best interests of the company and maximise value for the shareholders", said Pascal Levensohn, chairman of Levensohn Venture Partners, in a paper on the basic responsibilities of venture capital-backed company directors.

Oftentimes, venture capital (VC) partners to startups are rookies themselves, and may not understand their role or set expectations for the CEO's performance clearly. Mr Levensohn recommends that VC firms follow guidelines to promote effective behaviour in the boardroom, so that the CEO and management can focus on getting the job done.

Directors' responsibilities in a startup

A startup's development cycle comprises the seed stage, the early commercialisation stage, the late expansion stage, and the liquidity stage. Directors' responsibilities vary throughout these stages.

However, some things remain constant throughout the various stages of growth. Maintaining a high standard of corporate governance is a must, and general housekeeping duties such as establishing internal controls and accounting metrics are necessary. Corporate governance policies should be implemented during the early commercialisation stage, but directors should consider raising their corporate governance standards as the startup matures, and introducing additional financial reporting or analysis in the late stage expansion phase.

Mr Levensohn advises that there are four areas involving investment strategy that directors and CEOs should look at in order to achieve an aligned and effective board. Firstly, exit plans should be openly discussed, to ensure that shareholders and management have a common valuation in mind before considering a sale.

With that (and as a second area of discussion), exit timings should also be addressed, and this issue becomes more pertinent when investors join the board in different rounds of funding.

Thirdly, investment expectations, such as the amount of capital allocated for investment in the startup, should be jointly decided by the board and by the CEO, so that the level of each investor's reserves and conditions for additional investment are clearly understood by all parties.

Lastly, VC boards should discuss syndication plans; whether current investors will continue backing the company or if new investors will be brought in through subsequent rounds of funding.

Independent directors in the early stage of a startup

Startups should not overlook the role of independent directors in their early days. A startup typically looks for independent directors only when it is planning an initial public offering, which is less than ideal.

Independent directors should preferably have no stake in the startup, so that their views are free of any conflict of interest. An independent director may intervene whenever the CEO and other board members clash by reminding them to focus on the strategy of the company and look after the interests of all shareholders.

However, there are not as many independent directors who have experience in creating, growing and selling companies, especially in the technology sector, in Singapore, as compared to, say, the US. Even for most listed companies, independent directors do not seem to possess any startup background or experience, which can be useful entrepreneurial exposure.

This may result in many time-starved CEOs and founders feeling that their directors hinder the decision-making process with less than relevant questions, and thus not welcome them.

Such a view is a shortsighted one at best. A well-chosen independent director can help a CEO to deal with the realities of running a company and avoid making fatal errors.

At the end of the day, open communication is key to a healthy relationship between directors and the CEO, where expectations of the board of the CEO and the CEO's expectations of the board are not only mutually well understood but also aligned.

  • The writer is a member of the Governing Council of the Singapore Institute of Directors.

This article was first published on May 2, 2016.
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