Healthcare Operational Insights
Board Governance Basics: What Growth-Stage Companies Need to Know
June 20, 2023
Companies tend to go through a natural evolution: from creation, to growth, and finally to maturity. This same cycle applies to their boards of directors as well. Unfortunately, many growth-stage companies either have no board at all, or they have an inexperienced board not well-suited to growing the value of the company.
We at TTCP believe strongly that assembling an effective board of directors at this stage of a business’s lifecycle is instrumental for keeping the company aligned to its objectives and ensuring that capital is allocated wisely and with the proper oversight.
Common benefits of an effective board include:
- Networking and business development opportunities to help accelerate company growth;
- Experienced guidance on business strategy, including technology adoption, management team evaluation, and fundraising;
- Direct and honest feedback to the CEO on his or her performance and decisions, as well as the strength of the leadership team;
- Enhanced credibility within the industry based on the experience and reputation of board members;
- Improved decision-making with a diverse board;
- Increased ability to hold both company executives and fellow board members accountable; and
- Better transparency and reporting to all stakeholders.
Despite its importance, assembling an effective board can come with a steep learning curve for founders and executives who have never done it before and who may not have an appreciation of the value a properly functioning board can provide. Here we will examine three essential strategies that owners should consider when creating a board of directors, along with four additional best practices often adopted by highly effective boards. After all, since most corporations are required to have a board of directors, why not create one that brings optimal value to the company and its owners?
Recruiting effective board members is critically important – so much so that it deserves its own blog post which we’ll revisit in the future! But, as it relates to governance, a business should start with these key principles when first assembling a board of directors:
1: Clarify the board’s role and where it should dedicate its time. Broadly speaking, the board is the governing body of the company, responsible for setting strategy and overseeing management’s priorities. While the management team focuses on day-to-day operations, the board provides guidance and oversight for strategic planning, governance, risk management, legal issues, and the allocation of capital and resources. The board almost always oversees the CEO, including hiring/firing, guidance and feedback, compensation, and the annual review process (more on this later).
2: Establish effective board meeting operating procedures and processes. The most effective boards we have worked with hold meetings that are well-organized but also dynamic, creating an environment that encourages discussion and creativity. Conversely, board meetings that are formulaic and stick too closely to the slide presentation with little additional discussion tend to be ineffective. The key is to strike a balance between meetings that are simply informational readouts and those that drift too far off-topic and off-schedule. A lead director and the CEO should work in unison to develop an agenda – and then stick to it! Too many meetings end with important discussions cut short and a lost opportunity to bring a nagging question to closure.
Board meeting materials should be distributed at least two full days in advance so board members can come prepared for an intelligent and thoughtful discussion of the issues at hand.
Between quarterly board meetings, a growth-stage company and board should create a well-defined monthly operating review that allows the board to be deep enough in the details to be effective. A number of our companies now schedule hour-long monthly reviews of key metrics between longer meetings. These punchier sessions create space for the longer meetings to dig into strategic, meatier topics by mostly skipping the operating review of what happened last quarter.
For example, in one recent monthly meeting, the board of a portfolio company spent time evaluating the company’s cost of goods sold and analyzing various corrective actions – from reducing costs, to increasing prices, to charging for implementations and customizations, to discontinuing a product line – all factors that would either reduce costs or increase revenue.
A board that lacks an active monthly operating review process with little visibility into key performance indicators, such as the sales pipeline, will be much less effective than a board that does so regularly and transparently. This work can often be handled via an email distribution and a short scheduled call. It usually works well to have a subset of the more active board members rather than scheduling for maximum attendance. Done well, a thoughtful process creates meaningful dialogue and inspires confidence in the management team.
3: Put in place a productive board committee structure (or take on key work outside of the larger group meetings). A board often accomplishes important work through smaller subcommittees. Once a solid board foundation is in place, sub-committees should be deployed initially in two areas: finance/audit and compensation. It’s always helpful if board members on the committees are experienced in those areas, especially if their experience is relevant to the company’s given industry. These subcommittees should do work outside of the regularly scheduled board meetings, and bring recommendations or a clear question to the wider board. Smaller companies that haven’t formalized their board can often do this work one-on-one with a lead investor.
Later, once the size and complexity of the business warrant it, the board may identify other areas where additional subcommittees would be helpful, such as technology and governance/risk.
We’ve examined three core strategies that businesses should implement when assembling a board of directors. Now let’s look at four best practices we have seen companies embrace to optimize the effectiveness of their boards:
1. Seek full buy-in from the CEO. Boards are most effective when they work with a CEO who actively embraces governance and pursues board involvement on important issues facing the company. Without the CEO’s trust and engagement, a board’s impact can be severely limited. As is the case in any relationship, communication is key, and there should be a constant flow of information between the board and CEO. The No. 1 rule in any CEO/board relationship: No surprises! Bad news is a part of business, but hiding bad news is never acceptable.
On the flip side, we’ve seen problems arise when a CEO attempts to overmanage the board – or just ignore it – as opposed to leveraging it for counsel. In our view, a CEO who prefers an arms-length relationship with the board without regularly seeking board members’ advice is limiting the company’s potential as well as his or her own. Being open to the board’s counsel – even when it reflects a contrary viewpoint – is crucial.
2. Identify and engage a chairperson. The board’s lead director should be actively involved and operate as the CEO’s thought partner to help shape the company’s success. Effective board leaders also proactively draw in other board members when valuable and appropriate to do so and steer board meetings to keep the group on track.
The merit of experience here cannot be overstated. Board leaders with previous experience on other boards, and perhaps as CEOs themselves, bring a unique perspective that can only be gained by being “in the trenches.” For instance, one of our former CEOs recently became board chair of a new investment. He had experienced firsthand a number of problems and opportunities that our current CEO and founder faced. Today, that CEO and board chair have found it helpful to speak by phone at least once a week; and that’s also the case with most of our high-functioning boards.
Often a new investor leading a recent fundraising round will become the de facto chairperson initially, and we at TTCP consider it best practice to have weekly, 30-minute calls with our CEOs early in our investment lifecycle. These touchpoints help create trust and a sense of shared purpose and also help ensure that a CEO calls right away with important news, whether good or bad.
3. Conduct an annual review of the CEO’s performance. Strong and effective leadership from the CEO is crucial to the success of any organization. However, it can be difficult for peers and employees to provide honest feedback to their CEO.
Therefore, boards of directors, which are responsible for providing guidance and oversight for the CEO, should implement an annual review of the CEO’s performance. The review should span across strategy, organization, operations and governance. Boards should also set executive compensation for the CEO, aligned to the company’s strategic goals, such as growth, profitability, and performance; and in some cases, aligned to operational goals as well, such as a new product launch.
4. Create a culture of accountability. Finally, an effective board self-polices in terms of preparation, participation, and impact. It takes corrective action proactively when necessary. Most important, it is dedicated to taking the time necessary to be effective.
One great way to create a culture of accountability is to conduct a formal annual governance review. Unfortunately, this is one area where growth-stage companies often fall behind. The review process may evolve over time, but it’s vital to have one in place as soon as (or shortly after) a board is formed. High performing boards are intentionally created through hard work and continuous improvement – they don’t happen accidentally.
At TTCP, we have helped many growth-stage companies assemble and shape their boards of directors and to great effect. Every company is different, of course, but those that ask the right questions and embrace the strategies and best practices we shared here put themselves in a position to create an effective board of directors, which will ultimately play a role in driving the entire business forward and driving the financial returns we strive to deliver to our investors.
board governance, growth stage