Entrepreneurial Leadership and Management . . . and Other Stuff

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Jun
09

The Role of the Independent Director

For the purposes of this post, I’m referring to a member of the board of directors of a company that does:

  • Offer uninfluenced (by money, power or competition) opinions regarding the company’s strategy, tactics and overall execution decisions.
  • Bring related wisdom gained through experience in the market, product, service, management or company structure.
  • Actively stay informed about what the company is doing, how it’s doing it and how well things are going.
  • Make themselves available to the CEO when needed.
  • Make decisions that are in the best interest of the company, not necessarily in its board or its management team (when these differ).
  • Show up at the vast majority of board meetings. This should state all of them, but stuff happens.

The independent director does not:

  • Have any conflicts of interest with the company, including board participation in a competing company.
  • Own a substantial percentage of the company (through any means including investment) that may cause a bias in decision-making.
  • Have a job inside the company.

That’s actually the simplistic list, biased toward the role of the independent director in a small, private company or startup. The list for public company directors is much longer, more detailed and has a lot of legalese associated with it to cover the asses of the respective company and director.

I’ve been a director of 16 different companies so far in my life. I think I was a good director on most of those boards and I knew that I sucked on at least a couple of them. Several of the companies were publicly traded, but the vast majority were private, venture-backed companies. On those boards, I was (and still am at three companies) usually the only “independent” director. I put quotes around independent because I’m not sure that it’s possible to completely follow the rules I laid out above. As a board member of a small company, I usually get stock options or restricted stock in payment for my services and in larger or publicly traded companies, I get compensated with cash as well. Sometimes, I’m also a small investor in the company. Does that influence my decisions? Well, yes, sometimes it does. I hope and believe that when that happens, though, I’m still working in the best interest of the shareholders – the group that the board works for in the first place.

The boards of small, venture-backed companies actually vary little these days in my experience. There is usually one insider, almost always the CEO (sometimes, there are two – a founder and a CEO when the CEO is not a member of the founding team); one or more VCs; and one or more mutually agreed upon outsiders (sometimes there is more than one, but it’s hard to find qualified directors – in my experience having only one is the norm).

Like all directors, the independent director should help guide the company by taking a participative role in strategy setting; help the management team make high-level financial decisions; contribute to the setting of overall direction; determine compensation when appropriate; ask loads of probing questions; and advise the CEO when asked as well as, as needed, when not asked.

Most board-level decisions are made with reasonable thought and discussion. They are rarely . . . rarely a result of a non-unanimous vote (they are, obviously, always the result of a vote, it’s just usually unanimous). That doesn’t mean that disagreements don’t occur, it just means that reasonable people have a desire to work through things and to try and find consensus – before they vote on it. This is where the independent director has another, somewhat unique role on a board. That of the mediator or synthesizer of the parochial opinions of the insiders. That is, those that are employed by or heavily invested in the company. Often, this means bridging the gap between the management team and the investors of the company. Once in a while, it even means trying to find common ground between investors.

As an independent director, I find myself assuming this role a few times a year when things aren’t going well inside companies and once in a while when things are going according to plan or better. It’s time consuming because no party wants an arbiter. They just want it their way. At times, I feel like the Secretary of State working with Middle East factions. You get the idea. It’s enjoyable and frustrating. When it works out – which it almost always does because all parties want it to – it’s a lot of fun. The process isn’t always pretty, though.

As a CEO, I really appreciated the independent directors that sat on my boards. Even when their energy was directed at talking me off the ledge (i.e. I was wrong and needed to be shown the path), someone stepping in, holding my hand and offering me a different light to see the situation with was a huge help. I really valued having the person and role on my board. Similarly, I knew the independent director was working with other insiders to try to find common ground when he/she felt that the management team was in the right.

So, there are two lessons here. For those interested in being an independent director, be forewarned, you have a unique role to fill in addition to the normal directorship role. It’s an opportunity and responsibility in my opinion. For CEOs, recognizing the value that an independent director brings to the table should help you recruit the right person to fill that role and to, perhaps, think through the value of such a person on your board when it is being established.

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 June 9th, 2010  
 Will  
 Boards  
   
 6 Comments

6 Responses to The Role of the Independent Director

  1. Nice post Will

    I might add one more “does not have” to your list – does not have financial or employment or any other shared interests with any other major shareholder in the company, eg potentially competing or conflicting or compromising relationships with the company's investors or venture firms etc

    A lot of “independent” directors are on boards because are initially proposed or nominated or whatever by the company's venture investors. which can be perfectly ok. but sometimes such “independents” have deep relationships (or hope to) with those venture firms which can create sticky conflicts etc

  2. Jarrett Collins

    Agree that independent directors can bring a lot of value to a board, Will, even though they (like you) are usually outnumbered *and* they (unlike you) are often inexperienced in serving on boards. (Many independents are chosen first for industry expertise, not governance expertise.) This means that it can take a lot of courage to speak up in the boardroom. One remedy is to have good lines of communication *outside* the boardroom, in one on one conversations. Doesn't solve all problems but it allows for more iterative and exploratory discussions, hopefully leading to better decisions for the company.

  3. Thanks Steve and excellent point. No shared interest with any insider, especially financial, but even more basic.

  4. An excellent point, Jarrett. The industry expert outsider, especially one new to the directorship role, can find VCs very intimidating. I agree, that outside communication can help bridge this gap. I wish this happened more. Practically speaking – and it's an awful thing – there are some investors who aren't motivated to train and empower those who might not support their opinion. Many are willing to help, though. In my experience, the independent director needs to take an active role in making sure that communication happens to make it successful.

  5. I'd recommend joining NACD to independent directors who are new to the game – although chapters vary in their emphasis on smaller/privately held companies. The presentations are helpful but more importantly you get to meet others in similar positions, some of whom are more experienced.

  6. Great post, but only really scratching the surface of the subject. Please write more.

    The CEO has to take some responsibility for the effectiveness of the outside board member. If they're going to make a difference, often they need more, or different, forms of communication that the financial interests on the board. Often the financial interests on the board provide more value on balance sheet, governance, and legal issues, while outside board members can add value on more “strategic” (not to say that running out of money can't have a strategic effect !!) such as partner alignment, sales channel strategies, product directions, etc.

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