Properly chosen independent directors are worth their weight in gold.
Everybody knows that it’s important to have the right team to build a great business. But to be successful, businesses also need the right team at the top?—?the board of directors. Most startup CEOs, globally, don’t realise the importance of building a strong board. And in India, even more so, since historically corporations in the country have done quite a substandard job in this department.
That’s possibly one reason why most CEOs in newly funded Indian startups think that having only investors on their boards is okay. It’s absolutely not okay. Independent board members are a critical component of a successful company. Here’s why. Most entrepreneurs in India have ventured into that territory for the first time. They are building businesses with models never contemplated in the country and, more often than not, without global comparatives to use as benchmarks. They face operational, strategic, funding, and regulatory issues that did not exist in the past. In a nutshell, they’re entering unchartered waters and need all the help they can get. Some of that help comes from the management team, but a lot can come from the experience of strong board members.
In India, boards mainly consist of a combination of entrepreneurs (one of whom is usually CEO) and investors. The latter get on boards by virtue of putting money in companies, and although they want to support their portfolios, no one vets their capabilities as a potential advisor or mentor to the CEO. Even if they have entrepreneurial experience, it’s difficult to be qualified enough to help in the range of issues that might come up. For example, Alfred Lin, Airbnb’s board representative from Sequoia, has an ideal background. He was previously the co-founder and chairman of Zappos. In fact, Airbnb tried to hire him as COO. But even Lin alone doesn’t have the breadth of experience to tackle the variety of issues that might come up at Airbnb. For example, Airbnb is a marketplace playing at a global level. Their model doesn’t always sit well with local regulators, including the one in California. Having a board member who has built a global marketplace and understands how to navigate international waters might be helpful.
So, who make good independent directors? The right independent directors have an understanding of the economics of the business. They bring an experienced point of view on strategic issues, advise on management, and stand up to investors during board meetings. They bring credibility to the company.
The people best suited to do the things I just outlined are CEOs. Especially ones running similar kinds of businesses, but not in the same space. Going back to the Airbnb example, perhaps the CEO of Uber or Amazon could be a good addition to the board.
In India, if I were starting a consumer product business, I would consider CEOs of companies like Cleartrip, Hike, or Zomato to join the board. If I were building a SaaS (software as a service) business, I would look towards CEOs of companies like Freshdesk, Zoho, or Tracxn. If I were starting an online consumer brand, maybe the CEO of Lenskart or Faasos (Disclaimer: Faasos is a portfolio company of Lightbox) would be on my list. I have often wondered why some of our privately funded unicorns don’t ask our publicly traded unicorn CEOs to join their boards. The lessons from building Info Edge, MakeMyTrip or Justdial must be priceless.
Of the seven directors on Facebook’s board (not including Zuckerberg), four were founders of technology businesses building online products, although none in direct competition with Facebook. There was Reed Hastings of Netflix, Jan Koum of WhatsApp, Peter Thiel of PayPal, and Marc Andreessen of Netscape. Two others were members of the senior management of billion-dollar technology companies?—?Susan Desmond-Hellmann from Genentech, who now runs the Bill & Melinda Gates Foundation, and Sheryl Sandberg, who prior to Facebook, ran global online sales for Google.
Finding the right board member is hard work. For me, two things spell trouble right away. One, actively looking for “star power”. Check out the Theranos board. It includes three former U.S. cabinet secretaries, two former U.S. senators, a retired navy admiral, and a retired marine corps general. Massive star power. But to what end? You would think they’re a defence contractor, when in fact they’re a health-care company. Although famous and powerful, how could these people have the bandwidth to understand what the company was trying to do or give it relevant advice?
Two, bringing on people that are on too many other boards. You don’t want an independent director who sits on 10 boards. How can anyone take the responsibility of your board seriously if they sit on nine other ones? It’s not humanly possible to give your company the time it deserves (more on time utilisation in a bit). You see this a lot in private companies in India, especially in startups.
So, what’s the ideal framework? I will go with the New York-based venture capitalist Fred Wilson on this. His recommendation: founder CEO, two independents, and two investors. Founders should restrict the number of investors on boards to three, but feel free to keep adding independents.
So, you have got great people around you. Now what? It seems like quite a waste to bring them together and spend two hours just giving them an update on your business. If all you do at your board meetings is discuss the past quarter and why things went right or wrong, you might as well stop having the meetings. If a board member can’t come fully informed about where the business is and why, they should not be on the board or waste your time.
Entrepreneur and investor Mark Suster does a good job of explaining some of this in his blog piece “The Agile Board”. His solution to prevent meetings from becoming update sessions, is to “ … do a better job of communicating between meetings so that [board members] always feel well informed”. In fact, if you ask the entrepreneurs we work with in our fund, that’s how we work at Lightbox. We are able to do it effectively because we sit on very few boards. I am sure there are other funds that work in a similar way.
Also read: Even angels must do homework
If you take Suster’s advice, the board shouldn’t need to rely on board materials one week before a board meeting to know what’s going on in a company. Board members should be getting updates from and having conversations regularly with the CEO. Nothing in the board material meant for meetings should come as a surprise to the members. It is more of a reminder, a refresher, of what they already know. Each member enters the meeting prepared to have larger, more meaningful conversation based on their understanding of where the company needs to go.
I quote from an excellent article in The Harvard Business Review on what makes a board great: “The key isn’t structural, it’s social. The most involved, diligent, value-adding boards may or may not follow every recommendation in the good-governance handbook. What distinguishes exemplary boards is that they are robust, effective social systems.” It’s impossible to be a social system without having relevant conversations, disagreements, mutual respect, and conclusions. None of that is possible unless everyone is fully prepared and on the same page about the company’s current position and the reasons for it.
We are at the cusp of creating great technology businesses in India. It can’t happen without the right support from a great board. And a great board needs independent directors.