How to Create a Better Board of Directors
A serial board member explains why even young companies need strong directors.
A little more than two years ago, Stanford GSB lecturer and serial board member David Dodson conducted an informal survey of company board members. He queried CEOs as well as the members, and compiled a list of best practices for these advisory panels.
The most effective boards, he found, have a set of formal guidelines that they follow, instead of leaving things to chance.
“My strongest advice to a CEO or a board member is to put that scaffolding in place,” says Dodson, who has been a director and investor in 21 companies. Almost all the perils that company leaders face in the cases that he discusses in class with his students would not have existed if the boards had had a better framework in place.
Illustration | Tricia Seibold
Illustration | Tricia Seibold
This is especially true for boards of small and medium-sized companies that could take a page from large, more mature corporations that have more clearly defined rules about attendance at board meetings, for example.
Dodson, who founded Project Healthy Children and received his MBA from Stanford GSB in 1987, shared his thoughts about what makes a well-run board during an interview with Insights by Stanford Business earlier this year following his presentation during a forum on the topic sponsored by the Stanford GSB Center for Entrepreneurial Studies.
Boards Are Not One Size Fits All
The boards of large companies look and act in very different ways from those of smaller firms, Dodson says.
With small companies, the entire ownership may be in the room during board meetings. Also, a startup is trying to grow in leaps and bounds. Compare that to a legacy company in which annual growth of 5% or less is the benchmark, and each of the board members owns just a tiny fraction of the shares.
When there are that many stakeholders in a room and that many agendas to cover, there tends to be less order. “What oftentimes happens — and I think it’s a failure of small boards — is that people kind of wing it,” Dodson says.
The best companies, he says, are those in which the CEO is self-assured enough to be frank with board members and explain to them the issues that are keeping him or her awake at night. This directness opens the door to using the power of the board members to resolve the problems. Appearing to know the solution to every problem will not fool board members for long, he says.
“A CEO that lacks confidence is one that wants to protect themselves and create an image that they have all the answers, but of course, they don’t have all the answers,” he says.
In the end, it’s the bottom line — growth in revenue and profit — that matters. A CEO who is a showman before the board is not going to win the board’s confidence if the company is failing. And, vice versa, a CEO who is somewhat timid in front of the board will be fine if they are getting the results the board expects.
“What you’re really supposed to do is add shareholder value and run the company well and run the board meeting well, and the rest will follow.”
Chairing the meeting well shows the board that their time is of value, he says, and a poorly run meeting could be interpreted as a mirror of how the CEO runs the company.
Boards Should Be More Than Perfunctory
“If you leave those board meetings consistently prepared to do something differently because you learned something from the board meeting, that’s the mark of a good board,” Dodson says.
Otherwise, it is time to diagnose the problem and start asking some questions: Is it the way the meetings are being run that reduces their effectiveness? Is the makeup of the members wrong for the company?
“If it’s the people, that’s a tough fix because you are going to have to turn over people on the board.”
Many times the problem is more about how the meetings are being run, and that is when a CEO should seek out a member or someone outside of the board to help determine what needs to change. “Usually someone who has experience serving on boards will be able say, ‘Here are your problems, and if you fix these things you’ll fix your process.’
“If you’re going to spend the three and a half hours anyway, would you rather go down the elevator and say, ‘That was really interesting’?”
Are Nonprofit Boards Different?
Nonprofit boards are moving more in the direction of for-profit boards as nonprofits seek out the operational, strategic help that used to be reserved for companies, Dodson says. That is why nonprofits need to look beyond those who write the biggest checks when choosing board members. “It has to be people who understand operating issues and understand the difference between the operating issues of a nonprofit business versus a for-profit,” Dodson says.
The largest donors may be excellent at fundraising, but they often have little experience in running a business, he says. Of course, nonprofits cannot be operated exclusively as a business because the metrics of success differ.
“In a for-profit, it’s simple. Over time more cash has to come in than go out. A nonprofit is different; they’re mission driven,” he says. “The financials drive the mission and you need board members that understand that.”
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