One of the many challenges for a Board of Directors for an early-stage technology company is the need to quickly develop a common understanding among all the Directors as to their individual and collective roles. Why is this important? In early-stage technology companies, major business events can arise requiring the Board to advise management quickly on a course of action. Over time, it ensures a consistency of action and builds credibility for the Board.
In a crisis, there may not be sufficient time for management to gather all the data, do a thorough diligence review of the information, prepare scenarios and back-up plans, and present to the Board at its next meeting, and then for the Board to consider the information, scenarios, and risks, discuss among the Directors and deliver its advice. Often, the issue must be decided within a few days outside the context of a regular Board meeting1.
Boards are often poorly-equipped to effectively respond to these challenges. At a time when the Board needs to provide considered and consistent advice, the Directors may not have even met in person. This happens when Directors live out of town and management decides not to spend its limited funds on travel. Their only contact may be a scratchy teleconference call with interference from Bluetooth devices, lost cell sites, etc. Direct voice communications are difficult under these circumstances. Reading body language to sense Directors’ feelings on the issue may be impossible. Usually, there is precious little time for the important discussion. Directors may feel rushed into making a critical decision under pressure.
It can get worse. Directors are often chosen for different reasons. At least one company Founder, who is often the CEO, is usually on the Board to represent founders, management and employees. Typically, the founder has the best sense of the company’s technology, and often its markets. Angel investors often sit on the Board to provide the practical advice that comes from their years of experience. Larger investors may have the right to appoint representatives to the Board who, fiduciary duty to the company notwithstanding, seek to ensure that the investors’ needs are given priority. With divergent interests, the Board may not have a common understanding upon which to base their advice.
It may not occur to the Directors to specifically develop a mutually agreed set of expectations to guide their deliberations, perhaps naively believing that the Board will "come together" over time. However, if a major issue arises unexpectedly and the Board is called into action, the Board may be ill-equipped to respond due to a lack of a common frame of reference. In such a case, the Board may chew up valuable time discussing the basics of their roles and responsibilities and the practical meaning of fiduciary duty, so they can all get to common ground before they debate the issue at hand. They may never get there under the pressure of time, and the Directors may not be able to render the advice that management needs and must have. Occasionally, divergent views at a time of crisis can lead to a permanent rift in the Board, which negates its very reason for existence.
The lack of a common frame of reference is vividly exposed in a crisis, but it is important even over the long term. Directors need to develop and support common rules of engagement for all matters. For example, the fine line between questioning management’s recommended course of action on an issue, and substituting their own decision on the matter, is a line that all Directors need to understand and support. Otherwise, the Board may not be able to confidently render its advice to management, and importantly, build the credibility and trust that is essential to its role.
So a common frame of reference is important not just in a crisis, but over the longer term. How can an early-stage technology Board develop their common understanding? First, the Chairman must take the lead. It is one of the Chairman’s primary responsibilities to develop the Board so that it can effectively guide management.
If the company can afford to do so, a weekend retreat is an excellent forum. The Chairman, with the assistance of the Board Secretary, can develop an agenda and source various references on the topics of fiduciary duty, roles for the Directors, chairman, and Board, expectations for management and the Board, and so on. This might take the form of a draft Board manual. While this is a very time-consuming task, there are templates available that can be adapted to suit the company (see www.earlystagetechboards.com). Away from the daily administrivia, Directors and management can focus solely on the topics and develop their common understandings.
In the absence of a retreat, the Chairman should dedicate an entire Board meeting to developing its mandate. This meeting should be held at the earliest opportunity, not just to be prepared for an unexpected event, but also because the sooner the Board is on the same page, the more effective it will be.
The outcome of the retreat or Board meeting should be a Board manual or other written document which describes the expectations of Directors and management. It is easy to misunderstand or to forget a verbal consensus. By reducing it to writing, ambiguities can be exposed for resolution. There will be a permanent record for future reference. New Directors will have a document to speed up their integration with the other members of the Board.
1If the decision is a major one, then the Chairman may need to quickly call a Board meeting to decide this one issue. The company articles should include provision for waiver of the statutory notice period to schedule a Board meeting if all Directors agree.