Companies & Industries

When Your Company Outgrows Its Board


The needs of an expanded organization differ from those of a startup. New CEOs often bristle at boards that micromanage rather than govern

An increasingly common complaint from CEOs and other top executives is that their board no longer fits their company's needs. Either the composition of the board or the level of engagement hasn't kept pace with the company's growth. Typically, this occurs in one or both of these types of situations:

The Little Startup That Grew

In new companies, boards are often used quite differently from the way they are in the S&P 1500. The CEO—often a founder—typically includes on the board angel investors or VCs, as well as directors who provide expertise that might typically be found on the executive team of a more mature company in such areas as legal, marketing, strategy, or HR experience. The CEO often uses the board to make decisions that would typically be made by management in a more mature company.

More established companies would cringe at the way many startup boards operate, particularly with regard to their level of decision-making, which they would see as micromanagement. However, in a startup, this works just fine. Problems begin when the company morphs into a more complex and mature business where this type of governance structure is no longer workable. Often, the change point occurs with the elevation of the company founder to the role of chairperson with a new CEO—who has experience with a larger company—being brought on board.

Unhinged

Right away, the new CEO is typically unhinged by the way the board functions: "This board meets once a month. And they get right down into the weeds on marketing, strategy, and financing issues. They want to make decisions that I and my executive team should be making. Hasn't anyone taught them the difference between governance and management?"

Well, frankly, no. They've been allowed to operate as a quasi-management team. And while that's perfectly O.K. in the early days, it doesn't work well as the company grows. At some point, that board needs to learn how to govern. And the transition can be painful.

Two things have helped other CEOs: The first is for the CEOs to have a candid discussion with the board, defining expectations of who makes what kinds of decisions and how they want to work with the board. Often this works best after CEOs have a series of one-on-one conversations with board members; seasoned directors will know right away what the problem is.

The second involves the recruitment of new directors who have experience serving on the boards of mature companies. Often, they will be shocked at the items on the board agenda and can serve to provide a good regulating mechanism within the board itself to try to shift the board's focus from management to governance.

A 2008 Company with a 1998 Board

One of the most common symptoms of a company that has outgrown its board is this: Board members had the right skill sets and experience to make a major contribution to boardroom discussions when they were recruited 10 years ago. However, dramatic shifts in corporate strategy and operations now require entirely different types of corporate experience.

One chief financial officer explained it: "Since 2002 we've moved so dramatically on the international scene that our board has been left behind. I feel like a teacher explaining to them what's going on in the business today, and they all smile and say: 'That's great.' Believe me, I'm happy they don't get in our way. But I would give anything to have people who could challenge our thinking on the issues we're confronting or who have dealt with these issues themselves."

If this sounds like your board, the key is for your CEO to have a frank discussion with the chair of the nominating/governance committee and identify the skills and experience that it would be valuable to add to the board. Experience in entering emerging markets may be really important; something that wasn't considered five or 10 years ago in recruiting directors.

Recruit Before You Shoot

If you agree to bring new skills to your table, it's always best to recruit before you shoot. CEOs can expend a great deal of political capital and angst trying to dislodge unproductive board members to make room for new directors. Instead, find two or three directors able to fill the gaps and bring them on to the board before you wrestle with the ugly problem of who is asked to leave. So what if your board balloons to 12 or 13 people? Are your shareholders better served by a static board with 10 members or by adding members who bring valuable knowledge and expertise?

Fast-growing companies facing business issues at light speed need a board that can provide oversight and guidance to help them through uncharted waters. If your board hasn't kept pace, it may be time to do something about it.

Beverly Behan is the managing director of the Board Effectiveness Practice of the Hay Group and co-author of Building Better Boards: A Blueprint for Effective Governance.

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