A board of directors governs a corporation. The owners or shareholders elect the board; the board delegates management of the company to management. In my view the board has two principal tasks: (1) to hire, evaluate and when necessary dismiss the CEO, and (2) to see that there is an effective strategy in place and being executed.
In early stage companies, the founders generally form the board. They are the shareholders, the board members and the officers. But when they begin to raise capital, the new shareholders will want to have something to say about who will serve on the board. This frequently makes the founders nervous, as they want to stay in control of their company's and their own destiny.
Often we angels see boards made up of two founders and one outsider elected by the investors, or the CEO and his or her spouse, plus one outsider. I believe when the CEO does this, he or she is missing an opportunity to put in place a board that will not only bring expertise to the company, but will also hold management accountable and thereby accelerate the company's progress.
When we had Learned-Mahn back in the 1980s, we had an all-inside board consisting of the four founding officers and my father. It didn't really work very well. I was the CEO, and the other officers worked for me. But they were the directors, and I worked for them. My father brought really interesting family dynamics into the boardroom where they didn't belong. And what good was a board meeting when all of the officers worked together all day long? We didn't get any outside perspective.
After agonizing discussion, we decided to bring in outside board members to replace the three management directors that reported to me. We didn't replace my father, but family dynamics are the subject of another article at another time. We were able to recruit experienced business people to the board who could bring their experience to our company. They included Ray Smelek, who brought HP to Boise; John Dahl, who had just retired as the president of the Simplot Co.; Gary Atkins, CEO and founder of Extended Systems; and Charles Jepson, an early HP employee and an experienced small company CEO.
We got expert advice and counsel, and for the first time I became accountable to people who weren't my employees. In hindsight, I think that was one of the best business decisions we ever made. The outside board made us face our weaknesses and guided us to successful strategies. In fact, Smelek's counsel persuaded us to see ourselves as a financial software company rather than a company for banks.
Today I serve on the board of Medical Management Inc. The company manages physician-owned and hospital-owned medical clinics throughout the Pacific Northwest. Until a year ago, the board members were all company employees who owned company stock. A year ago, CEO Jim Trounson took the difficult step of asking the internal board members to resign. He replaced them with Dr. Ted Epperly, CEO of the Family Practice Residency program in Boise; Dr. Pat Hermanson, a retired hospital administrator and currently a professor of healthcare management at Idaho State; and myself.
We have served a year and were just re-elected by the shareholders, so apparently the shareholders are happy with the change. The boardroom is a much different place than it was before we were elected. We bring our diverse perspectives to the company, and we hold management accountable for performance. The results after the first year have been terrific.
When small-company management tries to hold on to control of the boardroom, I believe it is making a big mistake. The team is giving up the information and counsel they could be receiving, and they are shying away from accountability. Most entrepreneurs are so focused on execution, they lose sight of the big picture. An outside board will force you to confront your weaknesses and help you see opportunity where you may only see problems.
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