How to add value to a board of directors
On a recent WeInvest webinar, Johanna Posada, founder and managing partner of Elevar Equity, shared her experience on multiple boards and left us with some great insights into the role of a board member and how they can contribute to add real value.
Being on a board can be quite challenging. Recently, WeInvest Board Member Paula Giraldo shared her experience as a member of several boards and what she learned in the process in this must-read article. Indeed, it’s not easy balancing the duties and responsibilities of being on a board with the goal of adding value to the entrepreneurs and the company. This led me to carry out a survey amongst some founders about what they expected from a board member. After all, it’s especially important to know what they consider their needs are in order to add value for everyone involved.
This is what they replied:
- Help with networking, especially connecting the company with new mentors, investors, and advisers.
- Help with a business strategy based on your past experiences.
- Support in the recruitment process.
- Support in business development.
- Issue alerts about weak spots in the company.
- Help to establish strong governance.
- An unconditional, direct, and frontal advisory to the CEO.
In order to expand on these topics, we decided to invite Johanna Posada, founder and managing partner of Elevar Equity, who has been a member of over 12 boards, to be the guest speaker in the first of a series of webinars organized by WeInvest. In it, she shared her experience and provided some very valuable advice for anyone going through their first steps on a board or considering a future role as a board member. You can watch the whole webinar on the WeInvest YouTube channel, but here are some of the main takeaways.
Learning from experience: the importance of asking questions
Johanna Posada had her first board experience when she was in her early 30’s on a non-banking finance company backed by a wealthy and very traditional Mexican family. The other members of the Board were all men in their early 70’s, and she had to deal with a certain paternalism and the occasional inappropriate joke. She soon learned that in order to participate and influence the conversation, she needed a deeper understanding of the industry and the company. The best way to do that was asking questions. “I think actually even the most simple questions, at the risk of embarrassing yourself, are important because I’ve noticed that sometimes even a very basic question can really open up a very interesting conversation”, Johanna explains.
Constitution of a board: why forming boards early on is a good idea
When talking about boards, Johanna puts the focus first and foremost on the fact that it’s all about human interactions. Boards are, after all, made of people, so regardless of size and structure, that’s what it’s all about. According to her, a lot of the learning to be had comes from interpersonal dynamics. That’s why it’s perhaps valuable to ask oneself questions such as: Is there an open conversation? Do you have a relationship with other board members? What is the relationship between the CEO and the other board members and the board as a whole?
Apart from that, and regarding more formal matters, Johanna makes the distinction between the actual board, whose members are chosen by the shareholders and are governed by local laws, and advisory boards, which are more informal and put together by the CEO as a hand-picked group of advisors. She also explains that board roles and composition are different depending not only on geographical location and local laws, but also on what stage the company is at. Her advice? Form boards early on.
“They don’t need to be complicated, but the benefits of forming a true add-value board early on in the life cycle of a startup and raising funds are very obvious. In my experience, a lot of the reasons for startup failures are internal, not necessarily external, such as overconfidence of the team (especially if it’s young), disagreement between the founding teams or perhaps the CEO’s lack of expertise. All of these issues can be avoided or at least mitigated if you have a strong, supportive board”, Johanna says.
Her recommendation is to start with a small board. “Usually a typical startup board will be composed of three members: a founder, maybe the two VC’s, and if you’re lucky you can also bring in an independent. Five member boards also work really well, and then as the company matures, dynamics change and you can start adding more board members. I would say I’ve been on boards of up to seven people and they still work”.
Member roles: independents and observers
During the Webinar, special importance was placed on two key roles inside a board of directors. That of the independent board member and that of the observer.
“Why the independent?”, Johanna asks, “It’s not an easy conversation and there’s going to be a lot of discussion on what type of independent you want and what knowledge and expertise they can bring. Independents have a balancing function. There’s been conversations that have become a little difficult with other board members, and I’ve seen that independents can manage those discussions really well because they can actually translate some of the conversation between the different interested parties. So I would really encourage you to think about adding an independent in your boards”. Independent members are key, as they can become true advocates for the company. When thinking about who to bring on board, Johanna suggests making sure that they are people who are engaged with the Company and that they have a wide network of contacts.
Regarding observer roles, she also considers them to be very valuable in boards. “If you have the ability of being an observer, I think it’s wonderful. Observers should speak up; on some of my boards, they are even the most active participants. Of course you need to be respected by the other full board members, but if a company is choosing to have observers, they can certainly bring value”.
Board dynamics: decision-making and influence
Board meetings are not the only place where decisions are made. According to Johanna: “A lot of the decisions are actually taken outside of the formal board meeting. There are a lot of one to one or one to two conversations happening outside, before you reach the board as a whole. A good CEO that manages the board well has the kind of trust that ensures that the conversation that is happening outside the board is shared so that when we come together there’s alignment”
She also considers that, as companies mature, new investors may be brought into the board and this change of dynamics might make one need to step aside. “If part of your investment thesis is that you’re going to be active and you want a board seat, you should negotiate that from the beginning. You should consider from the start what’s going to be the capital evolution so you can perhaps keep the board seat or at least stay as an observer”.
Also, there are ways of retaining influence even if you’re not a board member. How? Johanna explains: “influence really comes through relationships. Especially if there’s an independent board member, it’s important to have influence on who that independent is. They can really become an amazing advocate for the company and even shareholders that are not represented on the board. Having a relationship with that kind of independent is the best way to have an influence on companies where we don’t have board seats”.
Why diversity is good business
“When you look around the world, 50% of the population is female. When you look at the workforce, that’s the case as well. Women make the majority of buying decisions and in a board you want to bring that perspective”, says Johanna. According to her, women “tend to be more intuitive in reading a situation and body language, and are more focused on human capital and recognizing what it takes to work with people to get things done”. Johanna defines this as some kind of “superpower”, and she thinks the ability to listen is a big part of it. This is something that CEO’s can appreciate. “I’ve been in tough conversations with CEO’s, but at the end of those calls I would always call them and see how they’re doing personally”, she says. This creates a special kind of trust, even though it should not be confused with unconditionality. She also believes that, at the end of the day, investors today want to see diversity in both boards and at the company level, so diversity is not only about what’s right, but also about good business decisions.
Do’s and Don’ts
Finally, Johanna shared some of the Do’s and Don’ts her experience as a board member has taught her.
- Do: take time to develop relationships with other board members.
- Do: create a virtual cycle of respect, trust and candor.
- Do: debate strategic decisions openly and constructively.
- Do: embrace honest discussions that could be uncomfortable.
- Do: insist and ensure that the team provides sufficient information regarding time and agendas.
- Do: ask questions. Even if they seem basic, they can start a conversation.
- Don’t: lose the forest for the trees. Make sure that you don’t lose the strategic discussion for focusing on the details.
- Don’t: micromanage. That’s not the role of the board.
- Don’t: create political fractions. People just need to be transparent and have that conversation up front.
- Don’t: create committees that are too large to be effective.
- Don’t: forget your fiduciary duty and again remember there’s always personal liability on the board.
As a final takeaway from Johanna’s webinar, I wanted to point out the emphasis she places on the human element of the board. In the end, it’s all about building relationships and trust, and about being upfront and transparent. A board will be as good as the people that are on it. Johanna’s invitation, then, is to constitute boards with a people-centric view. After all, it’s not only right; it’s also good business.
Co-Founder & Managing Partner at NXTP Ventures — an early-stage
venture capital firm investing in technology startups that positively
impact scale throughout Latin America. Co-Founder WeInvest Latam.