Strengthen Your Board

January 4, 2011

What makes a great board great are not so much its formal procedures, but whether or not its members’ informal modus operandi ensure those well-designed procedures function properly.

Robert C. Pozen makes this same point recently in The Wall Street Journal, where he argues that placing too much emphasis on procedure encourages “social loafing” – a situation where individuals don’t take responsibility for the group’s actions and instead assume others will lead.  (Psychologists also believe this phenomenon worsens as group size grows.).  From A New Model for Corporate Boards:

In 2002, Congress passed the Sarbanes-Oxley Act to prevent corporate governance debacles like Enron and WorldCom from happening again. But six years later, many of the largest U.S. institutions had to be rescued by massive federal assistance. All of these institutions were Sarbox-compliant: Most members of their boards were independent, and their auditors’ reports showed no material weaknesses in internal controls. So why were the reforms so ineffective?

I believe that the problem is the current structure of corporate boards. In short, they are too big, members often don’t have enough relevant experience, and they put too much emphasis on procedure.

Regulators, investors and directors should recognize that we do not need more procedures for corporate boards. Instead, we need more expert directors who view their board services as their primary profession—not an avocation.

We agree with Pozen, but wouldn’t call it a *new* model.  As venture capital investors, we typically limit board size at 5 to7 members, include industry experts as outside board members, and spend substantial time communicating with management and working on company issues between board meetings.

Lastly and most critically, our reward depends exclusively on whether or not the value of the company appreciates.   (By way of contrast, Pozen recommends directors receive annual compensation of $400,000 – with only 75% of that in company stock.)

A critical joint task for the venture investor-entrepreneur partnership is to strengthen the composition and performance of the company’s board of directors.  Here is a sampling of our thinking on the subject:

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