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How to build a great board of directors for your startup

Thought Leadership on Entrepreneurship
Cambridge Judge Business School Entrepreneurship Centre

 

 
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By Jonah Zankl, PhD Candidate in the Organisational Theory & Information Systems at Cambridge Judge Business School and Matthew Grimes, Reader in Organisational Theory & Information Systems and Academic Co-Director of the Entrepreneurship Centre at Cambridge Judge Business School.

A good board of directors is one that can provide insight into the environment within which your business currently operates, while offering oversight of current competitive strategy. For much of the 20th century entrepreneurial businesses focused on operating, embedding, and competing within single industries and geographies, and because of this corporate boards tended to be highly specialized. Yet as we consider the landscape of new startups, it is increasingly apparent that the most robust and scalable business models are now those that sit at the intersection of multiple complex boundaries: examples of such businesses include Laka, a rapidly growing insurtech for cyclists, or HealX, a biotech startup at the intersection of AI and bioinformatics for rare disease drug discovery. Following this shift from specialisation to boundary spanning, many entrepreneurs are recognising that a truly great board is one that mirrors the diversity and complexity of their businesses, unlocking capacity and creating effective guardrails that allow for these businesses to thrive across the broader and more complex competitive landscape.

In this two-part series we approach this topic of building a truly great board through two steps. First, we recognize and celebrate the growing interest over the last several years with respect to fostering demographically diverse boards. Yet we also expand this notion of diversity to include also knowledge and experiential sources of diversity, which may or may not overlap with demographic differences. In this way, we argue that demographic- and socio-cognitive-based diversity selection criteria can be complementary in the development of great startup boards, ones that can lead to the seizing of previously unrecognized opportunities and the avoidance of strategic pitfalls. Second, although diversity can serve as an important asset of your startup board, we suggest that entrepreneurs must also cultivate the capacity of that board to take advantage of such diversity and not collapse under its weight. As such, in the second part of this series we also discuss the necessary mechanisms — which we term as guardrails — that foster productive discourse and decisions among your diverse startup board.

Selecting great diverse board members

“Women held just over 7% of board seats in our study. But most strikingly, roughly 60% of the businesses [startups] in our sample did not have a single female board member.” — Rivera, Shepherd, & Teare, 2019, Harvard Business Review

Research has shown that board diversity is a critical factor in the performance — in terms of financial, innovation, and corporate social responsibility metrics — of organizations small and large. The benefits of diversity are often focused on the reduction of groupthink, stimulus of critical dialogue, and breaking down of pre-existing assumptions that can lead to ineffective decision making. A recent study, however, of 200 US-based venture backed startup boards by Crunchbase, Him For Her (a social-impact venture), and the Kellogg School of Management highlights significant gaps in gender diversity within the boardroom. This trend is one for alarm. 

The lack of demographic diversity amongst startup boards perhaps is attributable to a lack of formal board recruitment processes amongst startups. A recent survey1 has highlighted that over 65% of startups do not have plans and strategies in place to recruit and retain some of the most important members of their startup team: their board of directors. Finding board directors who truly expand the capabilities of your business in addition to executing on their formal governance roles requires deliberate attention to selection based on a variety of diversity criteria.

As a first step, founders should develop a clear set of criteria and targets towards demographic diversity on their boards. Additionally, we suggest that paying attention to socio-cognitive diversity is an equally important step. To think more broadly about socio-cognitive diversity, consider the following three criteria in broadening your board recruitment strategy:

  1. Does a new director help connect and embed the organization inside a geography that is strategically meaningful for success?
  2. Does a new director bring a lens that allows foresight into the otherwise unanticipated challenges you might face six months from now?
  3. Does a new director provide a contrarian perspective through divergent experiences, bringing a new dimension to your startup’s governance?

The Importance of Geography

Few startup founders today would describe the ambitions of their startup as anything less than global. These aspirations of scale beyond the local entrepreneurial ecosystem are equally important in both growing the venture and attracting funding. Founders are typically great at embedding within their local entrepreneurial ecosystem, whether through attending events at local hubs such as Barclays Eagle Labs, participating in accelerator programs like Accelerate Cambridge at the Cambridge Judge Business School Entrepreneurship Centre, and building connections with important figures such as angel investors and venture capitalists in their ecosystems.

Research has shown that the “strong ties” developed within your local ecosystem are a key mediator of major deals, venture finance transactions, and subsequent startup growth. But, where do the global opportunities arise? This is one area where the diversity of your board can bring tremendous value. Your board directors, if chosen strategically, can provide both critical connections and lenses into entrepreneurial ecosystems where your next phase of growth may transpire. Developing your board in terms of their local and global — or “glocal” — diversity is one key dimension for founders with scaling ambitions to emphasize. 

The Importance of Time Horizons

Competing time horizons are a challenge every startup CEO must manage. On one hand, startups are faced with immense short-term pressures to prove and validate their business models through customer acquisition, advance product development, and meet time-sensitive checkpoints to appease investors and raise subsequent funding rounds. On the other hand, scanning for new opportunities across the broader macro environment is an ongoing and deliberate long-term activity that builds the platform for future growth. While well-established companies also face this paradox, our research suggests it is even more apparent within startups.

Therefore, consider the role of your board in managing these competing temporal perspectives: how might you recruit directors that bring various temporal outlooks to your board? By this, we suggest that your board should be balanced with directors who have a mixture of experience and familiarity with the current trends facing and impacting your industry and those who can be thought of as futurists. Why futurists? While traditional board governance is often about assessing and mitigating risk that is immediately foreseeable, a director who is oriented as a futurist (a profile that can be both self-ascribed or professionally certified through the Association of Professional Futurists) can play an important role in highlighting and managing the paradox of temporality: competing short-term agendas with the long-term strategies. 

The Importance of Divergence

When we think of divergence, we often think of standing out, or dissimilarity, or a failure of agreement; this, of course is contrasted with convergence, a process of arriving at consensus. When shaping boards, startup founders may be tempted to recruit a set of directors that they believe will arrive at similar conclusions based on shared understanding and operating models. These conclusions support the founder’s own conceptions of where the business should aim towards. However, as design thinking frameworks advance, both convergent and divergent thinking are required to develop meaningful problematization and resolution of complex scenarios.

Under divergent thinking, individuals engage in mapping a set of possible solutions starting with a problem in mind and outwardly exploring the realm of possibility. Convergent thinking starts with the anticipated solution, with outward exploration seeking facts to support the hypothesis. Limiting the selection of directors to those that one believes will arrive at immediate convergence and consensus creates a strategic void by eliminating possibilities that can arise through divergence. Practically, your startup should consider recruiting directors who are known for their ability to critique and synthesize a variety of perspectives, those known for the exploration of the possible. In creating purposeful divergence, you are seeking those who can pull on the strengths of other directors, push for innovative and explorative conversations, but provide grounding for you as a founder. 

In our next article we will be looking at the role of guardrails, which can be found here.

Sources:
The Startup Board Report. KPMG High Growth Ventures and Think & Grow. 2018.
https://home.kpmg/au/en/home/insights/2019/04/startup-board-report.html

 


 

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