A Guide For Independent Board Members

Independent board members are the key to driving diversity and higher profits.

In March, I participated in a Clubhouse panel discussing the role of independent board members with David Hornik (founder, Lobby Capital), Judy Loehr (partner, Bayla Ventures), Paula Skokowski (CMO, Incognia), Rita Scroggin (founder, FirstBoard), and Avital Arora (VP Engineering, Salesforce).

60 minutes wasn’t sufficient to address the questions or to fully explore the nuances that come with this important role.

In collaboration with my Dell Technologies Capital partners, co-panelists, and industry colleagues, this blog documents a guide for independent board members. Many thanks to content contributions and reviews from Lauren Cooney (CEO, Spark Labs) and Clark Wilkes (Sr. Counselor, Dell Technologies).

We hope these materials will encourage more companies to open independent board member positions and for prospective independents to be better prepared for the experiences to come.

What is your experience with independent board members?

The later stage companies for which I serve both have independent board members.

The collaboration with Abby Kearns (CTO, Puppet and independent board member, Lightbend) and Marge Breya (independent board member, NS1) has been superb where both have had potent and lasting impacts on the companies they serve.

• Many of my previous boards had independent board members.

• As a CEO I led recruitment of independent board members to join my boards.

• My previous non-profit boards had (usually large) groups of independent board members.

• In one uncomfortable period a decade ago, I removed an independent board member from a board which I served.

The contributions and value of the independent board members over this time has been immeasurable.

What is a board of directors?

A board of directors is an elected group of individuals that represent shareholders, each of which being a “board member”. The board of directors is a governing body that typically meets at regular intervals to set policies for corporate management and oversight. Every public company must have a board of directors. Some private and nonprofit organizations also have a board of directors.

A board of directors sets policies for executive compensation, employee equity allocation, operational plans, strategic direction, ensuring financial statements are accurate, safeguarding and allocating financial resources, ensuring management’s actions are in the best interests of stakeholders, protecting the organization’s reputation (especially during crisis), communicating the company’s culture, and financing. Board members may be asked to join board committees that are formed at different stages for compensation, audit, risk, and strategy. Board members evaluate the performance of the CEO, and sometimes are called upon to lead the company through changing CEOs. Board members frequently are called upon to help identify and evaluate executive new hires.

Board members carry fiduciary duty, which is a duty to act in good faith in the interest of all shareholders. This is a legal obligation for a board member to act solely in the interest of shareholders rather than oneself, which implies that board members should apply strict care to ensure that no conflicts of interest arise between themselves and shareholders.

What qualifies someone to be elected to a board of directors?

Technically, just having a pulse.

Practically, companies and their leadership are looking for someone who has the experiences, network, and temperament to be able to understand the perspective of employees, the company, management, and shareholders in order to set policies that are in the best interest of shareholders.

Typically, people elected to a board of directors have one of two broad experiences:

1. Investing into companies, or:

2. Business management experiences

These two tracks provide people with awareness of the many facets involved with the general management of a company’s affairs creating a solid information framework for doing policy work.

What is an independent board member?

An independent board member is a board member for a company whose appointment was not designated by rights granted to an investor nor is a member of the company’s management. The board member is an “independent” because they do not have potential competing obligations as part of their employment by an investment firm, bank, or by the company itself.

What is the role of an independent board member?

It is identical to all of the other board members.

A board of directors sets policies for executive compensation, employee equity allocation, operational plans, strategic direction, ensuring financial statements are accurate, safeguarding and allocating financial resources, ensuring management’s actions are in the best interests of stakeholders, protecting the organization’s reputation (especially during crisis), communicating the company’s culture, and financing. Board members may be asked to join board committees that are formed at different stages for compensation, audit, risk, and strategy. Board members evaluate the performance of the CEO, and sometimes are called upon to lead the company through changing CEOs. Board members frequently are called upon to help identify and evaluate executive hires.

Board members carry fiduciary duty, which is a duty to act in good faith in the interest of all shareholders. This is a legal obligation for a board member to act solely in the interest of shareholders rather than oneself, which implies that board members should apply strict care to ensure that no conflicts of interest arise between themselves and shareholders.

In order for a board member to carry out their responsibilities, they need to have a broad and thorough understanding of the business, its market, and to a certain degree its competitors. Board members are peers and advisors to the management of the company and reflect their understanding by articulating the business’ reality. This is done through a combination of comparing the company to other outside situations, providing long-term thinking around strategy, product, finance or operations; providing key insights; and asking probing questions that create thought-provoking conversations.

Board members deliver their responsibilities by attending board meetings, developing and maintaining a network of influencers useful to the business (such as potential hires, other executive leaders, additional investors, customer contacts, and potential vendors), meeting with other board members and management privately, and by making themselves available to key company personnel. 

What is the fiduciary duty of a board member?

Board members, both for non-profit and for-profit entities, have fiduciary duties:

1. Duty of Care: You must act as a reasonable and prudent person would under the same circumstances.

2. Duty of Loyalty: You must place the interests of the organization / shareholders above your own.

3. Duty of Candor: You must disclose material facts in a timely manner, either about yourself or about the company.

4. Duty of Confidentiality: You must not disclose sensitive or confidential information.

5. Duty of Obedience: Only for non-profits board members, you must remain faithful to the mission and goals.

A breach of fiduciary duty may subject you to personal liability or your dismissal from the board.

How is an independent board member’s role different from other board members?

It is identical to all of the other board members.

When an independent board member provides insights, their perspective is offered with a context that doesn’t have influence from potentially divergent investor or employee goals.

What is considered an “independent” insight?

Providing independent, balanced insights is trickier than it sounds.

There are many scenarios where stakeholders have diverging interests which an independent board member must understand:

1. Investors. The investment history, previous capital contributed, structure of limited partners, and future potential investment capacity varies among investors creating potentially different interests, especially among investors that own different series of stock.

2. Debt. Debt is a senior instrument to shareholders creating different interests for debt holders and investors.

3. Founders. Founders exert significant influence over company culture, direction, and outcomes sometimes causing their interests to diverge from other common shareholders, which are typically also employees.

4. Dual Interests. Companies do business with other companies, whether through partnerships, acquisitions, or investments. Some stakeholders can have dual interests in both the company and the partners they do business with.

5. Common vs. Preferred. The rights of common shareholders, typically held by founders and employees, are significantly different than those of preferred shareholders, particularly around information, transfers, selling, or buying additional stock. It’s important to balance the needs of financing events driven by preferred shareholders with those of minority common shareholders with fewer rights.

It’s a common misnomer that the independent board member is there to “look out for the minority, the common shareholder.” That is a nice sentiment, but all board members are responsible for all stakeholders, regardless of the organization they represent.

However, since independent board members are frequently compensated in common stock or stock options of common stock, the independent board member eventually becomes a stakeholder of the minority as well. This is perhaps why independent board members are reputed to comment more on the needs of the minority.

What authorizes a company to have an independent board member?

A company has a set of governing documents that outline the rights of investors, how the company is organized, and the responsibilities of management. Within these governing documents are specifications on the board of directors, its size and composition, and the authority granted to it by the shareholders.

These documents are updated from time to time, usually around a major financing event where the structure of the cap table or balance sheet undergoes a significant transformation.

During these events, the governing documents can be modified to change the composition of the board of directors – adding new director seats, removing seats, or changing the authority of the board of directors.

Each board seat on the board of directors has a specification for how that seat will be filled, both in terms of identifying the shareholder / person who nominates a potential board member and then the rules for which shareholders and board members must vote to approve the nomination.

How does a company decide to add an independent board member?

The concept of an independent board member was authorized at some previous point when the governance docs were being updated, usually as part of a new financing round.

At some later point, the company and other board members decide that the position should be filled. Each board position has its own criteria for who initiates the process, who makes the nomination, and which shareholders ultimately vote in the election process.

Practically, the decision to fill an authorized position is driven by many factors:

1. Perception that adding an independent board member will add value to the company.

2. The company’s growth stage and the perception that increasing independent board members will have on future growth and financing.

3. The company’s desires and objectives to drive diversification and broader representation if the board’s composition is veering away from stated goals.

4. The introduction to a candidate whose qualifications are so overwhelmingly aligned with the needs of the company that the process is jump started.

Who initiates the placement of an independent board member?

The responsible party for initiating an independent board member is specified in the company’s governing documents. In the absence of clear criteria, this process is typically initiated by the CEO.

What is the earliest that a company obtains an independent board member?

A company can conceivably fill an independent board position at its formation.

Traditionally, you may see the concept of an independent board member first appear around the Series A / B financing. This is the typical time where the number of investor board members match the founder / common board members along with the company navigating a number of growth challenges. An independent at this stage can be viewed as a critical swing vote in a balanced board along with being able to add value to a company that is transitioning from product-market fit to growth.

As a company moves towards an IPO, the company begins to think about the ideal board composition that will be attractive to investors who might participate significantly in an IPO process. Boards that manage public companies are generally composed differently from those that are not.  Public company boards tend to be larger and have a larger portion of independent members, so it’s not uncommon to see later stage growth companies increasing the number of independent board members.

Moreover, the NASDAQ has proposed new requirements that would require boards of listed companies to have at least one woman and at least one underrepresented minority - someone who self identifies as Black, Latinx, Asian, Native American, Alaska Native, Pacific Islander or some combination — or someone who identifies as LGBTQ+.

The California legislature made AB979 a state law, making it a requirement for publicly-traded companies headquartered within California to add an executive from an underrepresented community to their board of directors. AB979 is an extension of the 2018 law SB826, which was aimed at increasing the number of women as board directors. California joined Illinois, Ohio and Maryland as states seeking to increase diversity on the boards of publicly-traded companies.

How does a board’s composition grow during different stages of investment?

The size and structure of a board changes over time as the needs of the business and interests of shareholders change. 

There are a number of events that may prompt the company undergoing a board composition change:

1. New Shareholders. When a company accepts a significant investment from a new investor, especially if that new investment is larger than the previous checks written into the company or the new shareholder has a larger ownership than existing shareholders, the board’s composition may shift to make accommodations for the new investor to get representation on the board.

2. Strategic Relationship. In some situations, if the company engages in a strategic relationship with another company, such as a broad product and selling partnership, the board’s composition may change to include representation from the other company.

3. Debt. Since debt is a senior liability ahead of shareholder interests, a large enough debt vehicle may come with requirements that the debt provider get visibility and representation on the board of directors.

4. IPO Preparation. The governance of a publicly traded company has different concerns than those of a private company. Private investors typically invest to receive preferred stock which grants them specialized rights in the company. An eventual IPO of a company would convert all preferred stock into common stock with the case – in many situations – where the private company shareholders will eventually reduce their positions in the company to make room for new investors that make positions in publicly traded companies. Public company investors want to see a balanced approach to governance of a company, and those that are preparing for an IPO may look at their board composition as increasingly need to be from independent board members to prepare for the vetting process of new investors.

5. Founder Employment Changes. In small companies, it’s not uncommon that multiple founders of the company hold board seats. If the founders that serve on the board change their role within the company or seek other employment, this may necessitate a board composition change.

6. Employee Needs. If an organization grows large enough where the employee stakeholder interests may diverge from those of management or the founders, then boards may restructure themselves to formalize employee representation.

What is a board observer and are there independent board observers?

Board observers are slotted positions that are given the right to participate in board meetings. Board observers are not voting members of the board and do not have fiduciary duties.  Board observers are generally expected to be silent observers of board meetings, but they often have their own unique perspectives which can contribute to business’ benefit.

It is often the case that strategic partners, debt providers, company counsel, or senior executives are granted board observer positions instead of being a full board member. The motivations for this vary but are primarily driven by a) many organizations do not want their representatives to have the obligations and legal duty that comes with board membership, and b) there may be conflicts of interest that prevent some organizations from taking fiduciary seats in other companies.

There is nothing that would prevent a company from having an independent board observer.  In fact, many CEOs are granted the privilege of deciding board meeting participation. It’s often the case that individuals who are not regularly part of board meetings are invited to participate given their unique insights and potential contribution.

How is an independent board member elected to the board of directors?

In the company’s governance documentation, the criteria by which an independent board director is identified and voted upon are described.

Since the board member is an “independent”, the criteria for selection and approval is typically a) a vote of investor and employee shareholders together in unison and b) consensus of the existing board of directors.

What’s the value to a CEO of an independent board member?

There are a number of important contributions of an independent board member:

1. Specialized Experiences. Often, independent board members provide unique expertise in an area of business that can be useful to the business. Independent board members are consultants to executive management on how to further their own capabilities in your domain of experience.

2. Advisor. Ability to provide advice to management on the top issues facing the company.

3. Cheerleader. Board members are champions for the company – to investors, management, employees, and the world at large. An independent board member’s ability to develop and influence networks is valuable.

4. Influencer. An independent board member can be a facilitator and consensus builder when investor and management concerns diverge.

5. Network. An independent board member’s professional network can provide timely advice and counsel. Board members are expected to keep their network fresh and relevant for other board members, the CEO, and management.

What’s the value to investors of an independent board member?

It is the same!

Can an independent board member be removed from a board?

Yes, absolutely.

The process by which a board member is nominated and elected to the board can be executed to remove an independent as well. The parties that do the nomination are also authorized to suggest that person should no longer fill the seat.

Additionally, many independent board seats are filled with a time horizon, typically 2-4 years. This is a courtesy so that the company can ask the independent board member to serve another term, rather than the company being in the awkward position from having to ask someone to step down from a board. 

An independent board member stepping down from a board is not a reflection of poor performance. Independent board members leave boards for any number of reasons:

1. Their life circumstances have made fulfilling board responsibilities more challenging,

2. Their current market relevance and network is not as well aligned as needed,

3. The company’s board structure has been altered, or

4. The company’s ownership structure has altered.

Can an independent board member resign before their term has expired?

Yes, any board member can resign at any time.

Your life circumstances and obligations may have changed and continuing to serve on the board would be difficult.  Also, in extreme circumstances, board members have a moral or ethical objection to a company’s path so severe that their concerns have no path to resolution. In these situations, board members resign to avoid breaching their fiduciary duty or violating their internal ethics code.

Are independent board members compensated?

Typically, yes. 

The compensation varies, but it is typically equity-based compensation and sometimes also cash-based compensation.

Equity-based compensation is typically given a vesting structure that is different from employees or executives.  Given a board member’s unique insights and access to “inside information” there may be limits to how or when a board member can gain liquidity to this compensation.

Cash-based compensation is typically given if the independent board member is also providing a consultative service to the company periodically.

Additionally, all board members are covered under the company’s Directors and Officers (D&O) liability insurance policy. D&O insurance protects your (and your spouses) personal assets in the event you are sued by employees, vendors, competitors, investors, customers or other parties for actual or alleged wrongful acts in managing a company.

What are the qualifications for someone to become an independent board member?

It is someone who has the experiences, network, and temperament to be able to understand the perspective of employees, the company, management, and shareholders in order to set policies that are in the best interest of shareholders.

Typically, people elected to a board of directors have broad experiences either investing into companies or with business management and operations experiences. These two tracks provide people with awareness of the many facets involved with the general management of a company’s affairs creating a solid information framework for doing policy work.

Can someone without previous board experience become an independent board member?

Yes!

Candidates without a track record of board membership can demonstrate their readiness to assume the position by communicating and interacting with other board members in ways that demonstrate the temperament and understanding other board members have.

How do I position myself as a possible board member?

There are a few things that will help demonstrate your readiness and viability as a potential board member:

1. Ecosystem Experience. Start building a track record of being engaged with businesses other than that one that employs you. Board members are governing an entity that they aren’t engaging within, so a track record of engaging with 3rd party companies helps demonstrate readiness. This can be working as an advisor, developing partnerships with the company you currently work for, driving industry initiatives, and forming working groups that span different companies.

2. Angel Invest. Consider becoming an angel investor either as a solo practitioner or as part of an angel group. The process of identifying, evaluating, making, and dissolving investments provide experiences that connect you with other companies, their executive teams, and their boards. The techniques learned and gained by building a portfolio of investments are directly applicable to the skills needed within the board room. Angel investors must demonstrate a value add to the company they wish to invest, and developing your own personal value add narrative and capabilities will also translate to the value add that CEOs look for in an independent board member. You do not need significant wealth to be an angel investor. My first angel investment was $7500.

3. Networking. It is essential to stay connected to executives or other board members that you feel are working on important projects. If these are projects that you can assist, perhaps there is a way for you to get engaged, which will demonstrate your willingness and capabilities to driving important initiatives forward.

4. Previous Board Experiences. Having a track record of acting in a governance and fiduciary capacity helps. For-profit board observer and board roles are the best experiences to obtain. While non-profit board members have fiduciary duties, the nature of the role is starkly different with non-profit board members serving the members, cause and communities as defined in the non-profit’s charter. In for-profit companies, the motivations and behavior of shareholders is different from non-profit members causing the drivers / issues / priorities of a for-profit board to be different than non-profits.  Both profit and non-profit organizations are driven by clearly stated missions, a desire to practice good governance, and a willingness to adapt to change.

How do I reach out to a (CEO / VC / other board member) to express interest?

On the off chance that you were aware of an open independent board member position at a company, the best course of action would be to find a brokered introduction to the CEO by someone the CEO has a close working relationship with. If you did feel the need to contact the CEO directly, it might be better to initiate the discussion around things the company is doing that is of interest to you; an offer to help the company to see if the CEO volunteers information regarding the open board position.

Are a company’s diversity goals related to the independent board member?

Increasingly, many companies are using their boards to lead on racial diversity, equity, and inclusion (RDEI). RDEI policies can be used to drive sustainability and performance.

Boards can play an integral role in leading their companies through business and social changes. They do this by assessing the company’s diversity profile, defining an RDEI policy, directing management to implement an RDEI policy, provide oversight of RDEI strategy with a standing board agenda item, … and to achieve diversity within the board itself.

Some board positions are mandated by the nature of the investor, debt, or management positions. This often means that the creation of new independent board member positions and their selection process are the best (only) way for companies striving for board diversity can achieve it.

How do candidates identify open independent board positions to pursue?

Generally, independent board positions are not openly advertised.

Searches are typically done by either a) sourcing from the relationships of networks from existing board members in a company, b) retaining an executive search firm, or c) partnering with an organization like Firstboard.io, a collective of experienced female operating leaders ready to join a board.

The best way to identify positions being filled is for prospective independents to build relationships with those serving on boards and to provide a profile to search firms that place independent board members.

What questions should I ask if I’m being interviewed for a board?

An investor approach is one framework for how a prospective board member could engage:

1. Team

2. Market

3. Product

4. Opportunity

5. Competitors

6. Go To Market

7. Financials

8. Strategic Considerations

9. Culture

10. Investors

11. Board Composition

While your meeting is an interview, keep in mind that the interview is bi-directional. They are considering your fitness for their board, and they expect that you are doing the same with them.

How do I prepare to be interviewed or asked to be on a Board?

It will be important that you have a board resume and a board biography. These documents are different than your traditional resume and biography and will lean towards your specific strengths as they apply to this role in particular and includes information on how you’ve created impact and what your track record as an investor or business executive has been – and how impactful you have the potential to be with your business and operational acumen, product expertise, financial background and the network that you are bringing with you to the table.

What documents should I request to ensure it’s a viable company?

There is any number of documents that could be inspected.

As a VC, we ask for any number of documents, both during the evaluation phase and during diligence post-term sheet.

1. Basic Corporate Documents: certification of incorporation, bylaws, actions of the board or its committees, business plans, and press releases.

2. Stockholder Information: Capitalization schedule outlining outstanding and issues shares for each class of securities, outstanding options and warrants, company communications with stockholders, and dividend history.

3. Securities Issuance: outstanding notes, stock option plans, investor rights agreements, shareholder agreements, registration rights, preemptive rights, stock exchange / transfers.

4. Corporate Finance: Bank agreements, lease financings, and any loans or other guarantees offered by the company.

5. Intellectual Property: Patents, patent applications, trademarks, copyrights, trade secrets, licensing agreements, communications on infringement of IP rights.

6. Employee Matters: Standard employment agreements, offer letters, benefit programs, compensation plans, collective bargaining agreements, employee confidentiality and invention assignment agreements, and org chart.

7. Officers and Directors: Bonus plans, severance plans, retirement plans, pension plans, compensation plans, management incentive agreements, board indemnification agreements, settlements and termination agreements of previous talent, compensation schedule to officers and key employees, and any insider transactions.

8. Litigation and Audits: Any letters to auditors, litigation files, any litigation settlement documents, judgments of courts or government agencies, information of any material litigation.

9. Material Agreements: Partnership or joint venture agreements, deeds of trusts, equipment leases, security agreements, contracts with large obligations, R&D agreements, and insurance policies.

While this list would be excessive to provide to a single person considering to become a board member, there are many pieces which can and are typically provided if requested.

What is the ‘process’ that a company uses to vet board members?

It’s similar to what companies do for any employment position:

1. Interviews.  You will meet with other board members, CEO, and senior managers.

2. Work Verification. Your professional history will be verified including employment, industry groups, investments, and publications. While not common, if there are potential conflicts of interests that arise from your participation in other organizations, this will be investigated, discussed, and addressed early in any review process.

3. Reference Checks. In addition to discussing your working style with references provided by you, back reference checks will be made through trusted contacts of board members and executive management that have previous engagements with you.

This process can be run quickly or dragged out over many months.

How is a board meeting run?

Every board is running slightly differently, but most boards make allocations for the following:

1. Business Update. Financial, business, and operational updates on the business’ performance from management, either the CEO or other executives.

2. Financing. Discussion around the company’s financial status and strategy around future financing.

3. Strategic Considerations. Review potential acquisitions, strategic initiatives, and acquirer interest in the company.

4. Standing Matters. Specialized topics that the board has asked for coverage such as risk, litigation, or racial diversity, equity and inclusion (RDEI).

5. Board Matters. Review and approval of matters requiring board consent: e.g., committee recommendations, meeting minutes, options grants, operating budget, and executive compensation.

6. Executive Session. A board members-only discussion used to provide feedback for the CEO.

7. Non-Mgmt. Executive Session. Sometimes members of the board that are not executives of the company will also meet to discuss executive performance.

It is common to see employees and board observers participate in many of the sections of a board meeting. The CEO or other board members can excuse board observers or employees from any section if the matters being discussed are on matters of confidential information. It’s common to see board observers from strategic partners excused from discussions relating to strategic considerations, for example.

Typically, many companies will host a social event before or after the board meeting.

How does an independent board member contribute outside of a board meeting?

A good rule of thumb is that that board meetings should never reveal any surprises to those attending the meeting.

The real work of information gathering, analysis, and hard contemplation of a company’s position often comes from the work done by board members in between board meetings.

There are material and significant conversations that occur in private, either in small groups, or 1:1 with management and other board members. Private meetings are how people a) build better relationships and trust for making hard future decisions, b) gather the color and context of material information and state of the business, c) can discuss matters that are difficult or inappropriate to discuss in a public forum.

By being fully informed, a board meeting is run more efficiently and board members are able to ask questions that are carefully considered, offer insights that are considered and relevant, and are able to observe the right moment which to deliver their thoughts.

Board members that choose not to frequently engage in offline conversations are usually considered by their peers as generally less prepared and perhaps not adding as much value; therefore it’s important that you stay engaged and participate in most if not all of the board activities.

Gosh, Tyler, that seems like a lot of work. What if your other work obligations prevent me from meeting that frequently?

There isn’t an obligation that a board member commits such a significant amount of their time outside of the board meetings. In fact, some board members achieve their position out of public notoriety as a signal and message to the market. The celebrity board member may not be concerned with building a deep relationship with management or other board members because their “value add” is their name. However, there is a strong case to be made that the best way to fulfill your fiduciary duties is to engage, and engage deeply to avoid missing out on key perspectives and events that can lead you to acting in the best interests of shareholders.

On a personal note, people would be surprised to hear that I am an introvert by nature. Frankly, most geeks are. Introverts are those who fill their energy reserves by being in isolation. Extroverts fill their energy reserves by being around others. It’s no surprise, then, that many board members are identified as extroverts given the broad and significant nature of interpersonal engagement that comes with the role. In my particular case, I care so deeply about the companies that I represent, my desire for their successful achievement of their mission is my overriding concern, and I suppress my nature by being a VC and board member so that I can give the best of myself to the companies which I represent.

Can or should I list my board member positions on my professional profile?

Yes!

In many cases, your network and industry insights will provide essential value to the company. Promoting your association with the company on which you serve will help further develop these insights and connections.

It is great to take pride in your achievements and business success.

As with any elected position, board membership is a privilege and serious responsibility.

Please be mindful of how those without the same opportunities may perceive you.