How independent board seats get filled

Welcome back to Above Board! Our focus on the topic of independent board directors continues today, this time zooming in on the tricky conflicts of interest that can happen when appointing independent board seats.

We’re back with Mike Baker who last week gave great details on what an independent board member is, what they do, and the important role they play. Mike’s career has included being a 3x successful founder/CEO, C-level executive through IPO, venture capitalist, General Counsel, Chairman of the Board, and independent investor. 

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AB: Welcome back, Mike. Thank you for joining us. Let’s jump in with asking: how do board seats get filled? Where does the CEO / board go to find independent board directors?

MB: The best practice is for the process to be CEO-led, so the candidates may well come from the CEO’s network. The independent board director may be an industry expert or an entrepreneur or someone who has been in the CEO seat before, which has been my path to serving as an independent director. 

It also could be through a search firm. I’ve noticed that European tech companies seem to use retained search firms more than US companies do.

My experience has been that the investors will have a lot of ideas about who might be a good independent, and these are suggestions that the CEO should take seriously: go meet these people, talk to them because even if you don’t think they’re a fit for your board they might be able to help your company in other ways. 

AB: Any things for CEO’s to be cautious about as it pertains to independent board member candidates recommended by a company’s investors?

MB: My advice to CEO’s is just like the investors might be a bit leery of your friend joining the board, you should think critically about friends of your investors as independent board members. Is this person an investor in the VC’s fund? Does the person have other business interests with your investor? An independent needs to be truly independent or what’s the point?

As they say, just because you're not paranoid doesn't mean they're not out to get you. There’s a lot of subtle conflicts of interest in business building and I think the best approach is to be very candid in acknowledging and trying to avoid them.

I was trained as a lawyer so my standard is to look for even an appearance of a conflict, disclose it, and get the consent of a neutral person to cleanse it. While it’s true that this “appearance” standard can be a pain to live by, it’s also true that potential conflicts of interest turn into live ones all the time. 

It really depends on the individual and if you think that they can be truly independent and not always side with the person with whom they have a prior relationship. I think that's a great question to put up on the table and discuss upfront. 

AB: As an existing board member, how do you recommend for or against the CEO in choosing someone as an independent director that you know is going to take their side in potential future negotiations?

MB: It’s always an issue. The investors are going to view a “friend of the CEO” negatively and when I say friend here, I mean somebody who is going to reflexively support the CEO in every decision. This type of person is tantamount to adding another CEO / founder board seat and as such, they're not independent.

So typically an independent board director is not friends with the management team; they may be professional colleagues or people with whom the CEO is familiar, which is positive because it builds trust. But the independent director, in my view, needs credibility around the table to be influential and help the company.

AB: Who gets the final say on who is appointed as an independent board director?

MB: Typically the investment documents used by institutional investors give them a form of veto right on the appointment of independent directors. So, it really does need to be done with the consent of both the investors and the CEO.

By the way, if the CEO is not consenting to the appointment of an independent board director, then it's not independent is it? It’s just the investor filling another investor seat on the board. So, almost by definition, there needs to be an agreement among both management and the institutional investors. The appointment of an independent board director should be a trust-building, productive exercise. Your ability to do that as a board is a good sign that you have the right management-investment working relationship.

I hear this from entrepreneurs all the time: “My VC’s didn't want an independent board director or they said the independent has to be a specific kind of person that we couldn’t land. It was more of a dictate than a collaborative decision.” Relatedly, it's not unusual when the seat doesn't get filled because essentially one side doesn't agree with the other side’s dictate.

Next week we’ll be back on the theme of independent board directors, turning out attention to the questions to ask when evaluating independent board directors. Until then, we encourage you to please share this newsletter with colleagues/classmates/friends if you’re finding it helpful.