The composition of your board is critical to its performance in supporting and advancing your private company. Your board should be composed of a variety of dedicated, effective members who represent a broad series of musical notes throughout the bass clef, supporting the operations in the heart – the treble clef – of your company. Improving your board’s composition is a worthy – and often difficult – practice that greatly impacts the performance of your company, as you all work to challenge and support company owners, management and employees in everyone’s objective of generating revenue and creating wealth.
Here are the most critical practices in cultivating a better composition of the people who serve on your board.
Establish the strategic purpose of your board. Define the role of your board. That is the critical first step. Is your company young, opening a new market or creating new paths? Or is your company an established market leader, preparing to go public? Is the purpose of your board to find investors, source customers, assist in solidifying supply chains or establish stronger risk management systems? Or is your company tenured enough that the board should exist to refine strategic direction, expand customer lines, overcome regulatory hurdles and ensure the company’s long-term success?
Your board likely exists to provide and emphasize operational insights in close collaboration with management and ownership. Defining, understanding and broadly communicating the purpose or your board is the first step in determining its optimal composition.
Determine size and structure. The size of your board is probably the easiest metric to grasp and decide upon, so do this next. Recruiting and selecting members of your board follows directly behind the decision about size.
Should your board be large or small? The size of your board should probably align with the complexity and stage of the company’s business. For start-ups, a smaller board of two-to-four members is often sufficient for agility, while more mature companies benefit from larger boards with specialized committees. Advisory boards can also provide supplemental expertise without complicating decision-making. Task forces are entry points to boards that a board committee may create with a specific objective and lifespan. Deploy considerations of size and structure as you move forward in board composition design.
Define the optimal people composition. Now, it’s time to get into the guts of this exercise. A well-constructed board integrates members with diverse skill sets and backgrounds, bringing them together to provide effective governance to the organization. Here are the key considerations.
- Skill sets and expertise. Directors should bring expertise aligned with the company’s strategic needs, such as industry knowledge, financial acumen, business scaling or merger and acquisition navigation. But you should examine beyond that – consider the highly dimensional beings that can fill these vacancies on your board. Should they be a collection of both seasoned entrepreneurs and corporate wonks? A variety of folks who are physically nearby and those who need to fly in with a completely different regional perspective? Recruit all types of people to your board. You not only want to have the necessary skill sets, but you want to add directors who each have a unique blend of experience, expertise and mindset relative to each other.
- Customer base representation. Your board should be comprised, in part, of people who are representative of your customers. These voices are critical to the success of the board and of the company. Do you deeply understand who makes the purchase decisions of your company’s products and services? Are those individuals represented on your board?
- Diversity and inclusion: DEI may be unfashionable right now, but the data supports its relevance and DEI components undeniably impact the success of your board. You should strive for varied perspectives on your board — perspectives that span professional experience, gender, ethnicity, education and personal experience. By implementing diversity and inclusion as components in your board composition, your board will think more critically, make better decisions and foster innovation. Maintaining diversity on your board is a tough exercise that few companies execute well. But it is critical to board excellence.
Maintain independence and objectivity. This is where private boards struggle in trying to be the best that they can be. Private boards tend to be repositories filled with friends, colleagues and fellow club members who all know each other. Intellectually, we know that independent directors are critical for bringing fresh perspectives and mitigating potential groupthink. Unlike public boards, where independence has specific regulatory definitions, private boards must define independence more pragmatically, ensuring directors can challenge assumptions productively, without bias or conflict.
How do you tackle this? Seek out differences among your board members. In your meetings, is a devil’s advocate always denoted for each discussion? Are your directors each able to play that role? Is that role able to be rotated effectively?
Another suggestion: Pull back from primarily hosting CEOs on your board. Too many CEOs sitting around a table is potentially homogenous and risky, as these folks can be spread thin over too many boards and are often similar in their approach to business. An overconcentration of sitting CEOs can create a board dynamic that lacks internal variety, limiting fresh thinking and focus.
Implement term limits and focus on succession planning. The best way to optimize board composition over time and overcome a lack of independence and objectivity is to implement term limits in the board and to establish rigorous recruitment and replacement policies that eliminate the practice of directors replacing themselves with someone just like them when it is time for their departure.
I am a huge advocate of term limits for all private company boards. It is surprising that most boards don’t have them. Several CEOs and board members were interviewed for this article and none employ term limits. In fact, only 26% of private company boards maintain policies on succession planning at all. No private company board should be complacent about succession planning. Instead, they should focus on having a dynamic, renewable board that can solve today’s — and tomorrow’s — problems effectively. Consider these factors:
- Components of the succession plan. A structured succession plan should outline criteria for new directors, recruitment timelines and emergency replacement protocols for unforeseen departures. Boards should revisit succession plans annually, integrating insights from director evaluations and company strategy shifts.
- Purpose of term limits. Implementing term limits ensures that boards remain dynamic, fostering fresh ideas while preventing stagnation. Term limits can also mitigate overfamiliarity, reducing potential conflicts of interest and encouraging fresh perspective and objective oversight.
- Tenor of director tenure. Tailor terms and limits to the company’s needs. Common practices include renewable three-year terms, with a maximum tenure of three, six or nine years. Companies should deploy staggered terms to maintain continuity.
- Performance-based extensions. Combine term limits with regular evaluations to ensure directors remain effective contributors throughout their tenure.
Apply analytics. If you haven’t done it yet, it’s time to adopt a board composition matrix. Develop a board composition matrix and ensure it remains accessible for real-time reference. Lay out the desired attributes for your board. Put the names of your board members in rows. Then populate the checkerboard with those who exist on your board that satisfy the attributes criteria. The empty spaces indicate where you need to source fresh membership. Your board composition matrix should factor in:
- Skills gap analysis. Regularly assess the board’s collective capabilities to identify gaps in expertise within your matrix. For best results, this analysis should be tied to the company’s three-to-five-year strategic goals, ensuring that board expertise evolves alongside business needs.
- Term limits and succession planning. Plan for director transitions to ensure continuity and avoid disruptions. A flowchart alongside the matrix can further clarify succession pathways and recruitment priorities.
Leverage evaluations and accountability. To keep your board composition, skills sets and your matrix fresh and dynamic, it’s important for board members to evaluate themselves and each other on a regular basis. Periodic evaluations help boards remain effective and address inefficiencies and skill set gaps. They also boost motivation in the boardroom.
- Self-assessments. Formalize a process for directors to reflect on and report their individual contributions.
- 360-degree evaluations. Implement a system for directors to evaluate each other, possibly with the guidance of an outside consultant who collates the feedback and provides anonymized recommendations for action.
- Feedback implementation. Use the evaluation results to generate actionable insights and drive improvements, such as restructuring the board and introducing new members.
Tailoring and Expanding Best Practices
Effective board composition is not a one-size-fits-all endeavor. The practice of evolving and perfecting board composition is grueling and never-ending. But if you want your company to be a top performer in all the ways that it should be, then the practice of evaluating, elevating and evolving your board composition is the most important activity that your board can adopt to serve itself and its future well. Private company directors must adopt — and adapt — these best practices to advance outcomes of excellence. A well-constructed board serves as a company’s most critical strategic asset, providing the guidance, oversight, support and expertise necessary for long-term success.