Chairman’s Corner: January 2004

Board Development – It’s the Right Thing

by Mario Morino, Co-founder of VPP

Developing a strong board is one of the most important actions an organization— for-profit or nonprofit—will undertake. The recent release of “The Dynamic Board: Lessons from High-Performing  Nonprofits” (see related story in this issue) by the Nonprofit Practice of McKinsey & Company, who serve as advisors to VPP’s board, only reinforces my own board experiences and further confirms the strong focus we encourage our investment partners to place on board development.

Like other aspects of organizational development, board development is something that the leadership of an organization learns and comes to appreciate more over time. I know it was not something I understood or fully appreciated initially, but, as a result of mentorship and great advisors, I came to recognize its benefit. I was fortunate in my business career that the organizations I co-founded were blessed (eventually) with great boards, and I have also had the good fortune to serve on other boards I considered highly effective. To keep this in perspective, however, I’ve learned some of these principles the hard way, as well as by sitting on a few boards that could have written the book on “how not to build and run a board.”

My most significant lessons came when the firm I co-founded merged to create Legent Corporation. The most effective thing we did as part of the merger was put in place a very strong board. I can honestly say that it was the board’s experience, sage advice, and counseling that allowed the business to overcome the conflicts and challenges inherent in the organizational consolidation we experienced and allowed the organization to heal and to succeed. We recruited proven executives for the board who had built large software and services businesses of the size and scale we hoped to achieve—individuals who had “been there, done that,” who we could learn from. I can’t emphasize strongly enough our naiveté—not only in terms of how much we learned and benefited from their input and advice, but also in terms of the appreciation we developed for just how much we didn’t know about managing the new, larger firm. And, from time to time, we augmented the board to add relevant expertise, giving us added credibility and opening new doors in fields where we were expanding—and the influence and advice of our board proved to be invaluable.

Since entering the nonprofit world in 1993, I’ve seen nothing that has dissuaded me from my belief in the importance of building and developing a very strong board of directors. To the contrary, my experience strongly suggests that one of the greatest opportunities for most nonprofits as they consider their future is taking the bold steps necessary to build a board that will help them achieve their strategic and longer-term needs.

When VPP enters an investment partnership, we do so with the understanding that our work is to support the leadership to strengthen and grow their organization. This work must start at the top of the organization, and we do all we can to encourage our partners to strengthen their senior management team and board. We believe it critical for an organization to focus on having 1) the right executive leadership for the stage of the organization’s growth and for the three-to-five-year challenges ahead; and 2) a strong board that will support and challenge that leadership, hold it accountable for promised performance, and ensure organizational governance. If these elements are right, then much of what needs to be done will be done well. If the leadership and board are not in place and effective, then everything else the organization undertakes will prove much more challenging as a consequence.

Here are some lessons learned on developing strong boards from our experiences in the for-profit and nonprofit sectors.

• Good boards govern and insist on accountability. For a board to function effectively and live up to its fiduciary responsibilities, it must transcend the traditional role of some nonprofit boards that focus only on raising money and, candidly, providing “rubber stamp governance.” In some of my early nonprofit board experiences, I was stunned by how little information was provided on budgets, forecasted funding, strategic issues, and important operational matters. The boards’ attitudes often were akin to passive, reluctant oversight—along the lines of “he/she is the founder and has built the organization and we sort of do what he/she wants.” In my previous life as a CEO, I grew the most, and the organization benefited the most, when we built a board that ensured strong governance, provided sage counsel and advice, and held me and our management team accountable for our performance. Shouldn’t such strong governance and accountability be desired, if not mandatory, when the interests of children and families are at stake?
• At some point, the board can no longer be simply be “the executive director’s board.” One of the most important transitions an organization must go through is the conversion from the board of “family and friends” to one that will provide governance, objectivity, and accountability. This is an enormous, and often traumatic, step for any organization, no matter the sector. A sign of organizational strength and maturity is when the board has established its independence (relatively speaking) from the executive director and has its own leadership in its board chair. Although the views and inputs of the executive director are important, the board must function with some independence in selecting new board members, organizing committees, and setting guidelines for the organization.
• Board seats should be filled according to needs, not personalities. A board must determine what is needed in terms of skill, experience, influence, and contacts to help the organization achieve its mission. And, boards must always be forward-looking, recruiting the members who will best help the organization get where it wants to go—even if it means transitioning board membership. All too often, people are recruited to the board because the executive director knows and is comfortable with them. This type of informal board recruitment may work well in the emerging years, but over time it often ends up cheating the organization. Instead, we urge organizations to identify their board needs based on their plans for the future and then recruit accordingly. Most executive directors dream of having high profile names on their board, but savvy boards look for the right person with the skills and expertise that best fits their needs, not simply the right name.
• Chemistry is critical. The relationships within the board and between the executive director and the board are absolutely critical to the board’s effectiveness, the organization’s development, and the executive director’s performance and growth. Even now, years later, I still call members of the Legent board for advice and counsel because of the strong chemistry that developed—built on mutual respect and the trust that comes from going through challenges together. Certainly, VPP investor Raul Fernandez built the same kind of relationship for his firm, Proxicom, where I, along with VPP investors Jack Davies and Ted Leonsis, was privileged to serve on the board. Boards can, and will, have differences of opinion. Such constructive conflict is essential, but continual dysfunction or perpetual conflict is unhealthy. I remember one for-profit firm that had developed some groundbreaking technology but because its board was so dysfunctional and constantly at odds with each other and the CEO, the company was doomed.
• The best board members will know the organization and the “market.” For a board to be effective, board members must understand what the organization does and the environment in which it functions. Achieving this knowledge requires two things: Members already have direct, first-hand knowledge of the area in which the organization functions or they are willing to learn. And, second, it requires an executive director and board chair willing to invest the time to “educate” the board. This often entails providing background or research information, arranging site visits, or organizing extra materials. It is, indeed, an investment of time and effort, but one that pays off in the long run. It’s a shame to watch board members give great advice that is counter to what is needed because they don’t understand the basics of the organization and its mission. It’s also important to have somebody who represents an organization’s constituency—in my other life, the marketplace—on the board. They always bring a grounded practicality, and can leverage their own network and community. For example, if an organization deals with immigrants, it may be important to have expertise from the immigration service, or if an organization deals with health care, to have executive expertise from a partnering hospital.
• Board members challenge the organization’s thinking. Great board members push the leadership of an organization to grow and develop. As a successful leader, it’s sometimes tempting to drink your own Kool-Aid. Positive publicity or recognition for the organization may even lead you to think you are better than you really are. A strong board helps keeps leadership perspective in its proper place. A good board asks tough questions and helps management maintain focus. It should not blindly accept plans, but instead ask “How are you going to get from here to there?”
• Board members see value by being on the board. Most of us pay a lot of attention to how a board member can help an organization, but joining a board should also be intellectually stimulating and rewarding for the individual. Most people want to learn, so, whether it’s keeping in touch with the market or some other goal, board members need to derive benefit from their stint on a board. Members also need to be engaged and this can be done through board committees, ad-hoc working groups, or simply reaching out to involve them in particular initiatives, using their advice and counsel as a way to show them value and respect. They will quickly discern whether and how you’re using their expertise. They don’t necessarily expect their input to be used or accepted all the time, but they do expect it to be heard and factored into decisions.

We urge organizations and their stakeholders to give board development much more attention and hold themselves accountable for this critical need.

The McKinsey report suggests three strategic roles for boards:

• Shape direction through mission, strategy, and key policies;
• Ensure that leadership, resources, and finances are commensurate with vision; and
• Monitor performance and ensure prompt corrective action when needed.

Executive directors, board chairs, funders, and strategic partners alike should ask how well the organization has recruited and assembled the requisite skills, experience, and influence to fulfill these three strategic roles with independence, relevant competence, and integrity.

Finally, never forget: The board member’s responsibility is a fiduciary one, not solely to the executive director, but to the organization and its stakeholders. I remember once during a merger, my counterpart forgot that tenet. He appointed a person to the board expecting, when push came to shove, the member would vote his way. Finally, the board member simply said, “Young man, I have a fiduciary responsibility to uphold.” It was over. No matter how close, no matter what kind of friend, a board member has to do what is right for the stakeholders—and that’s exactly what you want.