Board Independence is a CEO Superpower

. 8 min read

Will Herman, serial entrepreneur and angel investor, shared in Brad Feld’s book Startup Boards, “Creating and running a startup can be stressful and time consuming . . . Since the outside director should have loads of operational experience and will often have specific industry knowledge, chances are he/she has experienced almost everything the CEO will go through. Who better to listen, advise and counsel?”

Mercato believes that strong independent board governance directly enhances company value and serves the best interests of every stakeholder; including management, investors, and employees. We believe it is one of the best additions that we can give to a CEO to help make his or her entrepreneurial dreams not just possible, but highly probable.

Many forms of fiction feature characters and personas attributed with superhuman, supernatural, or paranormal abilities, often referred to as “superpowers”. This tradition is especially rich in the fictional comic book stories, movies, and video games. We seek to partner with CEOs who we believe are endowed with strengths, vision, adaptations, and functions as if they walked right out of a DC Comic book to lead a growth business. Some powers are innate, some are gifted, and some learned. We are fortunate to have a portfolio of CEOs who inspire us and who have an immense collection of powers and abilities. Board independence is a superpower which can affect both the leadership ability of the CEO and success of the business.

Growth businesses that have independent board members are frequently among the best-managed and best-governed. They have reached a level of maturity where entrepreneurs recognize that outside voices provide stability, objectivity, and protection from certain downside risks.

Greg is often quoted as saying “Being the CEO is a lonely business”. A CEO is constantly faced with hard decisions that need to be made with incomplete information and many of the decisions can be very consequential and you have limited time and people from whom you can get input. One of our ambitions is to serve as a support system on the Board and through the application of authentic value-add working with the talented growth stage experts on the Mercato Performance Team. CEOs can benefit from having a group of people with whom they can share ideas and perspectives. Independent board members may also bring a different and wider range of perspectives to the CEO than are typically found in a privately held, and institutionally invested business. However, independent board members should be much more than just a sounding board for the CEO.

“Independent” typically means that the director is not an employee or a former shareholder. Independence means that the independent director looks at what is good for the company and its shareholders, employees and customers, has the attitude of independence, and is empowered by the board and shareholders to put that independence to work.

• An independent board member can bring focus and depth of perspective about the industry, company, and market.
• An independent board member does not have to worry about retaining their job within the company and can make their voices heard in a more objective manner.
• An independent board member can bring career and personal experiences to help take advantage of growth opportunities and potentially avoid costly mistakes.
• An independent board member can be specifically recruited for network, expertise, skills, or perspective needed by the executive team and can serve as the “voice of the customer”.
• An independent board member can monitor the company to ensure that executives are accountable and act in the interest of shareholders.

A company should have a balance of both outside and inside directors. While outside directors can provide valuable and distinct perspectives, inside directors have the advantage of knowing the company’s inner workings, culture, history, and issues that need solving in real-time. Inside directors can be current employees such as the CEO and Founders. As with outside directors, inside directors still have a fiduciary duty to the company and are expected to always act in the company’s best interests.

A general consensus among stockholders, both common and preferred, is that independent directors improve the performance of a company through their objective view of the company’s health and operations. Outside directors can bring expertise and independence to the board, which can reduce agency costs and improve firm performance.

In a 2013 study, by Knyazeva, Knyazeva, and Masulis, they examined the relationship between outside directors and performance. They designed an objective study with 900 small and mid-sized firms in S&P 1500 Index from 1996-2006. Controlling for the availability of local talent, they found that independent directors are positively associated with firm value (market-to-book ratio) and operating performance (ROA). Their conclusion was simple: outside directors improve performance. “We find board independence positively affects firm profitability and operating performance.” (Anzhela Knyazeva, Diana Knyazeva, and Ronald W. Masulis. The Supply of Corporate Directors and Board Independence. 2013. Review of Financial Studies.)

At Mercato we participate in 50+ Board meetings every year. CEOs want independent boards who are going to be with you in your best and worst moments. We have witnessed some of the most honorable and committed people as independent directors with limited upside take their job function as a director so seriously that they’ve had to give up weekends and evenings to fulfill their obligations in pursuit of shareholder value.

Jeff Kearl and John Wilson co-founded Stance in 2010. They have thoughtfully built one of the most professional and high-performing Boards of Directors to support the mission of Stance to celebrate human originality and turn socks into one of the most exciting accessories. The Board is deep and diverse and each independent director is seen as a leader in their respective fields and industries and were recruited to deliver specialized insight and value. We wish we could invite every growth minded CEO into the Stance boardroom to discover for themselves what a high performing board can accomplish in support of the CEO and company mission. They have effectively used this source of superpower to meet the company’s key goals and objectives, including crossing $100M in revenue and official partnerships with the NBA, MLB, and Disney. The following are currently serving independent directors and a very, very, very brief snapshot of their experiences:

Carolyn MacNaughton – UnderArmour, WaveSensor, Nike, Oliver Wyman
• Carolyn advises on strategic apparel and channel opportunities and led footwear at both Nike and Under Armour and was recently asked to lead accessories at Under Amrour, including socks.

Jay Brown – Roc Nation, Jones Music Publishing, Elektra, Def Jam
• Jay advises on partnerships, fashion and industry trends and founded RocNation in order to manage some of the world’s most famous celebrities, many of whom are now “Punks and Poets”, including Rhianna and Willow and Jaden Smith.

Michael Dubin – Dollar Shave Club, Papa John’s International, Sports Illustrated, Time Magazine, MSNBC
• Michael pioneered the D2C category and subscription commerce industry before being acquired by Unilever for $1.0B. Michael is relentless with his innovation and advises around top of funnel marketing and brand awareness.

Scott Olivet – Brixton, DaKine, Skullcandy, Oakley, Nike, Gap, Bain & Company
• Scott advises on efficiency, product supply chain, and international opportunities and has led some of the world’s most innovative and well-known brands.

Josh James – Domo, Adobe, Rakuten, Omniture
• Josh is the very rare 2-time repeat Founder and CEO to take a company public and advises on high-growth, culture, and harvest opportunities.

You quickly come to the conclusion that Stance is well positioned to receive immense value in and out of the Board meetings. Can you imagine the types and depths of conversations as a result of the collective experiences of these Board members? They are truly extraordinary leaders and we are grateful for their time and are delighted with their participation.

So, what are eight good reasons and implications for having independent directors on your Board?

  1. New and innovative ideas. An independent director is not deeply linked to business traditions and should be free to examine the business with clarity and objectivity, even at the risk of challenging long-held, sacred assumptions about what is good for the company.
  2. Strategic information. Informed, knowledgeable, and empowered boards with engaged, independent directors can serve as the CEOs’ incorruptible coach, unbiased strategic sounding board, and disinterested decision-making body when conflicts arise.
  3. Needed skills and experience. An independent director should be purposefully recruited with special financial, marketing, product, governance or strategic skills and experience that he or she can use to enhance the company’s current operations and future prospects.
  4. Resolution of conflicts of interest. In any business, conflicts of interest are almost inevitable. Personal interests of board members may get in the way of implementing decisions even when they are arguably in the best interests of the company. Having at least two “non-interested” directors on the board opens up a method of approving transactions where some founder and investor board members are considered to have conflicting interests. Challenges to transactions by unhappy shareholders can be avoided or rendered less likely if approved by the independent directors.
  5. Minimize risk. Maximize the legal protections afforded to the company, management, and the individual board members with deeper, and more capable compensation, audit, and nominating committees.
  6. Performance accountability. Independent directors are better suited to hold management and other directors accountable where their actions and views are not subject to internal politics.
  7. Succession planning and continuity. Independent directors may be essential in helping the board and the Management team plan for succession or recruitment of new executive employees. They can enhance a network and impose objective standards on the succession process and serve as a reference point for hiring decisions.
  8. Increased valuation. Effective corporate governance directly contributes to elevated round and exit values.

A key benefit of having independent board members is their different and diverse perspectives, as well as their ability to augment the CEO’s own knowledge and expertise with their own different backgrounds and experience.

Independent board members can bring knowledge and expertise in areas where the CEO’s and management team’s knowledge may be lacking, such as finance, talent, internal controls, marketing, and other areas. Independent board members may also have important industry expertise and first-hand experience gained from working with other organizations facing difficult challenges, such as a cyber-security attack, channel conflict, or managing a personnel crisis.

A board also helps companies build trust with other organizations, since a board should extend the accountability for the company beyond just the CEO. For this reason, some lenders require private companies to have boards as a condition for extending financing; many lenders are likely to look more favorably on private companies with a more robust governance structure. Similarly, a board may be a tacit signal to customers and suppliers that they are doing business with a reputable organization that will be sustainable and dependable over the longer-term.

Elizabeth Wilson, who serves as an independent board member for Pinterest, Okta, and Zendesk was interviewed in an article on First Round Review and she shared her thoughts:

“You’re no longer serving the interests of just the founders, investors, team and early users. You’re growing from a village to a city. You’re accountable for a big, brand new population,” says Wilson. “At the time a company goes public, there’ll be a lot of independent and retail shareholders. Depending on the company, your base may grow to thousands or tens of thousands. The role of an independent board member is to represent the interests of those shareholders, and how the company is creating value for them. That’s the formal, legal description. Practically, you’re working with the founder and other directors to try to build value in the company. And so you want to assemble a team of people who, together, can do that.”

Mercato believes that a successful independent board member brings perspective, direction, and the ability to lead objective board discussions, and, drive better decision¬-making and results for all shareholders. A trusted independent director can make all the difference in a board, to the CEO, and to a high value harvest. A superpower for the CEO. If you and your board don’t have an independent director, you’re missing an opportunity to leverage someone with experience, knowledge, network — someone who’s truly been there, done that — to your company’s advantage.