The Damage a Bad Board of Directors Can Cause

The recent happenings at HP bring to mind just how much damage a dysfunctional board of directors can wreak on its company (for an HP example, note how the company recruited a CEO without the whole board meeting the candidate).

If nothing else, that situation has shown that the havoc an awful BoD can cause comes in many different flavors:

Damaging external perceptions

A dysfunctional board can be damaging on its own, but it only gets worse if that dysfunction becomes public. In the case of HP, the public nature of the HP’s issues created a perception that the company is not aligned behind a coherent strategy, is not solidly backing its CEO, and is not able to recruit and support the right leadership. Those perceptions in turn force company management to spend more time with customers defending the brand and strategy, which can sap away innovative spirit (see how Todd Bradely, head of HP PC group is impacted.)

Creating internal confusion

This occurs when board members have conflicting agendas among themselves and with the CEO. That dynamic is common among early stage companies with disparate investors on the board, founder and non-founder management board members, and independents (or lack thereof). Tension between board members and the CEO is difficult to hide from senior management, and that lack of cohesion around the same set of corporate priorities can lead to poor direction flowing down to the senior managers.

Leadership vacuum

A lack of board cohesion often results in the removal or departure of the CEO. The departure of that CEO opens the opportunity/risk for the board to cause significant harm by recruiting the wrong CEO (the HP board is all over that one). And as a result, the period of CEO transition creates significant gaps in leadership that tends to flow through senior management to the rank and file.

We often find similar dynamics in early stage software companies. These companies often start with a founding CEO and a board (if any) that is composed of one or more co-founders and possibly an independent adviser or two – it’s more of a forum than a board.

Then the company raises its first institutional round of funding. At that point, the company becomes more “incorporated” and a real board of directors is formed with specific fiduciary responsibilities. These early boards are typically composed of two managers (founding or non-founding CEO, and another founder or senior executive), two investors (from one or more VC firms), and one independent member. And that’s where it gets interesting.

As this type of board is formed, the CEO should take the lead in developing a balanced and cohesive board. But the CEO doesn’t have many seats to play with, so he’s stuck with the investors’ members (although the CEO has a lot of influence over which VC to raise money from and should be carefully evaluating the persona of the partner who is going to join his board). Where the CEO has a lot of leverage is in the recruitment of the independent board member, but that typically amounts to just one seat. So, more often than not, the founding CEO passes the baton to a more experienced CEO, or is replaced by the board altogether, resulting in the same CEO transitions that larger companies go through.

Ultimately, it falls on the shoulders of the early stage CEO to work very hard to keep the board balanced, cohesive and value-adding. Here’s a couple of posts I have written on the topic that you may find interesting:

You might also like ...
Finance & Operations
Companyon’s SaaS Benchmarks Modeling Tool

Companyon Ventures enhanced our Expansion SaaS Benchmarks Data Explorer by building the accompanying SaaS Benchmarks Modeling Tool to measure the current and projected performance of their portfolio against other high-performing SaaS startups. Check out the tool here.

by Parthib Srivathsan
Finance & Operations
2019 Benchmarks: Are You Burning Too Much Cash?
As you start planning for next year and beyond, the question of burn should be front and center for any...
by Kyle Poyar
Finance & Operations
Introducing OpenView's Expansion SaaS Benchmarks Data Explorer

Our 2019 Expansion SaaS Benchmarks Data Explorer allows you to find your exact peer benchmarks around the metrics that matter most: YoY growth, gross margin, cash burn rate, CAC payback, net dollar retention and logo retention. Check it out!

by Sean Fanning