You’re a founder-CEO with deep technical expertise but little business experience. VCs tell you that they’ll help guide you through the treacherous business issues you’ll face as you grow your business. (In fact, you are having trouble finding any VC firms whose Web sites don’t tell you they’ll do that.) Do they, indeed, provide such mentorship when it’s needed?
In contrast to boards of directors in public companies, which play more of a monitoring role (evaluating the CEO and top management; making decisions about senior hiring, compensation/promotions, and firing; reviewing major decisions), boards in new ventures need both to monitor and to mentor their CEOs and top managers. Compared to the relatively stable and complete management teams in public companies, the boards of new ventures need to play a key mentoring role and can potentially add more value to the company by doing so.
Broadly speaking, the following factors can increase the need for mentoring in new ventures:
- External challenges - e.g., rapid changes in competitive landscape, technological change, need to get initial customers.
- Internal challenges - e.g., high rate of hiring, the need to formalize some processes without endangering company culture and operations.
- Holes in founding team - the founders might not be experienced in growing new ventures and the team may have holes in key functions (e.g., CTO early on, CFO later).
- New non-founders - executives hired to fill holes or “upgrade” key positions (e.g., a new CEO who replaced the founder-CEO; see “Founder-CEO Succession” posting) who aren’t as familiar with the new venture or its people.
In work that I have been doing with Warren Boeker, we have begun examining the functioning of boards in new ventures. Our focus has been on how the CEO’s characteristics affect board characteristics, focusing on 3 board characteristics that should reflect the amount of board-level mentoring and monitoring:
- Board composition - In particular, the percentage of the board who are VCs. (We assume that VCs will play a disproportionate role in board mentoring and monitoring.)
- Frequency of meetings - The number of times the board meets per year (controlling, as well as we can, for the amount of informal interactions between the CEO and the board in between formal board meetings; see Note below).
- Board size - The number of people on the board.
We are examining the following 4 CEO characteristics to see how they affect the amount of board-level mentoring and monitoring:
- Amount of prior work experience - # of years of full-time work experience before joining the company.
- Functional background - whether the CEO had a technology background versus a sales/marketing background.
- Founder - whether the CEO was a founder of the company.
- Equity holdings - the percentage of company equity held by the CEO.
Our initial hypotheses assume that the first 3 CEO characteristics (prior work experience, functional background, founder status) will affect the amount of mentoring that the board should contribute. Consistent with past research (which has focused on how executive equity holdings affect the degree to which boards have to monitor executive actions), we hypothesize that the last CEO characteristic (the CEO’s equity holdings) will affect the amount of monitoring that the board will do.
Initial results show that each of the 4 CEO characteristics affects the 3 board characteristics, but that they do so in different ways. The table below summarizes the results. (Blank cells indicate a lack of statistical significance.)
In summary, two CEO characteristics – years of prior work experience and a Sales background (which should both affect the degree to which boards have to provide mentorship) – have an effect on all three Board dimensions, with CEOs with Sales backgrounds having fewer VCs, meetings, and directors than CEOs without Sales backgrounds. The other CEO characteristics have more varied linkages to the board characteristics. On the mentoring side, boards meet more frequently when their CEOs have Tech backgrounds (fulfilling that promise they made above!), and Founder-CEOs have a higher percentage of VCs on the board. On the monitoring side, the CEO’s equity holdings affect both the VC % and meeting frequency, but not the board size.
Note #1: Given that “meeting frequency” only captures formal board meetings and ignores the crucial informal interactions between meetings, we wanted to see if our results held up if we added to the model a proxy for informal interactions. To create a proxy for the degree of informal interactions between the CEO and the board, we took the subset of ventures that had a separate chairman and used the # of hours that the chairman (as the “lead” director) spent each month on company business. Adding this variable to the meeting-frequency model did not affect our core results.
Basic questions, in addition to any other thoughts you want to post:
- Are there other CEO characteristics that have fundamental impacts on board composition, meeting frequency, and size?
- Do the relationships between CEO characteristics and Board characteristics make sense to you (i.e., do any of the cells in the table conflict with your experiences or intuition)?
Note #2 (posted 9/22/05, in response to comment posted by Tim Connors): The results in the table above are after we control for the stage of company development, which is a key driver (in varying ways) of all three board characteristics. The issue deserves its own post; I’ll do it by the end of today.