Essential No. 7: Build a Billion-Dollar Board

Boards of directors at America's highest-growth companies contains customers, alliance partners, community members, and even distinguished CEOs

When it comes to boards of directors, is there a marked difference between the boards of growth companies and those of companies that struggle? That's the question I wanted to answer for Essential No. 7, so I set off to study the board composition of growth companies vs. those of failed companies.

I found a big difference. Companies that struggled or failed tended to have boards composed largely of management-team members and investors. In contrast, the boards of America's highest-growth companies are balanced with customers, alliance partners, and a community member such as a professor or a government official. Surprisingly, some even feature a CEO from a billion-dollar company. Even small companies had billion-dollar CEOs: Howard Schultz from Starbucks (SBUX) was a member of eBay's (EBAY) board early on in eBay's growth cycle. Charles Schwab was on the board of Siebel Systems (ORCL) before Siebel earned its first customers.

When I discussed this insight with Tom Stemberg, founder and former CEO of Staples (SPLS), he expressed his appreciation for Staples' seasoned board, whose members guided and governed his business from when he was operating his first store. "We were fortunate to have our investor from Bain Capital, as well as Mitt Romney, then governor of Massachusetts. The chairman was Leo Kahn, one of the most successful supermarket retailers of all time and the former chairman of Purity Supreme Supermarkets," says Stemberg. This combination created a board that knew when growth was proceeding too fast and when to diversify. "For us, managing growth was like trying to knit on water skis—we were trying to be precise and moving like a rocket behind the boat. The board made a difference."

find experienced, seasoned directors

Today, Stemberg serves as a managing general partner at Highland Capital and plays the billion-dollar CEO role on the board for PETsMART (PETM). He also serves on the board of lululemon athletica (LULU), a yoga-inspired athletic apparel company that is achieving exponential revenue growth and returns. In doing my research, I found that Stemberg's experience was not unusual:

• Of the fastest-growing companies, 60% had an alliance partner on the board and 30% had customers serving as directors. The same investment firms appeared, but rarely the same partner.

• I found CEOs from billion-dollar companies more than 70% of the time. It would seem that when CEOs agree to sit on the board of smaller companies, you can probably bet that they know a "Big Idea" when they see one and that they believe the management team can create an exceptional growth company.

• The boards were, on average, quite balanced. The average size was nine, with customers, alliance partners, community members, and CEOs from other large companies serving to counterbalance the investors and management team.

I had the opportunity to discuss this insight with Tom James, Chairman and CEO of Raymond James Financial (RJF), while leading a panel discussion at the Ernst & Young Growth Forum last year. He was named Entrepreneur of the Year in the financial services category. Raymond James, founded in 1962 and public since 1983, is a diversified financial services holding company with subsidiaries engaged primarily in investment and financial planning, in addition to investment banking and asset management.

James says that having experienced, seasoned people on the board is just what a growth company—and its management—need. "A board has to have no fear about challenging management. As a CEO…you need to be willing to stand up for your ideas, but sometimes you learn that the ideas of highly experienced board members are a lot more important than yours," he says. James also points out that relationships that board members have outside the company can be an invaluable asset.

A model for small-company boards

James' methodology, from even before his company went public in 1983, was to hire former CEOs of other brokerage firms. He used to tell his CEO board members: "We are putting you on the board so that we can avoid the mistakes that you have already experienced."

From personal experience, I can tell you that this is also a good strategy for a small company. I am on the board of a pre-revenue company, Primal Fusion in Waterloo, Canada, and I function as the growth advisor, similar to a CEO who has led a growth company. Primal Fusion is focused on pioneering a new category of online activity called thought networking. (Like social networking, thought networking provides a way to represent ourselves digitally in the online world. But unlike social networks, which represent our identities, thought networks represent our thoughts and ideas.)

Jim Estill, the original seed investor and current board member of Research in Motion (RIMM) is the investor board member. Estill, who was CEO of Synnex Canada, also serves in the billion-dollar CEO role. As Primal Fusion moves to revenue, we plan to balance our board with customers, alliance partners, and community members and academics. In planning for the future, we encourage CEO Yvan Couture to think about enhancing the board with new, external members as the company grows.

Tried-and-true rules

Many of the benefits offered by a carefully selected board offers should be unique to that company. But there are tried-and-true rules to remember. Ask yourself and your top management:

• How well are you finding and then incorporating strategy advice from customers, alliance partners, and C-level executives who have led growth businesses larger than yours? What are you doing to make joining your board an appealing proposition for them?

• If your board of directors is currently dominated with investors and management team members, what are you doing to better educate them on growth principles?

•Is your board being renewed with members who bring fresh experiences, perspectives, and contacts?

Here are three actions you can take to balance your board of directors:

1. Act Early to Balance Your Board of Directors

Follow in Tom Stemberg's and Tom James' footsteps: Balance your board with CEOs, customers, and alliance partners to accommodate the interests of investors and management-team board members. Whether your company is pre-revenue or already on its way to a billion in revenue and beyond, a board that can challenge and guide management is invaluable.

2. Leverage Advisory Boards to Bring Deep Expertise

While not formal boards of governance, advisory boards are key to accessing deep expertise. In the case of Primal Fusion, deep expertise related to the technology platform is critical. For many later-stage companies, a Marquee Customer Advisory Board (Essential No. 3) is invaluable.

To leverage advisory boards, make them small but highly talented and experienced. Host meetings regularly. While this may seem like an obvious action, over 80% of the companies in my workshops are not utilizing advisory boards or are not implementing them with a structured approach.

3. Breathe Fresh Life into Your Board

Particularly during downturns and recovery periods, renew your board or add to it in order to get fresh perspectives from both investors and management members. As business challenges evolve, a board that is going to push management to perform at its best needs to reflect the changes in the business climate, whether they are brought about by new technology, new products, or larger, external forces such as the economy.

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