Entrepreneurial Boards Composition & Compensation Survey
The Vell Entrepreneurial Technology Board report shares common and best practices of technology company boards, providing guidance on matters such as compensation and diversity of experience targets. Download Report
"Only about one-half of Inc. 500 companies report active, engaged boards of directors. Yet, in my experience, boards of directors are a critical success factor in fast-growing companies.” So says William Payne, of the Kauffman Foundation.
Payne would know. He’s an entrepreneur and an angel investor. He founded an electronic materials company in 1971 and sold it to DuPont in 1982. He’s made angel investments in 30 early-stage companies and served on the boards of a dozen such firms.
When the CEO runs into an obstacle he’s never faced before, a quick call to the board of directors can offer invaluable advice. Board directors can turn difficult situations into opportunities, steer CEOs clear of legal liabilities, and mediate disputes among leadership with the company’s best interest at heart. Far from being a burden, boards composed of the right directors are an asset to an entrepreneurial company.
Indeed, board directors spell success – and there are business gurus out there who are willing to fill a vacant seat. How then do you compete for top talent that will take a company to the next level? There are some common denominators among boards of directors that are worth noting. The Entrepreneurial Boards Composition Survey will offer you insights.
One key area that affects all boards is compensation. Barbara Hackman Franklin, a corporate director and former U.S. Secretary of Commerce, said: “While there is no prescriptive answer to the right formula for a CEO pay package, we believe there is an identifiable set of practices that boards can apply to their deliberations. Coupled with a spirit of courage and rigor, these practices can help ensure that we motivate and retain the best talent while minding the long-term interest of the organization and its shareholders.”
Another area: How can you build a board with a diversity of experience to gain the broadest knowledge base? Jeremy Curnock Cook and Geoffrey Vernon, directors of Rothschild Asset Management Ltd., an investment banking group headquartered in London, agree: appointing only recruiting directors from a small, familiar circle of associates is a common mistake early-stage companies make. This practice, they assert, tends to create a cozy club rather than a decision–making group that adds real value.
Tenure is another area of concern for a board. How much board experience does a director need? The Vell Entrepreneurial Boards Composition Survey not only investigates this topic but also concerns about the size of the board, how frequently the boards meet, what percentage of the board is independent, cash and equity compensation, and the prevalence of empty board seats.
By employing best practices in corporate governance, companies can assemble and maintain boards that help corporate executives drive greater profits and growth. Governance offers a level of accountability that keeps entrepreneurial companies on target with unbiased advice, insights into new and changing market opportunities, and warnings of potential pitfalls. The board of directors becomes the CEO’s personal advisor. Directors help level the playing field for entrepreneurial companies seeking to compete with larger firms. Indeed, board directors have never been more important to a small, growing company as they are in today’s global business environment.
Our goal with this survey is to offer a pivotal guide for leaders who are considering a change to the structure of their board and corporate governance activities. There is a bonafide shortage of qualified, executive board members to fill the seats of growing companies, especially as the private sector unveils vital issues that impact executive board director searches for companies of all sizes.
It is important to note prior work in this area, so we can compare and contrast changes in the entrepreneurial board landscape. In 2001, the National Association of Corporate Directors (NACD) joined Ernst & Young’s Emerging Growth Markets practice to study the governance practices of entrepreneurial boards.
The NACD study offered valuable perspectives on executive board directors. However, the market for board directorships has changed over the past six years. By painstakingly finding and analyzing new facts about entrepreneurial boards, we have brought you the latest thinking on this topic at a time when executives want to carefully examine the value and make-up of boards.
The 2001 NACD study measured the extent to which board practices at entrepreneurial companies differ from board practices at more mature companies and, more importantly, it defined the most pivotal reasons for disparities.
The Vell Entrepreneurial Boards Composition Survey offers a narrower focus and an updated perspective relevant for today’s business climate. The results corroborate what some widely experienced corporate directors and advisors have been saying for some years:The boards of entrepreneurial companies are different in many ways from the boards of large public companies. Surprisingly, the Entrepreneurial Boards Composition Survey on which this report is based showed that even within the ranks of entrepreneurial company boards,there are notable differences between private and public boards.
The findings are relevant to corporate directors serving entrepreneurial companies with a talent shortage that affects rank-and-file workers, the executive suite, and board members. The results will also be helpful to many directors serving mature companies, as well as companies seeking to find the best and brightest board members who add real value to the company’s bottom line.
We invite your comments for future entrepreneurial board of directors surveys.
Vell Executive Search
The characteristics of the boards who completed the survey were dramatically different, even among companies doing business in the same industry. Perhaps one of the most insightful differences is the make up of the board members’ professional backgrounds and industry experience. For example, there were large variances among companies in the proportion of board members who are company officers, venture capitalists, major investors and independent outsiders.
The average board represented in the survey hosts six members. This mirrors the NACD’s survey of entrepreneurial boards. The finding suggests that boards of small technology firms are substantially smaller than boards at most public corporations. For example, a 2006 study conducted by Spencer Stuart, a global executive search firm headquartered in Chicago, showed that the average S&P 500 firm has 10.7 members on its board. That same study shows a mere 15% of S&P 500 firms have eight or fewer board members.
The evidence is in and the overarching conclusion is this: Entrepreneurial companies are flying solo, with little in the way of best practices for their boards. The Entrepreneurial Boards Composition Survey reports a wide variance in board practices, such as a broad range in the frequency of board meetings (from 4 to 12). It is clear that small- to midsized companies must take action to develop and incorporate best of breed practices for their boards of directors in order to derive the maximum benefit from members and to attract world-class talent.
There is little research to help companies develop best practices for attracting, retaining, rewarding and drawing value from their boards. Often, chief executives are unsure of the appropriate: intervals for board meetings, compensation, and diversity of the board’s members.
The Entrepreneurial Boards Composition Survey unveiled broad differences in the remuneration structures of public and private technology firms. In particular, the study revealed private companies are much less likely to use cash-based remuneration, such as cash-based meeting fees or a cash retainer. In fact, private companies are much more likely to either not pay their directors, or rely exclusively on equity awards, such as annual awards or awards upon appointment.
Board involvement is fairly consistent across industries, despite some swings in both the high and low end of the spectrum. The survey demonstrates considerable diversity in the frequency of board meetings, for example: The number of board meetings at respondent companies ranged from one to 28 meetings per year. However, 80% of companies had 4 to 12 meetings. The median (mean) number of meetings among respondent firms was six (seven) meetings per year. The median number of face-toface meetings was 4 per year. (See Figure 11.)