Many start-ups and scale-ups looking to build a board start with people they know. It feels quick, easy and familiar. But it’s not the best way to identify and hire the people who can really drive your board’s performance. And there’s data to prove it – Dom Watson, who leads Nurole's Scale-Up business, digs into the evidence...
Open processes lead to better hires
Cornell University’s JR Keller is an expert in talent acquisition and management. He studied 11,000 internal hires at a Fortune 100 firm and found clear evidence that open hiring processes are more effective. He looked at roles that were filled through a company-wide advert inviting anyone to apply, and compared them to hires selected by managers in a closed process.
The open-hire candidates outperformed the closed-hire candidates, “on nearly every conceivable dimension of quality.” They were also 20% less likely to quit or be fired.
The implications of Keller’s study on board hiring are obvious. The more open your hiring process, the better the results. There are three main reasons for this.
1. The bigger the candidate pool, the better the applicants. Competition is more intense and standards are raised – typically, the five tallest people in a city of one million people will be taller than the five tallest people in a city of 10,000 people. By choosing someone you know would do a good job, you may overlook someone you don’t know who’d do an exceptional job.
2. It focuses decision-makers’ minds on the relevant information. As Keller explains, “The mechanics of posting” – i.e. opening up a role to applications – “require a manager to create a formal job description, which in turn establishes a set of criteria against which to evaluate potential candidates.”
When someone is selected without a formal process, “managers informally mold the job requirements around their preferred candidate rather than evaluating the candidate against the requirements of the job.” The more formal, open process forces managers “to rely on objective information."
A 2019 KPMG study of start-up boards found that just 17% of start-ups hire all new board members by “identifying a skillset or knowledge gap in their current board.” Adding people without thinking how they will add value and complement the existing members isn’t the way to build the best possible board.
3. Objective criteria help boards avoid bias. By starting off with an idea of who they want, boards begin by ruling out people who don’t fit that picture. This restricted search process can lead to a very homogenous board, where groupthink rules. Research shows decision-making groups with diverse perspectives perform better.
To find independent voices
In their 2020 study Board Dynamics over the Startup Life Cycle, researchers Michael Ewens and Nadya Malenko looked at data from more than 7,000 US start-ups between 2002 and 2017. They found that 31% of companies at their first funding round had “true unconnected” board members, i.e. people with no obvious link to either the founder(s) or the investors. This number went up to 51% for fourth round companies.
“Our key hypothesis is that unlike in public firms, where the main roles of independent directors are monitoring and advising, an important role of independent directors in VC-backed firms is mediation,” the authors write. “Specifically, independent directors can help mediate conflicts between VC investors and entrepreneurs on the board, which can increase both the ex-post efficiency of decisions taken by the firm and the ex-ante likelihood that the firm is financed.”
Without these independent members, boards can get very blinkered, and focus too much on short-term interests. This can lead to narrow discussions that seem out-of-step with the way modern businesses work. The serial investor and board member Aline Eibl has seen this first-hand.
“I saw boards composed of founders, management and all-male investors. The topics on the table were only about money: figures, KPIs and growth. Where I expected a guiding light for diversity, ESG, values, purpose — you name it — there was money-talk. Even the corporate world left that behind years ago.”
Because diversity matters
Research shows that too many start-up boards are homogeneous, which will impact the quality of the discussions, the range of perspectives and ultimately the performance of the board.
To take gender as an example, a recent study looked at 200 US-based venture-backed companies. Women held just 7% of the board seats, and 60% of the companies didn’t have a single woman.
This comes down to how start-ups are hiring new board members. A huge number come through investors’ networks, but only 11% of investing partners in US VC firms are women. You can see the pipeline problem in the KPMG study too, where the number of women being considered for board roles is very low.
Board hires are only as good as the candidates they have to choose from. A flip through your contacts is never going to provide the quality and diversity to build the type of board that makes a real difference.
Conclusion and further reading
It’s important that early-stage companies don’t underestimate the calibre of people they can attract to their board. Many talented and experienced leaders relish the particular challenges of growing a new business, the fast-paced environment and the opportunity to have a very direct impact. Thinking beyond your own network is crucial and you’ll probably be surprised by the kinds of people who are interested in joining your journey.
Further reading:The Nurole Guide to Building A Start-up Board