Four lessons for FinTech boards (and all)
The mythology of renegade founders building successful businesses is inescapable. But of course, nothing happens in a vacuum. What is often left out in the narrative is who the founders surround themselves with – their team, their investors and their partners.
A key element, easily overlooked or misunderstood, is the board of directors. To some, this seems to defy conventional wisdom: the role of the board is primarily to âhire and fireâ the CEO and approve strategy.
It is a mistake. The board can play a central role in the growth and ultimate success of a startup.
I had the opportunity to sit (virtually) with Bill McNabb, the former CEO of pioneer asset management Vanguard, business advisor Ram Charan and Dennis Carey, the vice president of the global recruiting firm. Korn Ferry, on their new book: Talent Strategy Risk: How Investors and Boards are Redefining TSR, on how to do just that.
In this article, I explore four areas around how the Board can support startups. Then I’ll take a closer look at the tactics that strengthen them in a future article.
1. The board can help CEOs keep a long-term and inclusive vision in view.
Ram Charan said to me provocatively, âIf you think short term and don’t build long term, then your short term will become shorter. Without good long-term planning, your business and your team won’t be relevant – and it will happen sooner than you think.
It starts with business goals and the metrics chosen to measure progress against them. The authors suggest including key mid- and long-term metrics or indicators, rather than short-term operational KPIs on current performance. The authors even go so far as to suggest that SOEs stop providing short-term profit forecasts and instead focus on progressing towards long-term goals.
The authors argue that long-term thinking encompasses a wide range of perspectives (and as readers know from my previous writing, I agree). And it’s as much the role of the board as it is of the CEO to think beyond the current execution, ensuring that the company stays true to its long-term vision.
A crucial part of taking a long-term view is recognizing a company’s responsibility to multiple stakeholders. The book explains how shareholders themselves âoccupy a hybrid niche in business ecosystems. They are buyers, clients who have entrusted their retirement and their retirement and life savings to an investment company. They are also ownersâ¦ It is the Board’s responsibility to ensure that ethical responsibilities are taken. A stakeholder view is not in opposition to that of shareholders. As Bill explained to me, âWe have the wrong debate. It’s not financial or impact. It’s about And. “
Many companies have ambitious vision statements. This long-term and metric vision will allow the company to stay true to its vision. It creates a sort of virtuous circle. After all, you are what you measure.
To fuel this, short and long term metrics need to be agreed upon and reported. This means both operational and financial measures, but also impact and ESG measures.
2. The visibility of talents is important
In all startups, talent is the key resource. It is the team that ultimately designs new directions, seizes opportunities and makes companies agile. The team manages the risk. And recruitment is often a brake on growth.
Since talent is so fundamental to strategy and execution, it can be an area for board support. Of course, this does not mean that the board should drive hiring strategy or HR policies. That’s the job of the CEO and the company.
But CEOs can (and should) engage board members to foster greater visibility into company talent. Sidecar Health (an investment of my company and of which I am a member of the board of directors), has done just that with its board of directors. The company recently onboarded 6 new senior executives and hosted a special session for board members to meet new employees and learn more about their backgrounds, and vice versa. The relationship goes both ways. As Patrick Quigley, CEO of Sidecar Health told me, âWe can move faster if our senior leaders can take advantage of the breadth of experience and networks of our board. That’s why we strive to unlock the potential of this direct connection.
It may also be necessary to build relationships between key talent and the board. As the authors explain, 2% of staff are probably responsible for 80% of the results. It is therefore the role of the board of directors to understand who these 2% are and how the company can best recruit, retain and develop them.
The board can support recruitment by helping to “win” the candidate. But in order to do that, they must be able to tell a compelling story.
The board can push the company to maintain the right culture. Turning a blind eye to cultural challenges will cause problems over time, just look at Uber’s case where the board did not pay enough attention to the issue, until it either too late. Culture is a key strategic issue because it is essential not to do things right. One of the roles here is to support an annual corporate culture audit (which is more likely achievable in larger companies). As Bill relies on this point, âfrom a fiduciary standpoint, it is an absolute responsibility. Where there is cultural failure, there is almost always a failure of talent and leadership. “
And because talent is so critical, communicating metrics to the board is also important. What is the conversion of hires? What is the retention? What is the growth? What works and what doesn’t? If it’s part of the conversation, it can be flagged and improved.
3. Offer an outside point of view
The board should act as a sounding board for the CEO. One approach is not only to give an opinion on the strategy, but also to structure an outsider’s point of view to bring different perspectives.
In this vein, the authors speak of the counterintuitive advantages of activist investors in state-owned enterprises. Not because it is necessarily pleasant to work with them (many CEOs might exclaim otherwise) but because activists challenge popular belief.
Even in the land of startups, where activist hedge funds are not part of the world, boards can provide invaluable outside perspectives. And in highly regulated industries like financial services, which also have multiple financial providers beyond equity, like debt for lending technologies or regulatory capital for insurance companies, this is even more so. critical.
External views can be structured for decision making. As Dennis explained to me, Warren Buffett has taken this approach for all M&A transactions, engaging two groups of bankers and consultants as advisers. One would argue for and the other against. Because there were economic interests in favor of getting the deal done, the structuring on the opposite side supported having the right opinions in the room. He attributes this to avoiding key traps more than once.
Broadening of corporate and board thinking can be integrated through diversity. It starts with gender, of course, but also socio-economic and cultural diversity. For financial inclusion startups, for example, bringing under-represented clients into the conversation can be beneficial.
The role of the Council is not only to manage growth, but also resilience. It’s important for all startups, but in fintech, it’s essential. When you are dealing with people’s money, life savings, etc., the liability is greater than with a consumer application or generic software solution. Fintech entrepreneurs are often ‘creators’, building something new that has never been done before.
There is a whole host of events that can arise and cause calamity – cyber attacks, bad actors, and fraud are key risks in fintechs. Have these problems been thought out and dealt with? It also has to do with the resilience of the business. Do you have the resources to survive? Do you think like a camel and make sure that resilience is built into the business model?
The Board can play a key role in risk management. Of course, managing risk does not mean avoiding risk. This is impossible in a startup that is inherently risky. But it’s about understanding the risks the business takes, the trade-offs to mitigate them, and the long-term options.
This process begins with an understanding of the risks the startup takes (and those it doesn’t). There are tradeoffs in every decision, which overlap with other goals like talent. For example, as the book explains: A business may choose to pay below the market with the understanding that this will result in a higher churn rate. Or the company may pay more than the market and reduce the churn rate. Is the company prepared to take this risk? For everyone? Who are the 2%? What is the risk for them in particular? This is a strategic issue that can be aligned with the Council.
Farewell thoughts – friends, not enemies
The Council can be a valuable asset in supporting entrepreneurs if it is properly channeled. They do not and should not lead the business, but can complement, support and amplify the CEO in their work. I will explore actionable practices to support boards and get the most out of them in fintech startups going forward. Stay tuned.