How Boards (Actually) Work

How Boards (Actually) Work
Secret CFO
January 13, 2024
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How Boards (Actually) Work

It was an hour before my first board meeting as CFO.

I was nervous.

I could see from my office that the chair of the board (we’ll call him Kevin) was in a private meeting room. He was talking to two non-executive directors.

Then I noticed two other non-executive directors were meeting in another room.

I’d met them all as part of the recruitment process, but this was the first time I’d seen them together. The dynamic seemed strange to me. It wasn’t helping my nerves.

After fifteen minutes, Kevin left the room he was in, and moved to the other room to talk to the other two directors.

Kevin’s chairhopping continued; back and forth between these two rooms. Before eventually he pulled all four of the directors into one room.

Frankly, it was f*cking weird.

Kevin was high profile, and a big personality. With a distinguished turnaround career. He was the alpha dog in the room. And in whatever room he chose to stand in.

I had to know what was going on.

I grabbed the CEO (who I was still getting to know): “What the f*ck are they up to?”

He let out a big belly laugh: “Oh, that? That’s the board meeting. The real board meeting. The one where all the decisions get made.”

“Oh. And what are they talking about?”

Another big belly laugh: “Well, in the real board meeting there are only two agenda items, young grasshopper. Agenda Item Number 1 is me. And Agenda Item Number 2 is you.”

One more big laugh, and off he went. It wasn’t his first rodeo.

After a few more minutes, Kevin left the room and came to my office.

Looks like the agenda item had been me this time.

“It’s all sorted.”

“What’s all sorted?” I asked.

Kevin explained: “Your paper on capital investment divided the BoD. Half of them loved it, half of them hated it.

I was confused: “I figured we’d discuss it in the board meeting, that’s what it’s for, isn’t it?”

This time Kevin let out a big laugh: “No, we deal with the contentious stuff before it hits the board table. I’ve been chairing boards for over a decade, and never once have we had to vote on anything. I wasn’t about to start for your little capex paper. Next time, make sure you know what each board member thinks before the meeting. And if you need my help, call me.”

This young grasshopper was going to have to work on his board politics.

And his belly laugh.

Behind The Boardroom Door: How Do Boards Make Decisions?

Last week we covered what boards do, and why they exist.

This week we will cover, how they work.

The Board of Directors (BoD) will have a charter that governs how it should function and make decisions.

These might be ‘corporate bylaws’, ‘shareholders agreements’, ‘board operating agreements’, etc …

But what we call them doesn’t matter; the essence is that the company will have a constitution in some form.

The constitution will specify what power directors have. And explain which decisions shareholders reserve (reserved matters).

The decisions reserved for shareholders would normally include:

  • Appointment and removal of directors
  • Approval of dividends
  • Selection of auditors
  • Approval of executive compensation

Directors are free to do whatever they need to act in the best interests of shareholders. That is, as long as they don't interfere with the shareholder’s reserved matters.

Let’s jump into the different types of boards. We are going to focus on for-profits. The function of non-profit BoD is a topic in its own right, and for a different time.

Types of Board

BoD are typically characterized as being ‘public’ or ‘private.’

This is too simplistic. Some public boards behave more like private boards, and vice versa.

What actually determines the type of BoD is its mix of directors, by type.

Last time we described three different types of directors;

  • Independent directors (non-executive, and with no material financial interest in the company)
  • Interested non-executive directors (non-executive, but with a material financial interest in the business)
  • Management (CEO, CFO, etc.)

SMB Boards

The simplest structures are those most often found in small and medium-sized businesses. In most cases management, directors, and shareholders are all the same people. Often only 1 or 2 people.

There can be no substitute for the speed of decision-making, and alignment of interests in a small or medium, closely held company.

No conflicts of interest, or complicated external reporting to worry about. No speculation about what is in the best interests of shareholders.

A note of caution in companies with two equal partners (a common structure). You need a framework for what happens in a deadlock, i.e. partner A wants to do the thing, and partner B doesn’t want to do the thing.

Hopefully, they can work it out, but what if they can’t? How does this get resolved? Default “no”? Partner A has a call option on Partner B shares? Whatever it is, talk about it, and formalize it. Before it becomes a problem.

Even if it never does, one of two things is inevitable at some point; one partner dies or one partner wants to sell. You need a constitution agreed upon and written down.

Private Equity Boards

BoD designs for private equity-backed businesses aim to bring the simplicity and focus of an SMB board to a bigger business.

It minimizes the distance between the owners and management. That gives shareholders a stronger voice. On PE boards, the BoD oftentimes directly represents 95% or more of the shareholding through the PE Fund or management.

In a public company, thousands of shareholders are indirectly represented by 8 or 10 independent individuals. The level of direct representation could be 1-2% or less at the extreme end.

When executed well, the focus and incentive alignment amongst a PE board creates real enterprise value. And financial engineering maximizes value capture.

Plenty of mediocre PE funds have made a lot of money using nothing more than financial engineering whilst interest rates were low. Things are different now. We will find out which of these PE boards add value and which don’t …

As a CFO on a PE-backed board, your relationship with your PE operating partners and fellow BoD is everything. The minute they have doubts about you, you’ll be gone. No hesitation.

Building mutual trust is key.

Typical Public Company Board

A typical public company BoD will consist of 8-12 directors, with nearly all of those directors being independent. 1 or 2 spaces will be reserved for the CEO and CFO.

Shareholders will vote on these directors at the annual general meeting (AGM).

Importantly, the independent directors carry a large majority over management. That means collectively they can:

  1. Vote down your plans if they hate them
  2. Fire you and the CEO

The democratic nature of this structure can lead to better decisions or to politics and lobbying sideshows. It depends on the board.

The skill a CFO needs on a BoD like this is the ability and political savvy to influence a democratic board at large. To reach a consensus on key decisions.

Learning how to lobby your BoD is the skill you have to internalize the fastest as a new public company CFO. Otherwise, you are just the guy/gal who brings the numbers to the meeting and is useful, but ineffective.

That isn’t the sort of CFO you want to be. Next week we will cover how to win at this dark art.

Here is an example of a typical public company independent governance structure. You can see the emphasis placed on clean reporting lines, supervision and independence at a board level.


All this red tape, just to make sure the CEO is doing their job.

When these structures are good, they create accountability and discipline. That will radiate throughout the business.

When it's bad it’s expensive, irritating, and grinds things to a halt.

Represented Public Company Boards

There is a less typical public company board structure, but one that is common enough to merit mention.

One that I will call the ‘represented’ public company board. One or more figures from management dominate the boards through their voting rights.

Think Buffett at Berkshire Hathaway (37% control) or Mark Zuckerberg at Meta (54% control).

Rather than relying upon its independence, these boards rely upon reaching the best answer for shareholders directly. By having those shareholders sit on the board.

The CFO in this boardroom will experience something different. Decisions made by dominant personalities. The CFO of Meta will live or die by what Zuck thinks of them. Whether that works or not, depends on the relationship.

In our first special edition later this month; CFO Secrets will publish a guide for surviving as Elon’s CFO.

Independent directors will often complement these boards, representing shareholders as a whole. More specifically, to represent shareholders not directly represented in the room.

They may be toothless though, if they are capable of being easily voted down.

This dynamic can also lead to complex boardroom politics. If you think about the visual above, these sorts of companies will adopt a similar structure. On paper. But a few individuals with overarching control may dominate them.

Many of the best-performing companies in the world have these structures. So they are doing something right.

It really comes down to the quality and motives of the individuals with control. If they are as responsible in the boardroom as Buffett, shareholders needn’t worry too much.

Dual Class Shares

Things get especially funky in the boardroom when you introduce dual-class shares.

In short, dual-class shares are where different shareholders hold different rights. Specifically, where there is a difference between economic rights (dividends and distributions) and voting rights.

Take Meta.

Mark Zuckerberg holds a separate class of shares from other shareholders. His carry 10 votes each. This means he holds approximately 13% of Meta’s stock economically. But he actually holds 54% of the voting rights.

So Zuck can pass an ordinary resolution (>50%) for a trillion-dollar company all on his own.

More importantly, all the other shareholders combined cannot pass a resolution without Zuck. He has passing rights, and blocking rights.

He is one of nine members of the BoD, and I’ve no doubt he takes counsel from them. But he doesn’t have to. So if the BoD of Meta won’t agree to something he wants to do, at any time he could call a shareholder's meeting. And fire the board.

It also makes him untouchable as CEO. He can vote down any proposal to remove him.

It means in effect the board members are merely ‘advisors’ to Zuck.

Think about how these facts would change the dynamics in the boardroom.

In a founder-dominated boardroom, as CFO you can find yourself trapped between a CEO/founder who will do as they please. And in most cases the BoD expects you to sweep up behind them.

Dual-class shares present less of a challenge when you are dealing with a once-in-a-generation entrepreneur. But there are plenty of dual-class share structures out there with founders who are not Zuck.

(And even Zuck isn’t perfect, ahem Metaverse).

How a Board Makes Decisions

Board Room Votes

Board decisions are typically delivered by a majority vote in the board meeting. In practice though, actual votes are rarely needed.

In my experience, contested votes are only needed for important and contentious issues. Think of that final episode in Succession (minus all the extreme dramatization) where the vote on the Matsson deal creeps round the table. Tension builds. No one making eye contact.

Source: Giphy

Don’t get too excited. Boardrooms are much more tedious in reality.

And, as you heard in this week’s ‘Working Capital’ the most exciting stuff doesn’t even happen in the boardroom. More on that next week.

Tension in the Boardroom

Getting the right amount of tension in the boardroom is a balance.

A board that never disagrees, is probably not challenging enough. Have they really considered the alternatives? Are they really doing the best for shareholders? Is management getting an easy ride?

And a board that needs a vote on every decision is not efficient either. A board disagreeing over a straightforward capex investment, or rudimentary policy changes is a bad sign. That is a board that can’t agree on a strategy. Gummed up with politics. Nightmare.

Both are dysfunctional for different reasons.

And a dysfunctional board leads to a dysfunctional organization. Poor direction. Frustrated management. Ultimately underperformance.

As CFO it’s not your job to solve boardroom politics. That falls on the chair. But by being the ‘honest broker’ and guardian of fact, you can take the oxygen out of a dispute. I use this technique all the time.

Debating Strategy in the Boardroom

Robust, but infrequent debates over strategy are healthy. If that becomes frequent, it's a sign that there isn’t an agreed strategy (even if it says there is on paper).

A BoD without a strategy has no frame through which to evaluate decisions. That leads to chaos. And if it goes on for long, it is a sign the board has the wrong chair.

When there is a board-approved strategy in place, the board can act as a gatekeeper for keeping the business on plan. Ensuring the business doesn’t get distracted by ‘shiny object syndrome.’

As CFO you are key in this. Make sure there is a solid FP&A cycle starting with a long-range plan. If you do it right, it will be the reference point for 80% of board decisions. You need to be flexible too, but in complex businesses, it’s easier to be flexible when you have a strong framework.

Board Delegation of Authority

Earlier we described matters reserved for shareholders. It's typically a small list of big things that shareholders have to approve. And it usually happens at the annual general meeting (AGM).

Similarly, an effective board will set a delegation of authorities (DOA). This is a fancy way of saying what the business can or can't do without getting permission from the BoD (i.e. the authority that the BoD delegates to the business, like the CEO or CFO). The CEO, CFO, COO, etc. must then make sure to observe these.

This will include M&A, capital investment above a certain level, major strategy changes, entering contracts above a certain length, etc.

The DOA is a critical document. And as CFO it's especially important. There is an expectation from the BoD that you will be a police(wo)man.

If the BoD DOA says that any capex above $5m must be approved by the BoD, but your VP of Ops exceeds that authority by committing to a $7m investment, you will be expected to blow the whistle on it to the BoD. And then they'll ask you how it happened and why your controls didn't prevent it. Good questions.

Breaching the DOA set by the BoD is a great way for anyone to get fired fast. Failing to stop others from breaching the DOA is a great way for a CFO to get fired fast. Weak.

The Bottom Line

  1. Know what type of board you are dealing with. It’s not as simple as ‘public or private’. Who controls the votes? How many votes sit directly on the board?
  2. Use the Long Range Planning process to galvanize the board around an agreed strategy. It makes boardroom decisions so much smoother.
  3. As CFO make sure no-one breaches the board delegation of authority. Remember, building effective controls is your job.

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