NIFO is Good Governance

“Nose in, fingers out” or NIFO intends to capture the essence of good corporate governance in describing the Board of Directors’ role in managing a company. Understanding the role and balance between the Board and management is essential for everyone to do their part in building success!

The Responsibility of the Board of Directors

As I have argued elsewhere, high-potential startups that plan to raise money should be incorporated in Delaware. Therefore, when thinking about good governance and the fiduciary responsibilities of the Board of Directors, it is reasonable to use Delaware General Corporate Law (DGCL) as a jumping-off point. Under DGCL, the Board of Directors (Board) is elected by the stockholders and, as the manager of the business and affairs of a Delaware corporation, is responsible for overseeing the operations of the corporation and ensuring that its actions are in the best interests of the company and its stockholder owners. Directors of Delaware corporations are subject to the fiduciary duties of care and loyalty (including the subsidiary duties of good faith, oversight, and disclosure). This framework does put the ultimate responsibility for the proper supervision of a Delaware corporation on the shoulders of the Board members, who are also ultimately responsible for hiring and supervising the corporation’s CEO.

The Complementary Roles of Board and Management

However, the role of a company’s Board of Directors is distinct from that of a company’s CEO and executive team. Directors are responsible for oversight, while management is responsible for leading and executing the company’s business. Even as the Board of Directors holds the ultimate fiduciary responsibility for ensuring that the company stays true to its mission, uses its resources well, and does its work within the proper legal, regulatory, and ethical boundaries, it is imperative that the company’s management team fully embraces its role to do the work of building the business with excellence.

This also means that the CEO and the company’s executive leaders must take a leadership role in working with the Board of Directors. The roles of the Board of Directors and management are complementary. If a Director is supposed to keep their fingers out, then the management must bring their hands-on leadership and execution to the mix. If management becomes passive and starts looking to the Board to identify emerging opportunities and issues, develop options and strategies, and have a role in execution, that will distort the role of the Board.

To fulfill its oversight responsibilities, an effective Board should understand what is going on, set strategic direction, and review and listen to what is happening in the organization while leaving the essential work of execution and implementation to the management team. However, if we dig just below the surface of this statement, it quickly becomes apparent that those spending their full-time effort on the business must support the Board in doing its work properly. For example:

• For the Board to know what is going on, management must establish effective reporting mechanisms to gather and share essential information with the Board members on a timely basis.
  
  
• For the Board to set strategic direction, management must identify and report on emerging opportunities and issues while developing options and strategies for the Board to review and affirm.
  
  
• For the Board to evaluate and assure good risk management, the executive team must establish systems that provide information, ensure regular audits to identify gaps, and proactively identify emerging risks.

Applying NIFO

In executing its proper fiduciary duties of care, the Board of Directors should ask probing questions, suggest alternative approaches for consideration, and provide feedback on options rather than simply being a rubber stamp for whatever management comes up with. However, the Board should not take over the business’s operations, as that is not the Board’s role. Appropriately applying NIFO means that Board members should:

• Understand the business by paying attention to the company, being aware of risks, and understanding how management is mitigating them.
  
  
• Set direction by reviewing and listening to what is happening in the organization and collaborating with management to figure out strategic direction, with ultimate responsibility for approving that direction.
  
  
• Govern (not operate) by leaving the implementation of strategic decisions to management and avoiding getting involved in day-to-day operations.

Practically, this means, as illustrative examples, that Board members should:

• Approve critical financial transactions like funding round term sheets but not be the point people for sourcing or negotiating those term sheets.
  
  
• Provide feedback and ideas on management’s marketing and commercialization plans as well as introductions to potential customers, if possible, but not develop marketing tactics or execute sales processes.
  
  
• Review financial, quality system, and cybersecurity audit results and ensure that management implements appropriate corrective actions by asking for updates on progress made.
  
  
• Validate executive compensation levels with outside advice and benchmarking, and approve all executive compensation, including cash, equity, benefits, and loans, to ensure that management is both appropriately motivated while also taking care that the interests of the company as a whole are best served.
  
  
• Be very careful about accepting consulting roles that may blur the boundaries between a Director’s governance role and management’s operational role.

Management can help Board members stay in their lane by providing the right information on a timely basis and collaborating with the Board to advance the organization’s best interests while simultaneously not inviting Board members too deep into the company’s day-to-day operations.

Reminder: I am not a lawyer, so please do not take what I write as legal advice. Consult your own corporate counsel on any aspects of your legal responsibilities.