Rethinking Board Observers – The Role of the “Silent Observer”

Posted on Aug 16, 2012 | 13 comments

Rethinking Board Observers – The Role of the “Silent Observer”

It has always surprised me that founders were so quick to fight over how many board members there were and so quick to agree to have as many board observers as people wanted.

I have always been vehemently against board observers and wrote some of the reasons in this previous post. But over the past couple of years I’ve slightly modified my views, which I’d like to explain:

The Case Against Board Observers
Unless your company is really struggling or there is something very controversial going on at the company (i.e. removing the CEO, selling the company without consensus) then NOTHING ever comes up for a formal vote. Almost all decisions at private, startup, VC-backed tech companies is consensus driven.

The reality of a board meeting is that the most influential and most persuasive voices normally shape the decisions. But the time spent on discussing issues can be really lengthy and get way off target when you have board members who aren’t disciplined or structured.

Even though you might not be voting on anything in a given board meeting you might end up burning 45 minutes of a 3 hour meeting responding to comments that are on inconsequential topics from the “over talker.” And the people driving your meeting off course are as likely to be your board observer as it is to be your legal board member.

So if you have 5 board members and 3 board observers you really have an 8-person board in every way other than formal votes. In my entire career on boards I have only seen hardcore split decisions in voting a handful of times in the years I’ve been doing this. And never has a split vote been in a harmonious situation.

The Case for a Silent Observer
I’ve softened my stance about board observers a little bit in the past couple of years.

I’ve come to realize that it can be very helpful when VCs bring associates to meetings. The associate can be very productive with the company after the meeting and likely has more capacity to help with followup than the typical busy partner.

So my new rule is, “bring your observer, by all means, as long as he/she stays silent.” And by silent I mean it literally. If the person is there to understand the context and help with follow up then they should be able to get full value from the meeting just by being there. I don’t really need to the conversation skewed by extra participants.

And if management values the opinions of the associates (and often they should!) they can get full value out of calls after board meetings and all of the followup associate with it.

Some Exceptions
I should note that I have had two exceptions to my thinking:

  • There are some increasing number of early-stage, smaller funds that prefer observer roles over board roles where they act like “normal” board members but they have slightly less administrative responsibilities than a full-fledged board member. I’ve been totally fine with this provided that it is understood by the board they they are observers in name only. They function like every other board member other than procedurally
  • There are some small investment firms where every 4th or 5th meeting a second partner attends the meeting. These are often people I’ve known for years, where I value their input and trust them to respect the fact that they have an extra seat at the table on that given day. I often welcome participants like these. But it is often not a formal right to an observer role and instead is handled on an ah-hoc basis.
  • There are times where you want two partners from a fund to be involved and you give one an observer role. Just know that two partners talking = 2x the board influence.
  • Some “strategic investors” have rules that they can’t sit on board seats. Board observer roles are a graceful way around this. But remember that they’ll have just as much influence as a legal board member.

The summary lesson for entrepreneurs is – know what you are signing up for in observers when you grant them legal rights to attend board meetings.

If they have full legal rights to an observer role and no restrictions  (i.e. must be silent) then accept them under the premise that you are actually taking on a full-fledged board member other than legal voting, which is unlikely to happen except in extreme circumstance.

And if you don’t want that but don’t want to bar them entirely, consider making the observer seat restricted to being a silent observer. You’ll thank me for it one day.

  • Peter V. T. Schlegel

    We’re considering observer roles for two advisors whom I potentially see becoming actual board members. So far I (founder+CEO) have enjoyed talking to them and value their input but would like to test the dynamics of them as part of the board before comitting.
    The (lazy?) argument is that inviting them in as observers can be done with slightly less paperwork and less hard feelings if they (or we) decide that they weren’t a great fit after all. Have you seen this done? And if so; how did it work out?

  • Philip Sugar

    The issue for me is board observer rights. Not board observers. Seems small but its not.

    Bringing an associate to a meeting? Great just ask and I can’t imagine I’d ever decline unless it was going to be a really contentious meeting, but in that event they really wouldn’t want to come. They know if they don’t obey the rules they aren’t going to be able to come back.

    It’s the rights that are the problem. Because then somebody feels they have the right to be there and in that case they are never an associate. Instead they are a person that is used to saying what they want when they want. They are not burdened by the knowledge that if they act up they won’t be invited back. Nope they are a house-guest that you can’t kick out. So in my limited experience they will not be able to resist trying to take over the conversation and when you tell them they have to sit in a chair not at the table and just observe you now will have made a serious enemy.

    So realize if you give board observer rights, you basically will either have another board member, or a pissed off person.

  • John

    I can speak from experience being a silent associate board observer – I’ve found it to be extremely mutually beneficial.

    From my standpoint, I’m early in my career in VC so I get a huge wealth of knowledge from listening to the input of seasoned entrepreneurs/investors, as well as every few weeks getting to see the stages (good and bad) of a company being built.

    From the company’s side, I see several business plans a day, plus have detailed data on 20 other companies in our portfolio – so I can pull information together that they may otherwise not have access to. I’m also not working 100+ hours a week building a company so I have some bandwidth that the CEO doesn’t have to help with ad hoc projects.

    I’d even go to the point of recommending it if you’ve developed a relationship with an associate at your VC. Invite them yourself to come to a board meeting – especially in the early stages of building your company when you have limited resources. They can be the gopher that does your dirty work for you – and will actually enjoy it because they’ll get a learning experience from it.

  • Mark Suster

    Just allow them to attend informally with no agreement if you’re doing a “test drive” – no reason to formally offer them observer roles under those circumstances

  • Mark Suster

    So, I should have been more clear. That’s what I meant … Board Observer Rights. Thanks for calling out specifically. If somebody has the right to a board observer seat then they’re a board member in (almost) all but name.

  • Mark Suster

    Thanks. Agree 100%. I didn’t see the value until a couple of years ago. 10 years ago I had associates at board meetings but they spoke up too much, which annoyed me (when I was CEO). Mostly it annoyed me because it was one more person competing for our limited time.

    But! They knew the business more intimately than their partner so they always asked more specific questions.

    With a silent associate I would go as far as to say – I think it’s hugely value add to the CEO and to the associate (and therefore to the board) because of the follow-up after the meeting.

  • Leslie L. Kossoff

    Mark, I’d put one more proviso on this: if you’re going to have an “observer” invite them for the segment of the Board meeting about which you specifically want them to observe – and only that segment.

    You’re correct that there should be a reason for their attendance – otherwise none at all. But, once they’re in, unless you put the topic/segment restriction in, the organization is at greater risk by having them there for the whole meeting when, frankly, they don’t need to know everything about everything – decisions or not.

    The CEO/Founders can even use the “in part” observer role as a progression toward whole meeting attendance, assistance going forward, etc. As you said, it’s like a try-out.

    Having been an executive and Board advisor for years, I’ve seen the “creep” that occurs if the observer role – once in – isn’t managed just as carefully as the decision to let them in in the first place.

  • arniesingh

    Generally agree with everything you say. All I’d add is that from my experience I think a board observer is totally worth having if they can add value in between board meetings with things like intros to potential hires and potential partners. Dana at Greycroft is a great example of this.

  • bfeld

    Excellent approach. I think you can solve the “should they be silent or not” decision by leaving it up to the CEO on an observer by observer basis. For example, there are several observers on the Return Path board, including me (I didn’t want to stay on the board long term as I felt he was in good hands with his amazing board of Scott Petry (Postini), Scott Weiss (IronPort, A16Z), Fred Wilson (USV), Greg Sands (Sutter Hill / Conestoga), , but Matt Blumberg, the CEO, wanted me to). So I agreed to be an observer. Matt treats me like a board member but separates functionally between me and the other observers. I’m not sure if anyone actually knows that I’m officially and observer vs. a board member, but it doesn’t matter because it’s up to him (the CEO) how each participant interacts.

    I view this as the only acceptable observer approach at this point. Either no observers or the CEO gets to decide whether the observers are silent or not.

  • Antone Johnson

    Philip makes a good point, and I agree with this assessment, but look at it flipped around: The true value to an *investor* is the *right* to have an observer, whether or not that person actually attends meetings. One major reason is that observers generally have the contractual right to receive all materials and other communications that go out to the directors (with rare and narrow exceptions).

    In practice, the way modern boards operate, a lot of information gets passed back and forth informally in emails or other communications between the CEO and board members (and observers). Hence even if the observer never attends a single meeting, he or she has the benefit of reading and digesting all this information. Wait, investors already have information rights, you might say — but those tend to be narrowly circumscribed (annual/quarterly financials, annual plan and budget, etc.) — and won’t include things like “copies of every email the CEO sends the Board.”

    I agree it’s pointless for the same firm to hold both a Board seat and an observer seat; the partner can (legally) share materials with the associate, etc. Where I’ve seen it matter is when VC1 leads a big round in which VC2 also participates to a lesser but still meaningful extent. To keep the Board from becoming unworkably huge, that round holds only one Board seat, and the director is designated by VC1. In that scenario, I think it’s reasonable for VC2 to have an observer seat allowing for the same flow of information that goes to VC1, albeit without the right to vote. There’s also observer-like language in “management” side letters that some VCs need to satisfy certain regulatory requirements (qualifying as a “venture capital operating company” is important if any of the fund’s LPs are pension plans subject to ERISA, if you must know).

  • Natasha Mooney

    I’m curious if your thoughts extend to board observers on the portfolio company’s side as well? For instance, if the CEO and COO have the two board seats, but the VP of Engineering is invited to be a board observer.

  • hunterwalk

    Mark – any thoughts on making observer roles time-limited so that you can gracefully remove someone without strife if they start to become less useful? The increased risk would be that the observer feels like renter not owner, but that onus should be on CEO anyway.

  • Shadow

    Great post