View the PDF version: Board Handbook (PDF)
This handbook is a perspective on the role of a high-performing board and its members for prospective portfolio non-executive directors and current directors.
One of the greatest lessons we have learned over our investing careers is the power of a high-functioning and aligned board. We believe it is a critical and necessary component in great business outcomes. A strong, positive culture starts with the leaders of an organisation. The board serves a key leadership function.
Historically we have sat on the boards of about one third of our portfolio companies at any point in time. Currently, we sit on one public board and five private boards, all of different sizes and stages in the growth cycle. We take the job very seriously. We revel in the opportunity to roll up our sleeves and have a real impact. We may also be offered board observer seats, which we approach with a similar rigour even though these seats do not have formal voting rights.
Each director on a board brings a unique set of experiences, perspectives and skill sets to their role. That said, we believe that the most effective boards and board members share some common attributes.
The purpose of this memo is to outline TDM’s perspective on the role of the board, how we think about ideal board composition, and best practices for non-executive directors (‘NEDs’).
It is one of our deepest and longest-held beliefs that a board’s job is to enable the business to grow the right way. This involves two complementary perspectives: (1) Understanding and operating within best practice governance principles; and (2) Acting in the best interest of all shareholders by ensuring a focus on maximising earnings growth over the long term.
Ultimately the positive power of the board is determined by the individuals who sit on it. We have been lucky enough to work with many wonderful directors over the years. Witnessing the great ones in action has only deepened our belief in their positive power — like watching a professional sportsperson at close quarters, it is very quickly obvious how much better they are than the average amateur or aspiring athlete.
The most effective boards play three critical roles:
Pairing NEDs with senior leaders as ‘sounding boards’ based on domain expertise can amplify the impact of the board. Most importantly, the board has to create an environment of psychological safety. The CEO and management team must feel comfortable proactively and transparently raising issues, concerns or questions.
We think of the board as a team. We care about the chemistry, cohesion and level of trust within the board team. We look to thoughtfully combine a diversity of skills, backgrounds, styles, gender and other attributes required to best serve the company. In our experience, the following is critical when thinking about overall board composition:
The most common method of determining the value of a director on any board is via the application of a skills matrix – what specific skills the potential or current NED can bring to the board. The hope is always that across the entirety of the board, there will be enough diversity of expertise and experience to ensure strong coverage across the entire matrix.
An example of a standard skills matrix is attached in the appendix.
However, when the focus is on a skills matrix alone, it can in many respects become a ‘box-ticking exercise’ and overlook other important aspects of board composition. For example, we are of the belief there is a need to establish a hierarchy of the importance between skills, and also some account for the cohesion of these skills that in certain individuals can create outstanding leaders.
Perhaps unsurprisingly then is that we much prefer to think the most effective directors have a rare combination of attributes – be it skills, character traits or mindset – that allows them to positively impact the outcomes around the board table.
Below are specific attributes that are important for successful growth company NEDs which, in aggregate, are not easy to find. The hardest (and most important) attribute to find is to have a NED think like an owner and for them to deploy the significant time, energy and mindshare that allows them to align this mentality with their actions.
We believe all directors must have an owner’s mentality, a passion for the mission and be great team players. The other attributes need to be well-covered by the board in aggregate, but they are not requirements for every director. For example, a board may accommodate an outstanding but time-poor female domain expert. However, it would be an issue if 100% of the board is time-constrained.
There are three key components to operating as a high-performance board team:
We set out below an indicative split of time for a high-functioning board. Importantly these time allocations are never the same month-to-month and there are large spikes in effort depending on requirements in the business.
The table is designed to show:
We also find that many boards underestimate the ‘hygiene’ workload associated with making sure executive remuneration is run properly and the basics of governance are done.
Note, the times specified refer to aggregate board time commitment, which is sometimes a multi-director shared workload and sometimes a single contributor.
When we recommend someone to be placed on a board either alongside or to represent TDM, we endeavour to set up the right communication channels and cadences such that the appointment is successful, and the nominee director can tap into the full resources of TDM.
While each situation is specific, a typical arrangement may look like the following:
TDM is a hands-on investor and seeks to provide support to our portfolio companies where possible. This assistance and support is always at the discretion of the CEO and Chair, with the intention of having better discussions at a board and management level, and ultimately attempts to fast-track better outcomes for all stakeholders. We commonly provide support in the following areas:
As part of our regular dialogue, we can align on how TDM can best deploy its resources to support the business.
We have publicly stated our belief in the importance of skin in the game for directors, with a rough heuristic being that they own 5x their fees in shares in the business. This alignment with shareholders in our view is immensely powerful — and a wonderful signal that they are deeply incentivised to maximise shareholder value through long-term earnings growth.
As a director, if you own shares and have a long-term perspective, you will experience greater rewards from the company’s long-term success. Conversely, you will experience greater pain from the company’s failures. That is a great alignment of interests and a motivator to work tirelessly to build world class businesses.
The great, high-performing non-executive directors, regardless of their quantum of direct ownership, frame all their thinking through this ownership mentality. Their lens for decision making and adding to board discussions is with a genuine interest in growing the business. They have a deep desire to help produce better outcomes across the business.
Directors with a strong ownership mentality commonly also demonstrate a bias for action. These directors often play a valuable role in driving the board and the CEO towards making impactful decisions, even in times of uncertainty. Where this attribute is scarce, boards can be prone to procrastination or flip-flopping in relation to difficult or sensitive issues. The lack of clarity that flows from delaying, or not making, important decisions can be demoralising for the executive team and exacerbate issues. The most effective directors will push towards making decisions and taking action.
It is this ownership mentality that enables the best directors to allocate energy to the business every day, not just 24 hours in advance of the board meeting. Because of this commitment of mental capital, the great NEDs come to meetings prepared, ready and willing to engage, ensuring meetings are of the highest quality that they can be. Sometimes this may limit the number of boards that these NEDs are willing to commit to, as they are always mindful that they don’t want to spread themselves too thinly, leaving them unable to drive the outcomes that they and the business want to achieve.
Passion for the Mission
Related to ownership mentality, the most effective NEDs care deeply about the purpose of the company and the impact the business seeks to have on the world. These directors go above and beyond the minimum requirements and expend significant discretionary effort to understand the systems and communities in which the business operates. TDM believes in ‘one mission, one platform’ which is an idea that truly great category leaders have one very clear mission to achieve and one purpose-built platform to achieve it. The best directors not only ensure the company mission is crystal clear, but also that there is complete strategic alignment in achieving this mission.
In addition, the great NEDs spend time understanding the culture of the organisation and the senior leadership team to ensure that it is in alignment with the mission of the company. These NEDs invest time getting to know key leaders and individuals in the organisation, and will spend time participating in key company events. They care about the employees of the organisation and promote investment in people and culture initiatives that support the experience and growth of the employees.
The best businesses have customers at their core. This means they consider how their decisions and actions will impact the experience of their customers. For board members, it is critical to be able to step into the shoes of customers to understand how they will be impacted by, and feel about, strategic decisions made by the board. In the life of every company, there will be times when the board will have to make difficult decisions that impact different stakeholders of the business. The best NEDs will ensure that the voice and perspectives of the customer are represented in these moments. And in doing so, the right course of action often becomes very clear to the rest of the board and management.
Acute Commercial Judgement and Acumen
The great NEDs, regardless of background and domain expertise, all have clear commercial acumen and judgement. Often this may mean they are current or past operators. We have seen current operators, undoubtedly time-poor, choose to intertwine themselves into the fabric of the business, and their impact is felt well beyond the board room. This is only possible because of the fact that their business acumen transcends industry, and quickly allows them to be a part of sound decision making.
Knows Their Lane and When to Stick to It (and When Not to)
High-impact NEDs are self-aware and know the areas in which they can add the most value. They will ensure their domain expertise is utilised and leaned upon at the right times. Importantly, this focus creates a purposefulness to the deployment of mental capital, and high-impact NEDs do not waste valuable intellectual resource (and time) on areas they are not an expert in.
Where the conversation is deep into a domain in which they are not an expert, a great NED will listen openly and deliberately pick the time to share a view only if it is value-additive to the conversation. A great NED is willing to show vulnerability and ask the ‘stupid question’ which may in fact expose an issue that has been missed.
Respect for other people’s ‘lane’ is key to a high-functioning board. This is often why we love high-achieving current operators on our boards — because they are time-poor, they direct their input and mental energy into where they can, in fact, make a difference.
Great NEDs in a high-functioning board are independent thinkers, not followers. They are acutely aware of the duality of this independence — that is, they must be independent in thought, and from management, but not from shareholders. Great NEDs are crystal clear in their role to represent shareholders and ensure that earnings grow over time. To do this, they will think and act like an owner of the business.
Great Team Player on a High-Performing Team
Like all great teams, the whole needs to be much greater than the sum of the parts. The best NEDs will create value through their interactions with the Chair, other directors and the senior management team. When it comes to boardroom synergies, often it comes down to the quality of the questioning and the skill of directors to ask the right question, the right way, at the right time, and a willingness to listen to the response. Great NEDs ask thoughtful follow-up questions which are helpful in providing clarity for others around the table.
A NED should be encouraged to play devil’s advocate and look for blind spots in strategy, risks or management reporting. This must always be done in a constructive manner. You can’t underestimate the positive impact a NED can have with constructive disagreement, with the caveat in our minds that they are willing to help find a solution. A great NED won’t ‘fire bullets’ unless they are also willing to get in, get dirty and clean up the mess, with a general willingness to assist management as required to ensure that things get back on track. It comes down again to being invested (mentally and financially) to ensure the right outcomes for the business are achieved.
In our experience, the best board members are good or great in the good times, but even better in the tough times. It is in times of crisis or adversity that strong directors really show their value. They lean in to support the CEO and management team and encourage the board to make decisions to provide stability and clarity for the organisation. We have seen many of the most vocal directors in the good times shy away into the shadows when things get difficult. In contrast, the best directors step forward at these times.