Independent Director Institute: Pledge to Encourage Increased Utilization of Independent Director Seats in Venture-Backed Private Companies
Good corporate governance, or the lack thereof, has become a defining issue in the business community. Corporate stakeholders, including investors, employees, customers, and regulators, are demanding that companies develop and implement best practices around governance.
A company’s board of directors plays a key role in overseeing a company’s governance policies and procedures. Within a board of directors, independent directors help to ensure that the board, and the company, can make critical decisions independent of conflicts of interest. A board decision that is made by a majority of independent directors can also help reduce the chance that it is later invalidated by a court.
Under Delaware law, which governs most venture-backed companies, “[i]ndependence means that a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.” A director lacks independence if he or she is “beholden” to the interested party or interested director(s), or is so under such party’s or person’s influence such that the director’s “discretion would be sterilized.”
In the venture capital community, corporate directors often lack independence from their companies due to the nature of their roles as executives and/or investors in such companies. To address this lack of independence, most startup companies attempt to reserve at least one independent board seat upon closing a venture equity financing round, but often fail to fill such seats for a period of time after closing (if ever). According to data from Aumni, on average, more than 49% of company boards have at least one vacant board seat, and more than 29% have at least one vacant independent seat, at the time a financing closes.
In addition to improving governance, having an independent director can lead to increased representation. In 2022, a group of universities and organizations, including Ascend, BLCK VC, Boardlist, UC Berkeley, Columbia, Corporate Directors Forum, UC Davis, Fourth Floor, UC Hastings, HBCUvc, Him for Her, Latino Corporate Directors Association, UCLA, National Black MBA Association, National Venture Capital Association, NxtWork, University of Pennsylvania, Santa Clara University, SMU, Stanford, University of Washington, and Venture Forward launched the Independent Director Initiative (independent.venturecapitaluniversity.com). This initiative trains — and helps place — individuals from backgrounds underrepresented in venture capital, to serve as independent directors on the boards of venture-backed private companies. The Independent Director Initiative is committed to providing a continuous supply of diverse and talented leaders to serve as independent directors.
Finally, having an independent director can help reduce legal risk to the company. When boards have to make difficult decisions, such as approving a down round of financing, an acquisition, or restructuring, disgruntled or excluded shareholders will often bring lawsuits. Fortunately, the Delaware courts have a history of giving deference to decisions made by boards with independent directors. This will become especially important in an evermore challenging macroeconomic climate and with the technology industry under increased scrutiny from all corners.
As leaders in the venture capital community, we call on our peer investors, executives, and directors to join us in encouraging the venture-backed companies that they invest in and/or lead to identify and appoint independent directors earlier in their company’s lifecycle.
Pledge Sign On
These individuals have pledged to _____________:
- Wesley Lai, Computer Courage