Building something no one else can measure: Insights on Boards and Governance Systems

Building something no one else can measure: Insights on Boards and Governance Systems

In the world of business, success is often measured by tangible metrics such as revenue, profit, and market share. These metrics provide a clear picture of a company's performance and growth. However, there is a blind spot in this approach – these metrics don't capture the underlying human behavior and emotions that drive success. As a result, many large teams and products settle for proxy metrics that can only partially measure the true impact they have.

But what if there was a way to build something that goes beyond these traditional metrics? What if you could create something that captures a space that existing incumbents can't easily go after? This is the challenge of building something no one else can measure.

One key aspect of achieving this is having a strong board of directors. Boards play a crucial role in overseeing the strategic direction of a company and ensuring its long-term success. However, not all boards are created equal. A bad board can be detrimental to a company, while a good board can be a catalyst for growth.

So, what makes a good board? According to Trae Vassallo, co-founder of Defy, it's about being laser-focused on the big questions and issues that can turn a business into a great opportunity. By avoiding distractions and staying focused on what truly matters, a board can provide valuable guidance and direction.

Charlie Munger, vice chairman of Berkshire Hathaway, emphasizes the importance of learning from the experiences of others. He believes in mastering the best practices and insights that others have figured out, rather than trying to come up with everything on your own. By learning vicariously, you can avoid making the same mistakes and make better decisions for your company.

Observing boards in action is a great way to start the process of becoming a board member yourself. By witnessing the dynamics and decision-making processes of boards, you can gain valuable insights into what makes a board effective. Fred Destin, a partner at Stride, highlights the importance of a good board, stating that while good boards don't necessarily create good companies, a bad board can kill a company every time.

Andy Rachleff, co-founder of Wealthfront and Benchmark, sheds light on the role of a board in assessing intellectual honesty on product-market fit. Genuine product-market fit is crucial for the success of a business, and a board's responsibility is to ensure that it exists before scaling prematurely. Premature scaling is one of the top reasons why startups fail, so this task is of utmost importance.

Fred Wilson, co-founder of Union Square Ventures, emphasizes that a board's role is oversight, not day-to-day management. Meddling by board members can hinder the growth and decision-making capabilities of the company. Instead, a board should trust and respect the expertise of the entrepreneurs and founders, allowing them to make the right decisions for their business.

Governance systems also play a significant role in the success of a company. The Roman system, where decision-makers were held accountable for the consequences of their decisions, is a prime example of a responsible and reliable system. While it's essential to have a governance system in place, it should be as simple as possible, but no simpler, and require those with delegated authority to have "skin in the game." This ensures that decision-makers bear the consequences of their actions.

Diane Greene, former CEO of Google, highlights the importance of asking questions as a board member. By engaging in a Socratic dialogue with fellow board members and management, board members can get to the foundations of different views and challenge conclusions coherently. Marc Andreessen, co-founder of Andreessen Horowitz, expands on this idea, stating that even if you have a point of view, expressing it in the form of a question can be more effective.

Boards with positive chemistry and mutual respect tend to enter a virtuous cycle. This cycle allows for open and honest communication, the sharing of difficult information, and the ability to challenge one another's conclusions. This collaborative approach leads to better decision-making and a stronger board overall.

Charlie Munger argues that governance systems should be tailored to the specific needs of each organization. While many companies rely on extensive incentives and controls, he believes that a trust-based system can be equally effective. Berkshire Hathaway operates under a trust-based system, which has proven successful for the company.

In conclusion, building something that no one else can measure requires a combination of factors. A strong board of directors, focused on the big questions and issues, can provide valuable guidance and direction. Learning from the experiences of others and observing boards in action can provide insights into what makes a board effective. Governance systems should be designed to hold decision-makers accountable while allowing for simplicity and "skin in the game." Asking questions and engaging in a Socratic dialogue can lead to better decision-making and a stronger board dynamic. Finally, fostering positive chemistry and mutual respect among board members can create a virtuous cycle of collaboration and excellence.

Three actionable advice:

1. Focus on the big questions and issues that can turn your business into a great opportunity. Avoid getting distracted by small minutiae.
2. Learn from the experiences of others. Master the best practices and insights that have been figured out by successful individuals and companies.
3. Foster a culture of trust, respect, and open communication within your board. Encourage the sharing of difficult information and the challenging of conclusions to make better decisions collectively.