In early stage venture capital practice we tend to see a lot of boards with a majority of dependent board members. This article differentiates an independent board member from a dependent board member in the sense that:

  • A dependent board member could be an ‘inside’ board member (e.g. member of the management team or entrepreneurial team of the venture);
  • A dependent board member could be an ‘outside’ board member (e.g. investment director from the venture capital investment fund that funded the company);
  • The independent board member is none of the above, and also does not have a substantial equity stake or (long-term) incentive in the company.

We are using independent board members actively to balance out boards. Some theories and articles claim that independent board members are considered “optimal safeguards of shareholder value”, because they have solely the eye on the wellbeing of the company and their stakeholders. If that is in fact the case, then rationally speaking the optimal board composition should tend towards a majority of independent board members instead of dependent board members, like we see a lot in practice. The National Association of Corporate Directors (1996) supports these findings and recommends that boards should have a “substantial majority” of independent directors, which research is later on supported by the Business Round-table (1997).


What is the optimal board composition?

Bhagat and Black (1999) however argue that there is no statistical significance on optimal board composition in relation to firm performance. Adams and Ferreira (2007) build on this premise and argue that there is an information gap for independent board members as they are as involved as dependent board members are. These findings could indicate that an independent board member is actually not the most optimal solution within boards from a business (financial) performance perspective. An extensive research in French (Cavaco, Challe, Crifo, Rebérioux, Radouat) shows more recently (2014) that there is actually a negative relation between accounting performance and the independence status of a board member, which result is also statistical significant and supports the research of Adams and Ferreira about information asymmetry.

As this counterargument of information asymmetry for independent board members may be valid, based on practice it is in the company’s best interest to remove the information asymmetry between dependent and independent board members in order to optimize the relationship between the board and their stakeholders. These things also take time to settle. Having said that, it is also part of the way the independent board member interacts with the company and how they act as a board member themselves. Some prefer to stay at a distance, some try to get (too much) involved in the operations.


The benefit of an outside view

One can conclude there is a fine line there, but what I’ve learned in this course is that it always works to your benefit if you show genuine interest, commitment and involvement as an independent board member towards the company and their stakeholders. The benefit of an outside view is an important value add that independent board members bring to the table and being well-informed, should balance out boards for the better of the company and their stakeholders.




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Robin Franken

Sr. Investment Manager at BOM Brabant Ventures

About Robin Franken

Sr. Investment Manager at BOM Brabant Ventures

After dipping his toes in accounting and corporate finance for a couple of years, Robin turned to venture capital at the end of 2016. As an investment manager at the Brabant Development Agency (BOM), a regional agency that supports and funds innovative start-ups, Robin focuses on early stage software ventures with either a SaaS, marketplace or hybrid business model. He is passionate about SaaS, marketplace dynamics and unit economics, from the early seed/pre-seed stage onwards to scaling, in both private and public markets.

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