BERKONOMICS – Business insights from Dave Berkus

Archive for November, 2010

Make informal advisors part of the team.

by on Nov.29, 2010, under Surrounding yourself with talent

Whether you find advisors from family, friends, faculty or fellow managers, great advisors can become an informal resource that rivals that of more formal resources, including board members.  You will certainly know when you’ve found such a treasure, almost always through introduction by others and rarely because you have deliberately approached someone to fill a needed hole.  Most of these people will provide time for you out of friendship, rather than seeking reward in the form of stock options or pay for service.  Therefore, it is important that you recognize their worth and be most careful not to overuse the gift of their time.  “We work for food” is a common mantra for such friends who are willing to provide such informal services.

Are there any rules for the amount of time you might expect before stepping over the line?  In my experience both seeking and providing such informal services, personal visits to a company for more than a short time before or after a lunch or dinner are fine. But a scheduled visit for more than a tour and meeting management is asking too much unless offered.  These people are not about the pay, and the treasure of their advice is worth the careful use of time in its seeking.

[Email readers continue here...] The best use of informal advisors is through phone and emailed short requests for help with a specific issue, one that can be explained easily and rather quickly, and whose resolution may be complex, but with good advice, you can find the way through the problem more quickly and even validate your intuitive answers to a problem.  These informal advisors will appreciate occasional updates in the form of emails just as you would email board members with news of progress.  But such contacts should never be constant or frequent.

Of course, you are free to just drift away from such resources by stopping the calls and emails, most often without being missed and therefore without need to worry over the effect of your inaction.  Such advisors, if providing concise and sage responses to questions well asked, are another valuable tool and one without a price tag.

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Any advice can be worthless, or worse.

by on Nov.22, 2010, under Depending upon others, Surrounding yourself with talent

Let me tell you the story of the first investment made by a newly organized formal group of angel investors.  It was thrilling for these angels to find a young entrepreneur with an idea for a business that seemed so destined for greatness that the angels invested over $1 million on the condition that the group receive two board seats and one observer seat on the start-up’s board.  The young, eager entrepreneur agreed immediately and the business was launched, well funded and anticipating great profits.

As the business expanded into a second city and then planned expansion into a third, there was a rift that became evident between these angel board members, played out in front of the CEO.  The angels argued about whether the expansion was too quick, requiring additional money, or should be slower and bootstrapped with profits from the first city’s success.  Finally agreeing upon expansion at speed, the angels raised more money and encouraged the CEO to accelerate the expansion, which the CEO did with enthusiasm.  It did not take long for the company to again run out of money, and for the board to split over the next moves (since the first city continued to be profitable).

[Email readers continue here...] The angel investors could not raise the next, larger round to finance the shortfall and further expansion, putting the fragile young company at risk for following the advice of its board.  In the end, the company had to turn to a wealthy individual investor who took control of the corporation as his price for saving the company.  Had the angel board members been able to agree upon a financeable strategy for growth, the company might have been immensely successful.   To put an ending to this story, the entrepreneur followed the suggestions of the new investor just as he had the angels, and accelerated quickly into more cities, again running out of cash.  The wealthy investor in the meantime, unknown to the CEO or the board, ran into personal trouble with real estate investments, and could not make good on his promise to further fund the company, which found itself unable to meet its obligations and ultimately was shut down, causing a complete loss for all.  Bad advice taken by an enthusiastic and compliant young CEO was the root of the cause, compounded by circumstance.

The lesson is for any CEO to filter all advice through the strainer of good reason, taking that which seems reasonable and rejecting that which is wrong for the company or the times.  By not putting up any argument and being completely compliant, the CEO ceded control of the company to outsiders who gave bad advice.

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Find an outside confidant, a CEO coach.

by on Nov.12, 2010, under Surrounding yourself with talent

The CEO position can be a lonely place, especially when the CEO finds himself in a position of not being able to bring an issue directly to the board and not wanting to explore solutions with associates within the company.  This sometimes happens when a CEO is unwilling to admit a weakness in an area that is critical, such as analysis of financial statements, or when a CEO is unhappy with the actions of his board or with pay offers by the board’s compensation committee that cannot be resolved amicably.  Having an experienced coach, usually acting informally and not for any kind of pay, is a safety valve for a CEO that cannot be understated when in times of great stress.

Sometimes that coach is a member of the board willing to listen and make suggestions off the record.  And often that is good enough.  In my experience, there are times when a CEO needs a completely neutral third party or a roundtable of fellow CEO’s to help guide him through a difficult maze.

Develop relationships with fellow CEO’s in non-competing businesses for a start. Perhaps even formalize the relationship with regular lunch meetings or meetings in groups of CEO’s to discuss personal issues without fear of the discussion leaking outside closed doors.

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D&O insurance is a “cost of respect” for board members.

by on Nov.08, 2010, under Depending upon others, Surrounding yourself with talent

Whenever there are outside shareholders, and when there is a product in release, there is a chance, no matter how slight, of a lawsuit against members of the board as well as against the corporation itself.  Even if such a suit is completely without merit, the cost of defense and the risk of a negative outcome both hang over the company and the director.  Directors and Officers insurance is meant to reduce that risk and provide for the legal defense of any such suit at the expense of the insurance company.  In that regard, even the lowest amount of D&O insurance available, $1 million, provides for legal defense costs to be covered.  The usual cost for such insurance is $4 to $6 thousand a year, with an extra $2 thousand for an additional million of coverage.

More important than the cost is the provision of investment documents from sophisticated investors requiring D&O insurance for the company at the time of funding.

Over the many years of board service, I have been sued as a director several times, in no case covered under the umbrella of a D&O policy.  Although I won each of these rather spurious suits, the cost of defense in some of the cases was not reimbursed, and the time spent in helping the attorney prepare for the defense and in one case through to a several day adjudication event, was not small.  As a result, I now insist upon D&O insurance for every board upon which I sit.  The backgrounds of these suits make for good stories, which you might ply from me at a later telling.

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What to expect in board member commitment.

by on Nov.01, 2010, under Depending upon others, Surrounding yourself with talent

Expect a board member to give a meeting a month, emails and phone calls between.  Urgent issues require more of all.

Board members are usually busy people, often running other companies or serving on multiple boards.  Early stage boards usually meet once a month for two to four hours, enough to ruin the rest of a day for those who travel even short distances.  In addition, most all board members freely receive phone calls and emails from the CEO during the month, all considered part of service.

There are times when board members are called upon to give extra-ordinary time to the corporation, such as interviewing candidates, strategic planning, recovery from a cash flow crisis or other urgent  issues.  Most often these are freely given by board members.

The line is crossed when a CEO asks a member of the board to consult to the company, spending considerable time with other employees regarding issues that might be handled by others than from a board.  Depending upon the board member, it is appropriate to offer a consulting fee for this time spent above the call of board duty.  Any such informal contracting of service should always be preceded with an agreement between the CEO and board member as to the amount to charge and estimate of time to be spent before further agreement is necessary.

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