What’s a company board good for, anyway?

Some of you have gotten along forever without a board of directors, or used your spouse as the “other” board member from the start.  But there are some very good reasons to build a great board composed of some outside members.  And good board members can add real value to you and the company.

In other posts, we cover legal responsibilities of a board, how to pay board members, the limits of their responsibilities, dealing with under-performing or “noisy” board members, and more.  Today, we cover an ideal board’s collective mindset.

If you are responsible for forming a board, managing it, or evaluating its collective performance, consider these three important modes of engagement as you guide…

Generative thinking:  Do you have board members who often ask “why?” or “What if…” Or “What are the alternatives?” Or the important one: “Is this idea on mission?”  These are generative thinking questions.  Hmm. Generative. Now there’s a word perhaps you have never heard, and should be added to your corporate toolset and vocabulary.

[Email readers, continue here…] Generative thinkers are relentless in asking questions that get to the core of an idea, often making the originator think more deeply about the effects over a longer period of time.  Some ideas sound unbelievably creative – and may be that.  But sometimes there is a barrier, an impossibly high cost not considered, a social backlash never thought of, or competition already covering the idea that is unknown to the originator.  Which leads us to the second class of creative board thinking…

Strategic thinking:  Board members who ask: “What is the competitive landscape?” or “How about the public relations impact?” or “Does this idea move us toward our goals?” or “Is this just too little value for too much money?” – are adding to the dialogue in valuable ways and should be encouraged, not just tolerated.

Most of us in management have too little time for strategic thinking.  “Ah ha” moments are too few when there are lists of urgent things to do that never seem to be completed.  Good board meetings allow time, and the chairman encourages members to ask strategic questions to help focus the board on its best use of that time.

Fiduciary thinking:  Most board members, especially those composed of members from larger businesses, are good at the fiduciary questions.  “Is this legal?” “Is it feasible (financially, with our resources, with our capabilities?)” “Can we afford to do this?” “Is this idea sustainable?”  These are typical fiduciary questions.  Importantly, these also help a board to cover the legal “duty of care” for the health of the company. But that, too, is the subject for another time.

The punch line:

Investing in the creation of a governance board is not enough.  We must encourage a constant use of generative, strategic and fiduciary thinking from  board members, encouraging this most appropriate mindset.  And we must present our ideas in board meetings or documents in such a clear manner that such questions will be asked, and discussion allowed.

Most importantly, we must leave enough time in a board meeting for these discussions. Which means reducing the time spent in routine reporting, delivering materials well in advance when possible, and encouraging participation from all board members.  This is not easy. But the potential for great results leads to the board giving “macro governance” and not delving into the micro details that management deals with on a daily basis.  A better company is the goal.  And what CEO or board wouldn’t want that?

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What if you come across juicy competitor information?

Many of us belong to industry associations and find ourselves at conferences and trade shows with time to spend with competitors.  Some of these are old friends; some even former associates.  It is natural to want to associate with these people for many reasons, certainly socially. Most CEOs want to obtain information about their competitors in the most subtle and non-obvious ways.  And of course, most are willing to trade information to get information.

In my former industry, I became an informal centralized source for knowledge about the revenues of each of the many competitors, with a special skill for asking just the right questions to obtain the information.  How many employees does the firm have today? Are you profitable yet?  Can you guess what percentage your revenue comes from recurring sources such as maintenance revenues?

In return for the answers to these several questions, I was usually able to guess a company’s gross revenues within a few percent and would state my guess to the CEO.  His reaction would guide me to increase or decrease my estimate appropriately.  He’d be a bit amazed with the quick fancy math work, and I would have yet another piece of the puzzle helping me to gauge the total size of the industry in annual revenues and the growth and size of competitors.

[Email readers, continue here…] All of this was immensely helpful in strategic planning and marketing, even though to this day I do not think those CEOs were aware of the value of the information so easily given.  And none of this is especially considered a trade secret, violating the unspoken covenant between competitor CEOs that there is a limit to such exchanges.

On the other hand, often a sales person or marketing manager would show up at my office door with a complete package of a competitor’s materials, including price lists, a proposal with discount percentages clearly shown and a list of feature functionality meant to reinforce the proposal.  The source of this information was typically the purchasing decision-maker for a friendly customer or candidate customer.  The question is one of ethics, since the competitor certainly did not volunteer any of the information, which would have been the competitor employee’s violation of confidentiality and cause for being fired.

What does a CEO do with this wonderful, rich information dropped at his door at no cost or obligation? Few would destroy it and ask all to forget that it was ever in their hands. Most would absorb the information and then admonish those who had seen it to not repeat to anyone that it was in their hands.  If you’ve been in business for long enough, you’ve seen your share of this gray market information.  My advice is to be very careful, think of the golden rule, never use this information publicly, and certainly never reproduce it, let alone disseminate it internally.

As to sharing information to get information, CEOs and executives are bound by a duty to their corporations not to share trade secrets with anyone who has not signed a confidentiality agreement, including consultants to the company.  For CEOs on the corporate board, it is a large part of the “duty of care”, a legal requirement of board members to protect the assets of the corporation first and foremost, one of those assets being the trade secrets of the corporation.

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How well do you use your business time?

Forming business relationships at the highest level

As you follow these insights from ignition to liquidity event, you’ll detect a continuing theme, emphasizing the need for deep and wide relationships that the CEO and senior staff can call upon for advice and guidance.  This is the time to elevate those insights to the level of highest value for the corporation, one that cannot be listed on a balance sheet nor included in an appraisal of corporate worth.

And yet, such relationships properly used and never overused, can quickly and precisely help a CEO cut through delays in government agencies, speed the process of product planning and ultimate release, aid in positioning in the market and help the CEO avoid a myriad of mistakes that could prove costly in time and money.

Analyzing your commitments of time to business

Often, I am asked by young CEOs how much time should be devoted to various types of tasks by a good CEO in a small, growing enterprise.  Of course, the response depends upon lots of variables, including whether the company is in a fund-raising mode (in which case the CEO may be spending up to 80% of his or her time on this alone).

I am chairman of the Technology Division of the ABL Organization, a roundtable organization with multiple CEO roundtables of about twelve members each, meeting monthly.  Each CEO is asked to make a deep presentation once a year in which he or she starts with personal and business goals for the coming year followed by concerns as to how to reach these goals. Much of the rest of the presentation is devoted to explaining to the group the causes for the concerns and offering information for the group to use in the feedback session to help the CEO seek solutions and to provide resources to the CEO for that purpose.

[Email readers, continue here…]  The format also calls for the CEO to examine his calendar over time and report classes of activities by percentage of total time spent, so that the group may add comments about use of CEO time to the critique.  It is from over a thousand of these CEO presentations over the years that I attempt to make these generalities.

 How much time do you devote to each type of activity?

A good CEO spends at least 30% of his or her time dealing with customers, including meeting directly with customers and being involved in closing the largest deals, maintaining CEO relationships, and “sniffing” the attitudes of customers toward the company as well as exploring the needs of the customer that might be satisfied by new product development.  15% typically is spent on direct management issues such as supervision of next level subordinates.  15% might be spent networking with those in the CEO’s relationship circle, including the roundtable organizations.  10% is typically spent networking with board members, usually with frequent phone calls, and preparing for board meetings.  10% is typical in exploring strategic concepts, reading about new developments in the industry and just spending quiet time contemplating opportunities.

There are many other classes a typical CEO will list for that remaining 20%, some concentrating upon time spent in meetings of all kinds, lumped together as if all meetings are of some equal value. The group often pays close attention when this happens, since it is a sign that the CEO considers meetings of all kinds a drain upon available time, and few meetings of special importance.

How many hours do you spend on business each week?

Whatever, the spread of percentages to make 100% of a CEO’s time, the CEO is asked to estimate the average number of hours spent each week at or on work.  Most respond with between 60 and 80 hours a week, emphasizing what you already know, that CEO’s are not often 40-hour workers.  But then again, in this new world of always-on communications, who is?

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Several more real costs of taking outsider investments.

Let’s talk about the reality of taking money from professional investors.  It is not the first time we’ve covered this general subject nor the last. But this time, we concentrate upon governance changes.

Once a company founder has tapped the funds available from his or her resources and from friends and family, if the company needs more cash for growth, the most obvious next step is to look for money from angel investors and venture capitalists, typically in the $300,000 TO $3,000,000 range.

This money comes with restrictions a founder may not expect, including restrictions upon the sale of founder stock, clauses that require the investor be allowed to sell an equal proportion of stock upon any other person’s sale of stock, anti-dilution provisions that protect the investor from a subsequent offer of stock at a lower price, and much more.

Almost always, professional investors, including angel groups and venture capitalists, also require at least one seat on the corporate board.  The investor organization is granted the seat as long as the investment remains, and the documents often name the first representative assigned by the investor group to the position.

[Email readers, continue here…] In later insights, we will explore the legal and ethical responsibilities of board members.  But the intent of these “forced” placements of a representative on the board is obviously to watch over the company’s use of invested funds and to help grow the company in value.  The combination of restrictive covenants in the investor documents and the new dynamic of board members with an agenda make for a change in the culture of the corporation, certainly one for the CEO.

However, outside professional investor board members can be a very good asset to the corporation with the skills, experience and broad relationships many bring to the boardroom table.

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How would you like a great advisory board?

Have you ever thought of creating an advisory board? As you can guess, that would be an informal group with no legal responsibilities, but one able to be called upon to act as business, industry and scientific advisors to you and the company.

Usually, you would want to create an advisory board to fill in the critical areas of need not evidenced in the board of directors or within the company itself.  University professors, industry gurus, lawyers familiar with patent law and former executives of competitor companies are typical recruits you might consider. Sometimes, celebrities will agree to sit on an advisory board as a gift to the CEO, providing a bit of glamour for the company at small expense.

How many advisors should you seek for a board?

[Email readers, continue here…]

There is no limit to the number of individuals for such a board, but there is a practical limit to the amount of cash and / or stock to be allocated to these outside advisors.  The rule of thumb for an advisory board member is to expect a half to a full day each year on site, typically in a strategic planning meeting with numerous members of the staff, as well as some reasonable number of phone calls from senior members of management during the year.  Included in the “package” is the expectation that the advisor’s name will be freely used in the company’s marketing, a bio listed on the website, and occasional calls will come as references to the advisor from potential investors and others looking for deeper insight into the secret sauce of the company or state of the industry than can be provided by many on the inside.

How do you pay an advisory board?

For this, an advisory board member for a small to medium sized company should expect to receive options equal to ¼% of the fully diluted stock of the company, vesting over two years, and subsequent grants if there has been additional stock issued to dilute the advisor, bringing the advisor back to this percentage if an advisor is renewed after subsequent two-year intervals.  Alternatively, some companies pay an advisor a fee of $1,000 to $2500 per “on premises” meeting day and optionally much smaller stock grants, if any.

Additional commitments of time by an advisory board member should be compensated as would any consultant, at half and full day rates agreed upon in advance between the CEO and the advisor. There is no rule as to uniformity of pay, as some advisors may be willing to serve at no cost while others are industry consultants used to receiving fair payment for services rendered.

Are there any special documents needed for advisors?

Advisors fill blind spots in the corporate knowledge base and guide you in areas where you feel you have a personal weakness.  There is usually a formal agreement between the company and the advisor, carefully calling out the time expectation, the forms and amounts of payment, and the indemnifications from liability granted by the company to the advisor in return for confidentiality and non-disclosure of company trade secrets by the advisor.

A particularly strong advisor, especially if well known, may be named chairman of the advisory board, which is often just an honorary title, since the CEO is usually tasked with the planning of the full day meeting of advisors annually, and setting the agenda to match the needs of the corporate board and senior management.

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An experienced coach has seen your movie before.

Business coaches come in all sizes and shapes.  Entrepreneurs will have a relative willing to devote time, a school friend with business experience, professionals who charge for the service, investors with a reason to promote your success and more.

Photo courtesy IBM Business Coaching

But by far the best coaches are those that have lived through the process you’re going through and built successful enterprises in your same industry.  Especially if they have sold their companies and live comfortably upon the proceeds, these people are often the most willing to help and the most patient through the process.

One great source for coaches is among fellow members of a CEO roundtable organization, Young Presidents Organization or similar association where you are comfortable with the coach candidate and know something about his or her style.  Another is through industry associations or civic groups such as Rotary or Lions Club.   Some larger communities have organizations of corporate directors, composed of a combination of service providers and professional corporate directors. I’ve personally been involved with the ABL Organization for almost thirty years and share problems and solutions with a monthly roundtable of smart CEOs from companies of all sizes.

If you take smart money from a good angel or venture organization, the lead investor usually becomes your board member and has a vested interest in your success.  If you are lucky enough to create competition among investors for your company, you can select the investor or group with an individual who has experience in your niche and identifies with your vision.

[Email readers, continue here…]   How do you pay a coach?  If the coach is also a significantly large investor such as a VC fund, the board member-coach will offer a limited amount of time outside of board work at no extra cost, all for the good of the investment.  Professional advisors, consultants, are typically paid by the half day or full day, charging anywhere from $400 per half day at the low end up to $3,000 or more at the high end for a full day of work.  Some charge by the hour, making themself available much as an attorney, keeping track of hours spent on phone calls and emails with you. And some will willingly work for stock options, an amount to be negotiated based upon time spent and stage of corporate development.  Years ago, I co-wrote my first book, profiling just such a person, trading his time and experience in exchange for equity – and managing to become wealthy in the process by picking and aiding great young companies that grew large and

Original 1994 book

were ultimately sold at a tremendous profit.  We had no term for such work in those days, and created the phrase “resource capitalist” to describe the person and process.  He brought resources to the table from personal experience to a great contact base, and was able to help speed the time to market while introducing the company to great potential buyers at the right time in the process.  His average percentage of a company was 5% in return for spending a day a week as I recall.

Jokingly, I used to tell people that I worked for food, with so many free lunches being offered from all sides. But alas, there is no free lunch.  And over the years I have vastly curtailed the practice. However, there surely are experienced executives out there who’ll work for a meal. It is worth asking.

There must be many more creative ways to pay a coach, especially for early stage businesses.  The one warning: avoid those looking to become partners, asking for larger portions of equity than, say, 5% when they contribute no cash to the enterprise.  There may be times when such a person can truly be a founding partner in a young business and devote enough time and resources to warrant more, but this is taking on a partner in every sense of the word, and should be done carefully and only after spending time with a number of the person’s references and becoming comfortable with the person, ready for the long run.

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Avoid “The tyranny of the new office” syndrome.

One of the most obvious observations I make with growing company CEO’s is that planning for a new office is done with an optimistic view of the future, incorporating planned space that compromises only slightly the measured needs for the next three or more years as outlined in the financial forecast.

The result, signing a lease for space enough to handle the growth called for in the plan, is a predictable group behavior I’ve come to label “The tyranny of the new office.”  The company plans a move to a new facility with plenty of space that is probably built out but not planned for use until the company grows to the next stage of need.  Employees move into their new cubicles and offices, spread out far more than in the previous facility.  The excitement and noise of working in too-close proximity to cohorts suddenly becomes an unexpected near silence, as everyone notices that they do not have to raise their voices any more to be heard above the din of noise.

[Email readers, continue here…]  The exciting sounds of an office filled to capacity functioning in a growth environment are exhilarating to most that have experienced it.  The distractions are dealt with using earphones with smartphones, concentration and tolerance; but they are dealt with by all.  The change to a near silent environment is so startling that, many times, employees express a bit of resentment or even depression, masked by the common statement that “it is so much easier to get work done without the noise.”  It is the excitement of activity that generates more and better output for most, not the isolation of silence.

But back to “the tyranny of the new office.” Two predictable outcomes almost always follow a move into an office much larger than today’s needs. First, you’ll find subtle moves by employees into the unused, reserved space.  After all, it is there and unneeded for now.  Why not make use of the space until needed?  And second, management sees the open space and often finds it easier to justify acceleration of one or more new hires since the facility is available and infrastructure complete.  Unconsciously longing for a bit more of the excitement from the noise of the previous office, managers often make subtle unrecognized moves to fill the void with new hires earlier than plan.  That’s why the label, “tyranny” even if the word seems out of context.

If and when asked, I always recommend more frequent moves as opposed to longer term leases.  It seems from experience that both the company and the employees gain from such staggered moves.

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Sign short term leases early on. Move as you grow.

Avoid long-term commitments.

It is statistically true that at least half of the young companies funded by angel or venture investors will not survive three years from funding to demise, and more than that percentage will die with two years if not well financed.  The greatest burden of either a growing company or one needing to retract and reduce expenses is the office lease.  Although payroll is almost always the greatest cost, companies have flexibility as to how to handle both rapid growth and rapid decline in the personnel arena.

The most difficult thing to deal with in either rapid growth or retrenchment is the office lease.  A five-year lease may be cheaper per month than a three year lease, and may provide for more free rent and tenant improvements.  Those benefits pale in comparison to the high cost of retaining or buying out a longer term lease when growing or reducing in size – which is most of the time for early stage companies.

[Email readers, continue here…]  From personal experience with many companies in my portfolio and from many board experiences over the years, young companies are unpredictably unstable in their facilities requirements. Flexibility is worth a few percentage points of fixed cost when companies are in high growth mode or are at early stages of proof of market.

It is a hassle to move, requiring time and planning.  It is much worse to worry over paying for two leases each month and tying up two large deposits.  Or honoring a personal guarantee if the company cannot pay.

Then there is the dread of “The tyranny of the new office” to worry about. But that is a story for next week’s insight…

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Are you uncomfortable with home-based workers?

Do home-based employees work with the same dedication and productivity as those in office cubicles next to each other?

That depends upon the management as much as the employee.  I have a friend who is a

CEO of a recruiting firm who “virtualized” her company after a decade of maintaining a fixed office location.  She organizes morning conference calls, has each employee tweet the others in their department when starting work and ending the day, creates the feel of closeness with employee contests, and rewards her best sales people by assigning them the best leads, creating an environment where the best excel and those unable to cut it in a virtual environment fall out on their own accord for lack of revenue.

But most important, the unpredicted benefit of having very low infrastructure overhead may be the one most important element in saving the company during the strongest and longest downturn in recruiting industry memory because of the recent recession.  Much larger recruiting companies were in trouble, with high fixed costs for facilities that could not be shed quickly.  This CEO’s decision to try to retain an excellent, motivated staff in a virtual environment paid off and continues to pay off in every way.  The employees are more satisfied, actually work more hours in a day even if spread over a longer period, and uniformly claim a better lifestyle as a result of the move.

[Email readers, continue here…]   But as you see from the story above, it does take more creative management to make this work. It is a management skill that was not taught nor learned until recent times. A creative CEO will find ways to motivate and compensate for the lone nature of working alone, but using social networking tools to make office workers and home workers feel and behave as a unit.   After all, with this generation of texting, tweeting, IM-based workforce, you’ll find as much of this kind of communication from adjacent cubicles as from distant home offices.

Let’s pause for a word about dress code and formal accountability for the home office worker.  Employees working at home must dress for work, even if casual, and find a schedule for the start of each work day that is to be counted upon by fellow workers.  It won’t be long before home workers will routinely greet each other via video conference from the home desk.  Although possible today and used by some, it is not a requirement of most employers with home-based workers.  Someone who “comes to work each day” even if to the computer in a separate part of an apartment, is putting on the business hat in a much more formal way that one who drifts to a computer in the room beside a blaring TV, dressed in pajamas and arriving whenever convenient.

How about the employee unable to self-motivate in a home environment?  With the proper measurements of productivity, it will soon become quite obvious to both the employee and manager that such an opportunity is not right for that person.

Ask any CEO who has tried letting employees work from home, whether for a day a week or as a rule with occasional office visits.  You’ll find stories of emails time stamped well into the night, work performed at unusual hours and productivity increases.  You’ll also hear a bit of pride in the telling.  A CEO that encourages this once-risky venture and is rewarded with increased performance, is a person fulfilled and willing to tell anyone who’ll listen.

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Niche marketing works. Here’s how.

How many of us throw away marketing dollars because our paid efforts reach an audience that is much larger than the target or niche audience we need to reach?  Whether it be for publications, social marketing, or even those once-necessary postal mailers, we have tools now that were not available just a few years ago.

So, let’s up our marketing knowledge first with a few short answers to marketing questions…

What Is niche marketing?  Simply, it’s offering a specific product or service to a specific group of people.

Why Is niche marketing important?  This is easy. Here’s a question to respond to a question:  Would you want to throw away advertising or marketing dollars reaching people who won’t buy no matter what? Of course not. So, aiming a brand-new smartphone full of great features but increased complexity using AARP Magazine as your marketing resource just won’t get the job done.  Your niche market is younger, and perhaps smaller – especially if the feature set on the smartphone is so radically new that you would need to reach early adapters.

So, what other benefits are there to niche marketing?  Here are just a few to consider…

[Email readers, continue here…]

  1. You’ll have less competition. If you can find a gap in the market and target a specific group of people that no other business is targeting, you’re onto a winner. Where else are consumers going to find your product, if no one else is offering it or if other companies offer it, but haven’t found the right niche audience?
  2. You’ll save money. Niche marketing means targeting the right audience at the right time for the right product.  That’s easy to say, but once was impossible to implement.
  3. You’re the expert. By narrowing your audience and product, you’ll be perceived as the expert and there may not be a competitor to challenge you with an adjacent ad or campaign.
  4. You’ll Think more deeply. If you’ve taken the steps to research your market and niche, the chances are that you’re taking your business seriously. You’ll wonder: ‘’Is this a worthy investment with probable payback in revenues? Will this campaign reach the audience I intend?”
  5. You’ll Have the Opportunity to expand your market with niche success. You won’t be wasting large amounts of time and money early on.  When you do connect with your niche, you will have resources to expand and alter your message for the next niche and then the next.

How to Find Your Niche?  So now I hope I’ve convinced you. But you have no idea what to do next. Think about your product or service.  Is there anything you could do to emphasize benefits that are unique to the niche? Competition is good, but – if there are hundreds of businesses out there that already have gotten to and penetrated this niche – you’re going to find it hard to get through the marketing noise.  So, narrow your message.

Emphasize features and benefits not addressed by others if possible.  Find a marketing or advertising outlet that is not saturated with other messages for nearly identical offerings.  Create social media posts with links to your site that drive search engine scores and increase search traffic.

Whatever product you’re trying to market, be sure to create at least an outline of a marketing plan and test your targets (niches) before jumping into the effort. You can do that by creating a small subset of the niche, and testing that segment before expanding to even the niche you’ve selected.

Keep your customer in mind. No need to race from unproven plan to large ad placement or social effort.  If targeting the small portion of your niche doesn’t yield expected results, revise the call to action, and try another subset. And most of all, never give up!

Here’s a quick nod to the folks at Colour Graphics for urging me to write this insight. – Dave

 

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