Does a “good heart” diminish the chances of success?

First, let’s separate the “good heart” from the issue of whether an entrepreneur is driven to succeed.  A sense of values that allows for sharing and fairness is not at odds with a ‘type A’ entrepreneur driven for success.

What is important is that stakeholders (people working for and with the entrepreneur) accept the entrepreneur for his or her good intentions, sense of fairness and willingness to listen.

Stories of the selfish entrepreneur

I have had numerous experiences during my business career where businesspeople I dealt with took advantage of the moment selfishly because they could, not because they should.  I recall an executive who kept a large deposit but canceled a contract, refusing to negotiate, because the next payment due was a few days late.  Or another who sued over a gray area issue, refusing to listen or negotiate.  (He lost the suit and paid both sides’ fees.)

My unscientific conclusion

[Email readers, continue here…]    And I have come to conclude that “good guys” (men and women) do finish first.  There is no scientific proof, no metric to measure the full meaning of “good.” and no special acknowledgement from any “good-watching” organization.  Even without these, I am sure of this.

Surely the ruthless more often win in the short run.  But early successes, built upon the broken backs of adversaries, are rarely followed by long- term wins for the tyrant or for the tyrant’s company.

Be of good heart.  You will enjoy your entrepreneurial or managerial ride much more, and your stakeholders will follow you through the flames as well as cheer your successes.

Images created with MS Designer using prompt: A realistic photo image of a casually dressed female businessperson standing as her six direct reports applaud her recent action. White background, No text.

The CEO position can be a lonely place, especially when you find yourself 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.

Sign of weakness?

This sometimes happens when a person is unwilling to admit a weakness in an area that is critical, such as analysis of financial statements, or when unhappy with the actions of your 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 that cannot be understated when in times of great stress.

Some possible coaches in your present sphere…

[Email readers, continue here…]     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.

Here’s a suggestion:

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.

Image created with Microsoft Designer (OpenAI) using prompt: A photorealistic image of a male CEO sitting at an office desk, looking lonely and alone. Image should have soft edges. Desk should be loaded high with papers in the inbox tray.

What’s the exposure?

Here are some examples: Entrepreneurs blaming their board for failures of a fragile, early-stage company.  Shareholders unhappy over the same loss, reaching out to sue every name available. Employees reaching out to anyone above to redress grievances.  In one case, an aggressive lawyer found all the members of an LLC, and sued every member found.  Whew!

So, what’s the chance this could happen?

Whenever there are outside shareholders or noteholders, or unhappy employees, 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.

What is D&O insurance?

[Email readers, continue here…]   Directors and Officers insurance (D&O) 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 dollars of coverage.

Consider completing the package.

Recently, insurance companies have added employee practice liability insurance (EPLI) to the package to address specifically the risk of employees suing for redress.  Given the increasing number of suits for sexual, racial, gender and other discrimination, this now seems logical and necessary.  So, add another $3 to $4 thousand to the policy cost.  Ouch!

Is the required?

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

I am one of those.

Over the many years of board service, before insisting upon this insurance requirement before service, I had been sued as a director several times, in no case covered under the umbrella of a D&O policy.

Although I won all but one of these rather spurious suits (and settled that one outlier to keep my unaffiliated wife out of this swamp), 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 – but for another time.

Images created using DALL-e, prompt: A realistic image of a man serving papers representing a lawsuit upon another younger man and his board of directors, all in business attire without neckties. Use clear background and ragged edges to picture.

Of course this is a tricky question. You might expect the answer to be “as much as necessary” or “more during emergencies” or “usually just at scheduled meetings.”

But 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 a maximum of four hours, enough to ruin the rest of a day for those who travel even short distances.  In addition, most board members freely receive phone calls and emails from the CEO during the month, all considered part of board service.  And with the advent of Teams and Zoom, board members travel far less frequently to meetings.

Special circumstances often appear by surprise.

There are times when board members are called upon to give extraordinary 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.

Crossing that line…

[Email readers, continue here…]   CEOs: You will probably cross a line if you ask 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 for you 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.

Do you expect your board members to be more involved that this? 

Have you discussed this during a board meeting?  And would you want more from your chairperson?   How about asking a board member to spend time with one of your VP’s or directors?  All of these are great questions to clarify with your board.

So, now we’ve discussed the expectations that are the norms.  It’s your turn to make expectations clear and be sure there is agreement about these expectations.  Good luck!

Images created with DALL-e from prompts for this blog post.

Many early-stage CEOs and board members have asked for some guidance regarding pay and time commitments for board members.  Here is my best advice, based upon many boards and many years.  Pay early-stage board members of companies that are not lifestyle businesses one percent of the fully diluted equity in the form of an option that vests over two to four years of service.  You do not pay professional investors who are serving on behalf of an investment company or VC and paid by that company.

How do you set the option price?

The option price should be set by appraisal under IRS rule 409a, and certainly should be low enough to recognize that common stock options are not worth as much as preferred stock, given the many preferences of the latter.  If you have only one class of stock, the price is the same as the last investment price per share if no 409a appraisal.

Special clauses for board members and senior executives?

Further, the option should contain a special clause for board members and those executives who may not be brought forward to an acquiring company – that accelerates vesting to 100% upon a change of control in the corporation, which aligns the board member with the best interests of the corporation itself. Otherwise, you might picture an event in which the sale of a company to be consummated a few months before full vesting could cause a board member to find ways to vote for delays or even against a sale of the company, awaiting full vesting of his or her options.

How about companies without intent to sell or IPO in future?

[Email readers, continue here…]   For lifestyle companies or later stage companies, board members should be paid on a per-meeting basis in cash. Typically, this payment amounts to $1,000 per meeting of the board, adjusted upward for public corporations to $3,000 per meeting on average, with special pay for committee chairs and special meetings.  These payments recognize that board members are not working for equity but for the equivalent of consulting fees plus the attendant risks of board membership.

Clarifying who receives options

To be clear, venture investors with investments from their funds are not typically ever offered pay for board service, which is expected as part of the investment.  Inside board members, CEO and any other paid employees are not paid for board service in either stock options or cash.

Expenses for travel are often reimbursed by the corporation. 

VC board members sometimes request this, other times do not. It should not be offered to the VC members unless requested.

Next week, we’ll cover what should be expected of a board member in the way of time allocated to the company.

Images produced with Midjourney: Prompt for first: “Four diverse adults sitting around a conference table examining a document for each.  Realistic human images. “

Practically speaking, this is an impossible goal.  We have investigated the restrictions imposed by investment documents and the obvious need to keep continuity on the board with the retention of the CEO position at the very least.  But it would be the best of form to require in the bylaws of a corporation that all seats are re-elected annually.

How about loss of institutional knowledge?

Well, here’s a problem that needs a bit of thought.  If you elect your board members annually and for some reason aggressively change members, you will experience the steep learning curve required to get the newest board members up to speed to contribute with deep knowledge of the company and of your management style.  And that’s not good.  Re-electing board members again and again is not a problem – if those re-elected members contribute effectively as they fill their seats.  But annual re-elections signal to all that a board seat is not permanent or even long-term.

How about non-profit boards?

There are three types of members on non-profit boards, and the balance is critical.  There are those with money to give or get, necessary for all non-profits.  There are those with great community and industry contacts for finding honorees for events or bringing onto the board.  And there are those with deep knowledge of the non-profit itself, always able to help when members without that experience make suggestions that may be impractical or tried before.

How about staggered four-year terms?

[Email readers, continue here…]   That’s appropriate for non-profits for the reasons listed above. But I’d revert to the annual re-election habit for all but non-profit boards.

Why the difference?

For non-profits, this allows for the creation of a board development committee to find and recruit outstanding new board members and find ways to unseat those who are no longer contributing or even attending board meetings.  Such a policy further reinforces the duty of care for the corporation by its board.  Unseated board members with longevity and a history of participation can be invited to become “emeriti” members of the board with observation rights but no vote.

The annual shareholder meeting:

Although not required by all corporate bylaws, all companies should hold and document an annual shareholder meeting in which the shareholders are notified at least 10 days in advance and given the right to submit a proxy vote for their choice of officers and for any other issues that will come to a vote, including expansion of the stock option plan to include more available shares.

The bottom line is that good corporate governance calls for a skill set within the board that is not often present, but for the protection of members and the corporation itself, necessary.

In fact, such a board would seem out of place in a one-person company.  As soon as any outside money is ingested into the corporation, others have a vested and legal interest in the behavior of officers entrusted with the best use of funds.  Money from friends and family usually is offered in a casual manner with much less restriction than professional investors, so that a formal board is a logical step but not often created upon this event.

Then along comes either money or contracts from strategic or financial investors or partners.

The operations of the corporation become more complex. Ownership is spread among

several classes of investors.  The number of employees grows.  Bank loans with restrictive covenants are taken on.  These events, one or all, usually are triggers for the founders to seek to create a board for oversight and guidance.

And then company grows…

Once the company hits high growth or larger size, it is logical to follow the standard practice in the creation of two standing committees composed of outside board members (not employees or executives) – the compensation committee and the audit committee.  Compensation’s charter is to approve stock option grants for any employee, no matter how small the grant, and all salary and benefits for at least the CEO if not the next level down, to avoid conflict of interest with the CEO.  All actions of the committee are in the form of recommendations to the full board for a vote and are not binding until that event.

[Email readers, continue here…]    Second, the audit committee is responsible for hiring an outside auditor as appropriate, reviewing the accounting practices of the corporation and making sure that laws are followed relating to recognition of revenues and expenses.  Good audit committees also review the corporation’s insurance portfolio, risk protection policies such as email and computer use, disaster response and recovery policies and any other area where the corporation’s very life could be at risk from inattention.

Yet another personal story…

Let me tell you the story of a company on whose board I sat for several years.  The CEO insisted that between husband and wife, over half the stock always be in their hands, refusing new offerings or any other form of dilution, and controlling the majority of board seats in the process.  After replacing two board members with two other friends who were a bit less independent, during that first meeting with all of us present including the two new board members, I suggested that the corporation then form the two committees – audit and compensation.

“Never!” was the single word as I recall the CEO’s immediate outburst.  I made a motion to bring it to a vote. The corporate attorney was present, recommending this as a relatively safe move for the CEO.  I called the question after a drifting discussion. You can guess that the three friends voted down the measure, perhaps as a sign of unison, since this was the first vote by the two new members.  It was the final nail for me.  I engineered the extraction of the outside investors, even at a near total loss.  At least the investors could then take the loss against ordinary income under rule 1244 of the IRS code, worth something to each, rather than being locked into what was a slowly failing lifestyle business with no effective oversight.

At one time or another, most all businesses use consultants to fill the gaps in knowledge or to provide guidance for management.  Consultants are good in that you can sample their work with short projects, change to other consultants quickly, and stop using them when a project is completed.

A personal story of ignorance of good advice.

I have a partner in a consulting practice that specializes in the travel industry.  Several years ago, we were hired by one of the largest companies in the industry (yet another Fortune 50) to perform a top-to-bottom audit of their processes across 27 facilities, and recommend measures to increase efficiency, increase income, better the customer experience, and of course, decrease costs while also increasing the quality of service.  We were quite confident that our services would yield great, measurable results.  The work continued for about eight weeks between the two of us as we visited the 27 locations and worked with employees in departments across all disciplines within each location and at central offices that performed services for all locations.

The result of the consulting project…

Finally, at the end of the project, we had identified nineteen specific issues, each of which would, if implemented, accomplish one or more of the goals outlined at the start of the project. The sum of the savings and increases in revenue were worth multi-millions annually, well worth the implementation of most or all of the recommendations.

[Email readers, continue here…]   On the final day of our assignment, I was responsible for the “reporting out” to the assembled twenty or so executives in the large conference room of this major corporation.  I started my presentation, which had been carefully documented in handouts and PowerPoint, with this story…

A unique description of the “ignore” lesson.

“I want you to all imagine that it is tomorrow morning, looking back upon today’s reporting of these past months of work by your consultants.  Imagine that today I build for you a beautiful sandcastle exactly at the water line of the ocean nearby.  Tomorrow, we both will visit that beach and look at the water line, and find not a beautiful castle, but just smooth sand, just as it had been the day before building our beautiful sandcastle.  In other words, I would not be surprised if you accept our report today with enthusiasm, but then in the overwhelming rush of daily business, fail to implement few if any of these recommendations that you so enthusiastically received.”

The story is true, and the results were as I predicted.

A few of the recommendations were implemented over time, one with great effect and even a national advertising campaign behind it (that you surely saw on TV).  But most were just ignored.  I imagine that our report sits today on someone’s shelf, filed with others from past and from following months and years.

Unfortunately, it is human nature to enthusiastically ignore to act upon recommendations of third-party consultants. There are many, many exceptions, but far more instances of this in the business world.  Not all consultants give advice worth taking, of course. But when they do so, it is only as good as that which you implement.

Over the years in business and as a member of over forty boards, I have received good advice from corporate attorneys and on occasion bad advice as well.  There is a line that should be drawn in a relationship between corporate attorney and CEO or board.  Attorneys are paid to protect the corporation, not to give business advice.  Some are experienced enough to provide great business advice.

But the law degree they earned does not assure that, even though most CEO’s respect the advice they receive from their attorney highly enough not to doubt the conclusions or the experience behind the conclusions offered.  And since attorneys are paid to protect, often they will give a litany of warnings about what could go wrong when accepting a contract clause that they have been trained to challenge.

Business advice vs. legal advice

There comes a time when a CEO must decide to reject what may seem like important good advice from the attorney and chance acceptance of terms within a contract that may cause risk, but controllable risk or risk that is so remote as to be worth the acceptance of the business represented by the contract at hand.

Another story about this…

[Email readers, continue here.]   I was chairman of a company that had been offered an investment by a Fortune 500 company offering to make a strategic investment in our business, which would be capable of driving new demand to the large company through a series of new web services creating a greater need for the large company’s products.

The business terms had been agreed between the business development officer of the investing company and our board, as both companies turned the details over to their respective attorneys for documentation.  The attorney for the investor was a member of a large, respected law firm in Silicon Valley, and certainly was full of himself as sole legal protector of the rights of his very significant investor.

As drafts of the otherwise standard investment agreements passed from him to our attorney and our management, we immediately spotted a significant number of terms we not only had not agreed to but were contrary to the spirit of the investment.  The attorney held fast defending every challenge, stating that “these terms are standard for our client and cannot be changed.”  We appealed to the business development executive, who deferred to the attorney restating that the terms were unchangeable as far as the big company was concerned.  After conferring between our attorney and board, we walked away from what would have been a fine strategic partnership, killed by an attorney who probably understood the client requirements but was unwilling to offer flexible solutions to problem areas.

Drawing the line…

That attorney had made what we considered business decisions on behalf of his client.  By the way, we immediately found a willing replacement that had an attorney not quite so full of himself and quickly concluded a similar deal to the acceptance of all.  And to this day, I caution my CEO’s not to deal with that Fortune 500 firm because of the experience we had with its attorney.  You never know how much far reaching an action can be, given the speed and extent of communication between CEO’s today.

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 you cut through delays in government agencies, speed the process of product planning and ultimate release, aid in positioning in the market and help you 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 senior manager 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 their time on this alone).

[Email readers, continue here…]   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 that CEO seek solutions and to provide resources to them for that purpose.

The format also calls for the CEO to examine their calendar over time and report classes of activities by percentage of total time spent, so that the group may add comments about use of that person’s valuable time to the critique.  It is from over a thousand of these CEO presentations over the years that I attempt to make the following generalities.

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

A good CEO spends at least 30% of their time dealing with customers, including meeting directly with customers and being involved in closing the largest deals, maintaining valuable relationships, and “sniffing” the attitudes of customers toward the company as well as exploring customer needs 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 and advisors, 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.  That last 10% is most important and often overlooked. It represents strategic thinking.  “What if?”  “How about…” “When should we…” “How could we…” You get the idea.

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 cohort reviewing this time spent 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 senior manager’s time, the roundtable presentation requires the CEO 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 CEOs are not often 40-hour workers.  But then again, in this new world of always-on communications, who is?