Picking up where we left off…
In my last insight, I described the CEO who stacked the board with two friends, making a majority for control purposes and relegating the investor representatives to insignificance. There were no outside board members with industry experience, no members the CEO trusted with governance backgrounds, no scientists to evaluate the technology that is the core asset of the corporation.
A recipe for failure. 
If the CEO does not fight for balance of the board, outside board members must fight for this to protect the corporation. If for no other reason, this protects the members of the board from making decisions without rising to the standard of careful deliberation under the “reasonable care” test.
How about the size of the board?
[Email readers, continue here…] Some board members find themselves debating whether there should be an expansion from five to seven, from seven to nine or more to allow for such a mixture of protective seats created by the investment documents and balance with outside board members.
What about multiple investor rounds?
Sometimes, as in one board where I sit today, there are so many classes of investors, each with one or more seats, that a seven-person board is not enough.
I am not for large boards.
There are social studies that reinforce the notion that a group of six or seven is far more likely to arrive at reasoned decisions effectively than larger groups. Look at the example of most non-profit boards, where the number of members often exceeds thirty, requiring the creation of an executive committee to get the work done.
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.
forget this point. They write in their investment documents that they will occupy a seat on the board for as long as they are invested in the company, thinking of this as a protection for their investment and tool for them to influence growth.
corporation comes first. Some investor board members are also member of boards for companies that may overlap in markets or even compete directly, although rare. Either way, I have seen many instances over the years of my board service with VC’s on the board, which the VC’s have had information about other firms that would be classified as confidential – that they offered at least piecemeal in a board meeting of another company where they serve. There are issues that stress the loyalty of board members such as placement of employees or recruiting of executives from firms where the VC or board member has inside knowledge. These are rare, but each stresses the duty of loyalty to the corporation on whose board they sit.
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.
“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.”
expenses are accounted for as earned, not when the cash is received. (You, on the other hand, account for your individual income on a cash-accounting basis, counting the cash not the date of your earning or accrued expense.) The difference: If you earn pay due December 31st and it is paid January second, you pay income tax on those earnings in the following year. But the corporation that pays you accrues the expense and takes the deduction in the year in which the income was earned or expense actually incurred.)
creating and reviewing data. Bookkeepers are often trained on the job although sometimes more formally and handle the physical work of accounting for the transactions. To expect a bookkeeper to provide analytical planning is to ask for something they often cannot provide, except in a cursory way.
Many early-stage CEOs are not trained and ready for such tools even if available. The lesson here is twofold. There is a benefit to using a good accountant to help devise critical reports for a corporation; and CEO’s must quickly become financially savvy in the analysis of financial statements and metrics that measure the health of a business. To fail to have this skill is to reduce the corporation’s capability to discover problems early and take advantage of growth opportunities.
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.
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.
On the other hand, often a salesperson 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.
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.
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.
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.
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.
