Posts from Board

I am developing a standard format for these MBA Mondays series. I do five or six posts on a topic and then I solicit four or five guest posts to wrap it up. Today we begin the guest posts on the Board Of Directors series we've been doing for the past six weeks.

Hopefully everyone who has been following this series on Boards understands the point that you want independent directors on your Board and that the best choice for independent directors are fellow entrepreneur CEOs who have been through what you are going through.

One of the most sought after independent directors in the world of internet startups is Scott Kurnit who has started a couple internet companies and has sat on eight boards including several public boards. If you are not familiar with Scott, here is an interview he did with me in late 2010 at the Paley Center.

I asked Scott to lead us off in the guest post section because I know that he has some strong opinions about Boards and Board composition. And he shares some of them with us in the guest post below.

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Fred has done his usual fabulous job outlining the critical issues with Boards. Today I’m going to address two concepts that surprise people every time, end up generating lots of head nods, then usually don’t happen. These suggestions clearly fit into the art of the board more than the science. And it’s the unwillingness to depart from traditional norms by those around the table that stop them from happening.

1. Your best friend should be on the Board, and
2. No one who works in the company other than the CEO should be on the Board.

Why would you take a valuable Board seat for your best friend? Doesn’t every seat need to be occupied by people with industry expertise, financial acumen or years of board experience? That’s logical, but what about having someone who you trust with your life? Someone you’ll truly believe when the Board is telling you that you’re not performing or that the financing you seek is wrong or that you’re spending too much or your request for stock options is too aggressive?

Ideally, your best friend has industry or financial or board expertise – but even if not, having someone who has your back… who tells you the unvarnished truth… that you believe in an instant… is in everyone’s interest. This seat is critical. Fill it.

As a repeat CEO and board member, I try to fill this role of CEO pal if a CEO doesn’t have one. I’m well aware of my fiduciary responsibilities to shareholders, but I try to think of the CEO first since if he performs, the company performs and changing out CEOs is a wrenching and often disastrous activity. A CEO should have someone he can tell anything. That makes a better company and a better outcome for shareholders.

Now, for my second point which will certainly raise the hackles of co-founders who are on the board, work their butts off and may have as much stock in the company as you do: The fact is, there’s only one CEO, one leader. And that’s why people who work for the CEO can’t also be the CEO’s boss. Yes, fundamentally, that’s what Boards are… the CEO’s boss.

Here’s the simple logic. The CEO can’t be in charge 29 days out of the month and then report to her subordinates on the 30th day. That screws up the crispness and clarity for the 29 days. A CEO should not be giving compensation or making non-objective decisions concerning subordinates, in order to make sure her own comp and Board decisions get approved on day 30. Ridiculous. You often end up with a horrible combination of dysfunctional board member and insubordinate… subordinate – all wrapped up in one person. You can’t be both a worker and a boss at the same time. Sorry, co-founders… you can observe at Board meetings… but you don’t get a vote. Period. And when the CEO tells you to leave the Board room… well, she’s the boss.

Since I have this awesome space courtesy of Fred, I could go into why Board members should have no ego, need to come to every board meeting in person, need to give performance reviews to CEOs, should only do email during Board meetings within a designated 5 minute block every hour and create an environment where everyone knows everything with total transparency. But, I won’t abuse the privilege of this space or your time.

Just get a pal on the board and keep your pals who work for you off the board. I promise, your company will be better and return higher rewards for all concerned.

Thanks Fred.

The Board Meeting is the primary way that Boards function. This post is about making Board meetings effective and helpful for everyone involved.

A Board cannot be effective if it doesn't get together frequently. Some Boards meet monthly. I like that approach when the Company is young and there are a lot of changes happening frequently. But for most companies, a monthly Board meeting will be overkill.

I'm a particular fan of the twice a quarter Board meeting. The idea is to have one meeting mid quarter and one meeting after the quarter has been completed. A lot of public companies use this format since the Board needs to review the quarterly numbers before they are reported to the public. I think eight meetings a year is a great heartbeat for a Board and this schedule works well for all kinds of companies.

Some Boards only meet once a quarter. I am on a few Boards that meet face to face once a quarter. I generally encourage those Boards to meet over the phone for an update in between the face to face meetings. Those update calls/meetings are less formal than a full Board meeting but they keep the Board engaged in the business and connecting with each other.

Board meetings should be discussions. They should be interactive. They should have some structure. But they should not have too much structure. Some CEOs and Board Chairs make the mistake of driving the Board line by line through the agenda, cutting off meaty discussions in the name of staying on schedule. The purpose of Board meetings are to have these meaty discussions not to get through the agenda on time.

I prefer that the Board get all "official business" out of the way at the start of the meeting so that the meeting doesn't have to get cut short to approve stock options, minutes, or some other important but perfunctory Board resolution.

Once the Board has done that, the discussions can begin. The CEO should tee up the discussions. There should not be too many topics. I think three or four are good. One or two can be tactical items. But most of the discussion items should be strategic and thorny questions that the business must tackle to be succcessful. Good examples are "what is the ideal business model for our company?", "can we be in two businesses at the same time?", "do we need to build, own, and operate  our payments system to be successful long term?", and "can we build a sustainable business long term operating solely on Facebook?". Note that all of these are questions.

Board meetings should last two to three hours. I think two hours is too short. But more than three hours of intense discussion will turn most brains to mush. So you can't go on too long either.

There are a few techniques that I've observed over the years that I like a lot. The first is that the Board deck should be sent out three or four days in advance and it should include all the important financial and operational results for the Board to consume in advance of the meeting. It should also tee up the big discussion items so that the Board can start to think about them in advance of the meeting. The Board does not need to go through a line by line review of the financial and operational results in the meeting. But the CEO or Chairman should ask the Board if there are any questions on the numbers and time should be set aside in the event that the Board would like to have a discussion of the operating results.

The second technique I like a lot is when the CEO puts up a list of the three or four things that are "keeping me up at night" at the start of each meeting. This can be a way of teeing up the discussion items for the meeting. Or it can just be a way for the Board to get into the mind of the CEO quickly. The best way that I've seen this done is the "keeping me up at night" slide shows the items that were on the slide the prior meeting and the items that are on the list currently. That shows what things have been "resolved" in the time since the last meeting, those things that have not been resolved, and the new things that have popped up.

Possibly the most important technique I've observed over the years is the executive session at the end of the meeting. This is when the Board meets without the CEO and team in the room and has a discussion of the meeting and what the key takeaways are. The executive session can be five minutes or it can be a half hour. Sometimes there is very little to discuss in executive session. Sometimes there is a lot. After the executive session ends, the CEO should either be invited back to have a debrief on the executive session or the Chairman of the Board should meet with the CEO to debrief on the executive session. This is an opportunity for the Board to provide feedback to the CEO on the business, the team, and performance, and the strategy. Boards should not miss this opportunity to provide feedback and CEOs should demand it of them.

In summary, Board meetings should not be operational reporting sessions with information flowing one way. They should not be for the benefit of the Board. They should be for the benefit of the CEO and the senior team. I've always loved the idea of a "kitchen cabinet" and to me that is what a great Board meeting should feel like. The Board should be a set of experienced, engaged, and helpful advisors and Board meetings should be a place and a time for that group to provide the most help and assitance they can. It is the CEO and Chairman's job to make sure that happens and it happens on a regular basis.

One of the least discussed elements of a Board of Directors is the chemistry among the Board members. It is critical to a well functioning Board but not always considered in Board construction.

Like a well functioning startup or a top flight sports team, the chemistry between the participants on a Board must be strong. That doesn't mean they need to be best friends who hang out with each other outside of the job. It does mean they must respect each other and lean on each other's strengths to get to the right decisions.

When you are building a Board, you must think about chemistry as much as you think about it when you hire a team. You want to have a Board that can work well together.

And you need to invest in chemistry after you've assembled your Board. I like regular Board dinners before or after the meetings. There is nothing like breaking bread and having a beer or a glass of wine to get folks to relax and connect. I also like annual Board offsites where the group spends an entire 24 hours together, usually talking about and plotting strategy for the coming year(s). These activities outside of the Board room are critical to developing and investing in Board chemistry. Once obtained, you cannot let Board chemistry calcify. You must continue to invest in it for the long haul.

Sometimes you will have a Director (or two) that just doesn't fit in. Unless that Director has a contractual right to their seat (usually as a result of investment) or brings a critically important skill set to the Board, you should seek to remove that person from the Board and replace them with someone with similar skills who will fit in better.

Even when an investor has a contractual right to a Board seat, you can get one of their partners to replace them in an effort to get better Board chemistry. Don't take this approach lightly however. It will be seen as a hostile move by the person you are seeking to replace. I have been involved in these situations a few times and it must be handled delicately, usually via the senior partner of the firm involved. If the person who is serving on your board that you are seeking to replace is the senior partner of the firm involved, then you have an even more difficult problem.

If there is one point that I want to drive home more than any other point in this entire series on Boards, it is that your company needs a strong Board and you must do everything in your power to make sure you get one. Don't accept that you have a dysfunctional Board and you have to live with it. If you have a bunch of investors on your Board that you can't get rid of, seek to add a bunch of independents to balance them out. And then build chemistry between the independents and the investors.

Group dynamics are an interesting thing. Adding or subtracting one or two people from a five to seven person group can dramatically change the chemistry. So pick your Board members wisely and if you have an issue, deal with it to the best of your powers.

I think Matt Blumberg, CEO of our portfolio company Return Path, has done an incredible job in developing Board chemistry. He has removed and replaced a number of Board members over the years, including an investor director. He invests heavily and continuously in Board chemistry. And he has assembled a set of strong personalities with very diverse strengths (and weaknesses) and he gets more out of us that I could possibly imagine. He should write a book on this topic.

I bring up Matt and his success as a way to suggest that seeking advice and counsel from other entrepreneurs and CEOs can be a good way to think about how to improve your own Board. And you might want to consider some of them for independent Board members while you are at it.

Your company is going to have a Board. It should not be an afterthought. It needs to be well constructed, well managed, and it needs to function easily and efficiently with strong chemistry. When you achieve all of those things, you will see that a great Board is a tremendous asset to a company, and you should pat yourself on the back for doing something that very few manage to accomplish.

This is the first of a series of MBA Mondays posts on the topic of The Board Of Directors. I want to dig into the role and responsibilities of the Board as a way to kickoff this series. But first a few disclaimers. I am not a lawyer and I am not giving out legal advice on this topic. I am a practicioner and am telling you the way I see it and what I've learned over the years. I think both are important perspectives. You will have to look elsewhere for the legal view on this topic.

The Board of Directors is the governing body for a company. All major decisions will need to be ratified by the Board. You will need the Board's approval to sell your company. You will need the Board's approval to hire or fire a CEO. You will need the Board's approval to do a major acquisition. You will need the Board's approval to do a major financing, including an IPO. On all matters of major strategic importance, the Board will need to be engaged, involved, and supportive.

However, the Board should not run a company. That is the role of the CEO and his/her senior management team. The Board's job is to make sure the right team is at the helm, not to be at the helm themselves. Boards that meddle, that get too involved, that undermine the management team are hurting the company, not helping the company.

Boards work for the company. The company is their responsibility. They must always act in the best interests of the company and its major stakeholders; the employees, the customers, the shareholders, the debtholders, and everyone else that is relying on the company to deliver on its promises.

Some would say that the company works for the Board. But I think that is wrong. The company works for the market (and I am using the word market in all of its meanings) and the Board and the management team work for the company. Every director must put the interests of the company first and their interests second. This is called fiduciary responsibility.

About ten years ago, I was in a Board meeting when management told the Board that they had uncovered significant accounting issues in a recently acquired company. This was a public company Board. And these accounting issues had flowed through to several quarterly financial statements that had been reported to the public. Every Board member who was also a material shareholder (me included) knew that the minute this information was disclosed, our shareholdings would plummet in value. But there was no question what we had to do. We had to hire a law firm to investigate the accounting issues. We had to immediately disclose the findings to the public. And we had to terminate all the employees who had an involvement in this matter.

Things like fiduciary responsibility seem very theoretical until you find yourself in a moment like this. Then they become crystal clear. Directors often must act against their own self interests. They must do the right thing for the company, its shareholders, and its stakeholders. There is no wiggle room on this rule. For directors, it is the golden rule.

The hard thing about being a director is that many times, the right answer is not clear. Should we accept this extremely generous offer and sell the company? Should we ask the CEO to leave the company? Should we go public or wait a few more years? There are no formulas that you can run to tell you the answers to these questions. There is no "right answer." Only time will tell if the right decision was made. And even then, there will be debate.

Debate is what good Boards do. They put the key issues on the table and discuss them. Good directors are deeply engaged in the important issues and they are upfront and open about their opinions on them. They are respectful of the other Directors and listen carefully to opposing opinions. Boards should try to reach a consensus and then act on it. Board should not procrastinate on the big decisions. Boards need a leader to drive them. That leader is commonly called the Chairman. I plan to write an entire post on the subject of the Board Chair as part of this series.

There are many CEOs who want to manage their Board. That is a mistake in my opinion. A great Board manages itself and treats the CEO as a peer and gives the CEO's opinion great weight. But a great Board is not a rubber stamp. A great Board pushes the CEO and the company to make the most of the opportunities in front of the company. It makes sure that the CEO and the management team are pushed out of their comfort zone from time to time. It asks the hard questions that must be asked.

Boards are fluid. They should evolve. Members should come and go occasionally. There should not be too much churn but some churn is good. Board members should not coast. Board members should not treat their seat as a right (even if it is). Boards should always be looking for new blood.

I will end with a somewhat controversial statement in light of the way some of the most successful tech companies are run. Boards should not be controlled by the founder, the CEO, or the largest shareholder. For a Board to do its job, it must represent all stakeholders' interests, not just one stakeholder's interest.

Next week I will talk about how a Board is selected, elected, and how it evolves over time.

Every board meeting should end with an executive session. The term executive session is an oxymoron because it is a meeting of all the board members other than the executives of the company.

The first time most CEOs hear of this idea, they hate it. The words "we want to meet without you" strike fear in the hearts of most CEOs. And understandably so.

But it is a critically important part of the Board's job to manage the CEO and to some extent the CEO's senior management team. The Board is required to regularly discuss the performance of the CEO and the senior team, to address their compensation, and to work to make sure the CEO and senior team are working together as well as they can.

You can't do that job with the executives of the company sitting in the meeting. And yet, you want the executives of the company in the Board meeting. The more the better in my opinion, at least for most of the meeting.

So "best practices" says that you should end every Board meeting with an executive session. Some executive sessions last 5 minutes or less. There is simply very little to discuss. Some executive sessions last hours. That's generally not a good thing. Most last 20 to 30 minutes.

I've been sitting on Boards since 1990 and have probably participated in over a thousand Board meetings. To be honest most of them did not end with an executive session. In addition to the CEO's discomfort, there is also the issue of timing. Most Board meetings end in a rush. It is seldom that the CEO's agenda fits into the set time slot. And Board members have schedules to keep. So it is the executive session that often gets skipped.

So I don't totally practice what I preach. But after having participated in a particularly excellent executive session recently, I am recommitting myself to executive sessions. I will need all of your help. Entrepreneurs and CEOs should embrace them and make sure they happen. And fellow VCs should do the same. They are incredibly important and we have a fiduciary duty to do them.