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board behavior

Boards, Leadership

Why you need a CEO on your board when you are the CEO

July 20, 2016 Leave a comment

One of the first decisions an entrepreneur needs to make once she has raised money for her great new idea is to build a board.

This is a conscious act. Yes, your investors probably have board seats, at least the lead investor will. If your investors are angels maybe 2 or 3 of them have demanded to be on your board. But beyond this crew you owe it to yourself to step back and think about who do you want on your board to help you build your company.

It is entirely reasonable for you to put one outside director on your board, and it’s an unusual set of investors that will not allow you to bring one new director on. And when you do, you want to bring on a current/former CEO.

Why a CEO? Why not a technologist, or a family friend, or your cofounder? Fundamentally, a current/former CEO is going to have seen your movie before and will bring a wealth of unexpected advantages to your board and your company.

Independence
Your board has a duty to represent all your shareholders, but more than that they have a responsibility to care for the company first. For your employees, your reputation, your probability of success. Having a board member who is truly independent of the investors can help bring a broader perspective to the board discussions. I have seen investors who are so focused on their own issues they lose sight of what’s best for the company. An independent director can take her role – as the one person who is not worried about the timing and size of liquidity but is instead worried about the long term success of the company – very seriously.

I met with a big time PE partner (let’s call him Adam – not his name) recently, who is sitting on a private technology board. As we talked he told me the CEO was dealing with the issue that he, and the other big time PE firm on the board have different agendas. One is a long term investor, one is interested in liquidity sooner, and the difference is a strategy problem for the CEO. The investors are balanced in ownership and the CEO is caught in the middle. I asked Adam “Why is this the CEO’s problem? Surely the CEO’s responsibility is to grow a great company and create the greatest value he can, not worry about negotiating between the two of you on the timing of an exit. It’s a ridiculous waste of his time”. Adam (figuratively) took a step back and agreed. I’m not on this board, but I can still make the case for the CEO not being distracted!

Resources
You’re going to need advice as you build your company, great advice. Yes your investors may know a few people, but you want to be referred to people who are not looking to your investors for future referrals, again who are truly independent. You’ll need lawyers (you want a pit bull in your corner unless you have truly world-class VCs), recruiters, marketing consultants etc. etc. And when you hire them you want to know they are loyal to you, not back channeling to your investors. An independent CEO should have a quality network for you to tap into.

Working for you
There will be times when you need to get something done but you are out of time and need some sleep. You can use your CEO/director to give you capacity. Maybe you need her to build a model for you, maybe you don’t know how to present an issue to your board and your director can build a sample presentation for you to help you frame the issue. At a minimum your director can do deep reviews for you of your own presentations, legal agreements, offer letters, compensation plans… with the eye of someone who has done it before.

Role experience
A high quality former CEO will bring experience of what the job really entails. What are you truly responsible for vs what decisions your board can make (which is very few in reality)? What does it take to build a world class team? What does it take to close your first few big deals? How to focus. Only someone who has done the job for many years really knows what it takes, and there are many investors out there who like to give you advice, but have never been in the role. Your director can be a sounding board for you in the role of CEO.

Being the bad guy
Your CEO director is not your friend, and sometimes she may feel like your enemy, but because her only reason to be there is to help the company, you can trust her even when you hate her. I’ve always had a former CEO on my boards, and sometimes it’s been absolutely maddening.

For example, the time my director attacked me in a board meeting and took me to pieces for a plan I proposed. Afterwards I asked him what the hell was he thinking coming after me in a board meeting? He humbled me by telling me he could see my main investor was winding up to attack and so he decided to attack me first so I did not get into a fight with my investor. He knew me well enough to know that if attacked I would attack back, and hard, and that could damage my relationship with my investor.

And for example, the time my director had a one-on-one with me and decimated my forecast. Destroyed my faith in every deal. Ripped every one of my sales campaigns to shreds. His motivation? To wring every piece of optimism out of my forecast so I knew the worst case and could then focus on what needed to be done to bring the probability up on each campaign.

Daily coaching
There are times when things go well, and then there are times which are rough. Raising money can be one of those times. Having someone you can call every day to review how things are going is so very helpful, and you cannot be calling your investors. You need a safe place to call. Someone who has no other agenda but to help you and the company succeed. And someone who has been there. That is a current/former CEO.

You may be thinking “well that’s self-serving of her given she’s a former CEO who sits on boards”. Yes, probably right, but right now I am meeting with many, many interesting entrepreneurs and I am hearing too many worrying stories of entrepreneurs who need better board advice and support.

Photo:  © 2016 Penny Herscher and from Buzzfeed

Leadership

Open Letter to CEOs: Manage Your Interaction With Your Board!

April 30, 2015 Leave a comment
Posted in Inc today

So you’re the new CEO of your own company. You’re living the dream! You’ve thought through the pros and cons of being a CEO and you’ve got your first round of venture capital funding.

This means you also have a board to manage, which can be a minefield for you. So how to navigate the minefield? To begin, you must create a well-organized board meeting. Use my Top 10 tips to run a board meeting as a starting point but once you have the logistics down, it’s all about your behavior and leadership in the room.

One of the most common mistakes I see with new CEOs is thinking they need the board’s approval. You don’t. Your job is to figure out the strategy, what to do and to make good decisions so that your company grows. A board’s job is to support and advise you. Sometimes board members get confused about this and they will believe that they are there to make decisions; however, beyond hiring a new CEO or deciding whether to put more money in, they don’t have that power. If you take their advice and it’s wrong, they’ll still fire you, so the decisions, ultimately, lie with you.

The board needs you because you are the leader, the one who hired your team, the one who holds the strategy and the one with the customer relationships, so replacing you is a major risk for the company (not to mention a major time sink for the board members). The board will judge you on the quality of your decisions, whether or not you follow their advice. If the board loses confidence in you then they will replace you, but up until that moment you are in the driver’s seat and they are there to help you. This is not permission to be arrogant or disrespectful, but understanding this dynamic will help you be a better, more confident CEO. What you need most of all is to gather all of the input and perspective you can from your board, but not decisions.

Here are some questions to ask yourself to ensure your behavior in your board meeting maximizes the result:

1. Are you unconsciously seeking your board’s approval? For example, what do you say when an investor tells you to do something that you believe is wrong? If you are seeking their approval, you will probably validate the idea “that’s a great idea,” but if you are seeking input, then you’ll acknowledge the idea instead by a comment such as “thank you for your input, let me think about it.” Develop a stable of respectful responses that tell your board that you heard them, it’s good input, but you’ll still need to decide.

2. If you are female–is your behavior serious enough? If you giggle, fidget, run your hand through your hair or exhibit any of the “girlish” characteristics, you will be judged and taken less seriously. Unfair, but true. So learn to sit still, don’t fidget, lean forward, take notes (but in a considered way), lower your voice and dress carefully. Imagine how a strong male CEO whom you respect would sit in the meeting- are you conveying the same level of gravitas?

3. Where do you sit? Don’t sit at the front of the room, eagerly presenting all the slides to your teachers. Sit in the middle, or at the head of the table, and host your staff as they present their materials. Sit yourself between the power players, not in service to them.

4. What is your communication between meetings? Again, you are running the company and while some level of update is appropriate between meetings, a running commentary is not. Think about what impression you want to create. The more you communicate the details, the more you invite your board to weigh in with their opinions. Be thoughtful about what, and when, you communicate. You want to be thorough, but that is why there is a board packet. Assume your board members can read.

5. Have you properly prepped your team? It’s worth having a prep meeting with your team to talk through the agenda and what you want to get out of the meeting. Manage their presentations to be crisp and brief (three slides is a good rule of thumb). Use their time wisely and excuse them before the long debates begin, because they have real work to do.

Your board is there to help you. They are not your friends or your teachers. They are investors and representatives of the shareholders who only want you to maximize their return. Up until the time that your company is profitable and/or public, you need their support. Always keep in mind, you are running the company, not the board. It’s worth remembering that in 99 percent of the cases, the board needs you to lead the company more than you need them. If that is not the case for you, then you may be in the wrong job.

Respectfully remember that up until the minute they fire you, your board needs you more than you need them. Remind yourself of this and you will keep your head in the right place during board meetings.

Boards

Why activist shareholders travel in packs

June 5, 2012 Leave a comment

Have you ever wondered why activist shareholders travel in packs? It’s because they are significantly less effective alone—just like any other minority on a board.

Activists (often hedge funds) accumulate a position in a stock because they want to make change happen at a company and, by making change happen, they will make money on their investment. It may be that they think the company is being mismanaged and so is undervalued against its potential. It may be that they think it should be broken up and the pieces sold off. Or it may be they think the board is incompetent and by driving change they can increase shareholder return.

Daniel Loeb, who runs the hedge fund Third Point, is currently in the news for the aggressive strategy he pursued to get onto the board at Yahoo!. He accumulated 5% of the stock, demanded 3 seats on the board, was rebuffed, found a fatal flaw in new CEO Scott Thompson’s inaccurate resume, and then used that chink to drive a wedge into the board room for himself and two of his nominees. Dan has become famous for his investment track record and his pithy letters eviscerating the management and boards of the companies he targets.

Carl Icahn has a long history of launching campaigns against companies, and like Dan, often wins—like he is doing at Chesapeake. Shareholders delivered a bruising rebuke to Chesapeake Energy’s board on Friday and although the board had agreed to replace 4 directors with Icahn’s and Southeastern Asset Management’s hand-picks, shareholders still withheld their votes from two key directors. In this case, two activists (Icahn and Southeastern) teamed up and acted as the lightning rod to help shareholders express their dissatisfaction with the board’s oversight of the company.

But why, you may ask, do they travel in packs of 3 or 4? Dan Loeb is a smart cookie and no shrinking violet—why does he need to bring two of his guys onto the Yahoo! board with him?

The answer lies in how inefficient and/or difficult it is to be alone and an outlier on a board. Boards aim to be collegiate, making sure diverse opinions are aired while also providing good financial oversight of the company. They want to get to unanimous recorded decisions in the end (no matter how contentious the internal discussion) and disruptive behavior is frowned upon. If you want to make change happen as a board member you need to develop support from other board members first or there will be no further discussion or vote.

If you are an activist that wants radical change, that very change is probably unpopular with management and the existing board or you would not be agitating for it as an outsider. Your new ideas will die on the vine unless there is someone else in the room to pick up your idea, expand on it, help you build momentum and overcome objections and, in the end, second your motions to ensure a vote.

Further, if you can get three people on the board together with the same purpose they can create significant momentum behind an idea. And sometimes, these activists can take advantage of directors’ natural tendency to act as individuals, and so create divisions among directors who have not yet figured out the need to unite.

This is why Starboard Value (which owns 5.3% of AOL) is proposing three nominees to the AOL board to challenge the strategy. They are also trying to line up proxy advisory firms ISS and Glass Lewis to support their new board members as this will influence how major shareholders vote. They want to be sure that if they get elected they can force a change in strategy at AOL by acting as a team on the board.

When you’re a voice of one it’s very hard to make change happen. It takes two to get a discussion going, and when you are just one it is too easy for you to be shut down—or if you will not back down—be labeled as disruptive and so have your effectiveness reduced. Activists know this and so, like any smart hound on the hunt for a kill, they travel in a pack. They show us the importance of having a group to represent alternative points of view on a board.

Odd, then, that so many Silicon Valley companies whose major customers are women have no women on their boards (like Facebook), or, if they have one, check the box and think they are done. Especially odd since we also now know that having women directors on boards improves return on capital for shareholders.

Because of the nature of how boards work, having token representation, whether it’s an activists point of view, or gender-based point of view, is not enough. Activists are showing us the way. It’s time to get more qualified women onto leading technology company boards.

Boards, Leadership

How to understand your board’s baffling behavior

March 7, 2012 Leave a comment

Boards don’t behave like management teams and their sometimes seemingly baffling behavior can be an irritant to management. But if you can get inside the head and motivation of a board member you can, with a little distortion of the nth dimension, understand their behavior.

Whether it’s a public company board, a start up board or a non-profit board there are perspectives a board member has that give them a very different view than the senior management team:

1. They don’t live it every day. Some board members do a better job than others of learning and remembering the critical aspects of your business, but if they only attend meetings once a quarter (or even once a month in the start up case) your business will have moved by leaps and bounds between each meeting and you have to take the time to back up and fill in the gaps for them.

2. Reasonable people given the same information will often make the same decision. But given that your board does not have all the same information as you, they will not instantly come to the same conclusion as you. They are not being difficult, they just don’t have the same info. And, short of a Vulcan mind meld, you are always going to know more details than them, so be patient.

3. Good governance on a public board requires a board to have diverse opinions and deliberate – it’s all part of good process. That then means they are not going to agree with you, in fact at least one of them should be disagreeing with you and challenging you at times or they are not seriously deliberating. Some board members disagree “just because” as a way to shake up the conversation and see what falls out. It’s all part of the process, not about you.

4. Really good board members have a laser like ability to figure out what you are most defensive about and then pick at the wound. It’s a way of testing and needling the CEO to understand what the real dynamics of a difficult situation are. It’s meant to be helpful.

5. Being defensive is like a red rag to a bull. When a CEO has a defensive “don’t question me” reaction to a challenge it’s infuriating to the board member because a) it’s the board member’s job to question and b) it signals that the CEO is not on firm ground with his/her position, knows it and attacks back to try to stop the line of inquiry. As a CEO it’s bad, bad behavior. I cringe inside every time I do it!

6. The board’s most solemn duty is the selection of the CEO. Boards are always, always thinking “Is the person in the job the best person for the job right now?” Their duty is to the shareholders, even in a private company, and the selection of the leader is the greatest impact they have on the return to the shareholders. As CEO you just have to get comfortable with it, and help the board question you, and engage you in a continuous succession planning analysis. The day will come when you may not be the best person – for any one of a thousand reasons including your own – so get comfortable with the discussion.

7. Different board members have different roles to play. Some are financial – they may well ask remedial questions as they seek to understand your products, but if they are a former CFO and running your audit committee – God bless them! Some are technical and may question your go-to-market strategy but be a great resource for you when it comes to evaluating a technology. But just because they have a deeper set of skills in one area and less in others it does not mean they always remember that.

8. Your board are not your friends. Remember pt #6. They are your advisers, your ultimate employer and the representatives of your shareholders. While they may be fun to have dinner and play golf with outside the meeting they are not your friend inside the meeting and you can get smacked in the meeting if you forget that. Want to complain to someone safe? The only safe person in the room is your outside counsel (your lawyer) once you tell him the conversation is confidential.

9. Your board may have their own fears and issues about being on your board which can show up as baffling behaviors in your meeting. One board member (of a currently high profile and controversial public board) told me about the reputational risk of being on a board that should have been interesting and fun but has now turned into a public pillorying. The problem is by the time the going is rough it’s hard for the board member to resign if the company actually needs his/her help. You can’t know what challenges they are facing so don’t assume their behavior is always about you.

10. Your board’s job is not to motivate your team. In fact they can do quite the opposite when they get on a tear on an issue. Your job is to be the buffer between your board and your execs and if one of your execs can’t handle the challenging, difficult decisions, don’t have them in the room. Or tell them to grow up and grow a thick skin.

So if they are baffling you, or annoying you, or confusing your team take a deep breath and remember they are probably good people trying to help the company. And never forget the old proverb “With the rich and mighty, always a little patience”.

For help on your meeting – refer to my How to Run a Board Meeting post.

I sit on the boards of FirstRain, JDSU, Rambus, the Anita Borg Institute and Planned Parenthood Mar Monte. No one board is special – these behaviors show up across the spectrum.