Archive for the 'Boards of Directors' Category

Mt. Everest conquered but not tamed

hillarynorgay61 years ago, on May 29, 1953, New Zealander Edmund Hillary and Nepalese sherpa Tenzing Norgay became the first to reach the summit of Mount Everest, arriving just before noon after spending the night high on the mountain.

The anniversary brings to mind another May (1996) expedition on Everest which ended in deadly disaster.  The details of what went wrong in that May 43 years after Hillary and Norgay’s triumph are recounted by John Krakauer’s Into Thin Air (one of the recommended books on decision-making in The Library in St.Pete.)

air_In the author’s retelling, a series of events led to several climbers inexplicably ignoring the “Two O’Clock Rule,” which says:  if not at the summit by 2:00, turn back because “darkness is not your friend.”   Their descent occurred at night, in a blizzard, as they ran out of supplemental oxygen.  5 people died and others barely escaped with their lives after many hours wandering in the dark while braving subzero temperatures.

That series of events was analyzed by Professor Michael Roberto in a 2002 paper entitled “Lessons from Everest.”  It had struck Professor Roberto that “the disastrous consequences had more to do with individual cognition and group dynamics than with the tactics of mountain climbing.”  He found several factors that caused experienced people to violate their better judgment.

Cognitive biases

3 cognitive biases came into play:

  1. Sunk Cost Fallacy:  The magnitude of the personal investment – $70,000 and weeks of agony – made many reluctant to turn back once so close to the peak.  “Above 26,000 feet the line between appropriate zeal and reckless summit fever becomes grievously thin.”
  2. Overconfidence bias:  The lead guides had impressive track records of success and had overcome adverse conditions before.  One told his team, “We’ve got the Big E figured out.  We’ve got it totally wired.  These days, I’m telling you, we’ve built a Yellow Brick Road to the summit.”   He also “believe(d) 100% I’m coming back” because “I’m going to make all the right choices.”  The overconfidence extended to many other climbers as well.  Krakauer wonders if they weren’t “clinically delusional.”
  3. Recency Effect:  Paying too much attention to recent events.  Climbers had encountered good weather on the mountain in recent years so many of the climbers thought the storm was surprising but in fact it was rather typical.

Team Effectiveness

The team lacked the ‘robust social systems’ in which members’ informal  modus operandi ensure that the decision-making process functions properly.

  1. Climbers were almost strangers and had not had time to develop trusting relationships.
  2. Group members did not feel comfortable expressing dissenting views, in part because one expedition leader had stated, “I will tolerate no dissension up there… my word will be absolute law.”  (Sadly, to protect everyone via enforcement of the Two O’Clock Rule.)
  3. There was an absence of candid discussion due to (a) the deference in the “guide-client protocol” and (b) a pecking order amongst the guides that led “lesser” ones to keep their concerns to themselves.

Complex Interactions and Tight Coupling

Very briefly, “the team fell behind schedule and encountered the dangerous storm because of a complex set of interactions among a customs problem in Russia, Scott Fischer’s acclimatization routine in Nepal, a Montenegrin expedition’s use of rope, a failed negotiation with Outside magazine, and so on.”  There was also no slack in the system, so when there was a problem in one area it triggered failure in another.

The bottom line may be that they violated a sacrosanct rule, but the more interesting question is why?  The unwillingness to question team procedures and exchange ideas openly prevented the group from revising and improving their plans as conditions changed.

Though the stakes are (much) smaller in a high-growth company, an entrepreneur faces similar challenges:  he has a team and a plan, faces a fast-changing environment, and the odds might be long.  Success hinges on creating an environment of mutual accountability in which team members trust and challenge each other.

 

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The chemistry must be respected

"The chemistry must be respected."

“The chemistry must be respected.”

Inc.com has advice for early-stage companies: the partners with whom you choose to work are more important than the need for control.

By now everybody has a big stake in your success and would like to feel consulted on the major decisions you’re making with their money.  It surprises me that this is even controversial but in this day-and-age it sometimes is.  I know there are bad investors who do bad things. There are just as many bad entrepreneurs who do bad things.  As with most of life, it’s more about whom you choose to work with, what their reputation is from others and how well you’ve vetted them more than an absolute need for control.

Or as we once put it:  the fate of control is that always seems too little or too much.

Getting this piece right isn’t so much about control as it is about chemistry.  If VC-CEO partnerships are like marriages (as is often said), then the issue of control needs to mirror that of a healthy marriage.  It’s not about 100% control, or even 51% control – it’s about playing to each others’ strengths and making the concessions and adjustments that a given situation demands…  It’s hopefully a long term relationship, and so over time you each learn when to take your shot and when to pass the ball…

Once the honeymoon is over, will you collectively put forth the constant effort required to sustain the relationship?  How will you resolve conflict?  Are communications open and largely free of clashing egos?  Does the quality of the arguments make the outcomes better?  U2 credits their longevity to a “group ego” that trumps everything else.  Can you develop what Fred Wilson of Union Square Ventures calls “shtick tolerance?”  You don’t have to accept everything about your partner – outside of integrity/honesty – but you must be able to more or less tune some things out over the long haul.  You’re patient with their shtick because they’re patient with yours.  It’s hard work.

Predicting interpersonal chemistry isn’t always easy.  Most venture firms will have a good “rap”, but it’s absolutely essential for entrepreneurs to verify that through their own rigorous due diligence:

Entrepreneurs who are raising growth capital (i.e. bringing on a long term partner) as opposed to selling their businesses (i.e. get the best valuation) should invest a lot of time conducting due diligence on their prospective financial partner.  A credible partner will let you (indeed, encourage you) to talk to as many of their previous entrepreneur partners as you want to get a feel for what they are like to work with.  Entrepreneurs should ask for references from successful investments, unsuccessful investments and current investments.  Ask for the venture firm’s entire list of previous and current investments and randomly call a number of them.  Find some independent sources on your own who weren’t provided as references but know the venture firm…

The chemistry between entrepreneur and venture partner in private companies is more cooperative, longer-term, and (mercifully) not subject to the quarterly reporting pressures of public companies.  Both will have real “skin in the game” and the same incentive to understand the nuances of the business and focus on long term value creation.

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End-of-year twitter digest, 2013

Thank you to all our readers for joining the conversation here in 2013.  We wish you all a happy and prosperous 2014, and look forward to seeing many of you at the Florida Venture Capital Conference, January 28&29 at Hyatt Regency Orlando.

Offered for your reading pleasure, in case you missed any:  a compendium of our twitter highlights from 2013.

BPV twitter header

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Is good old-fashioned intuition out of date?

intuition2Is There Still a Role for Judgment in Decision Making?  Harvard Business School Professor James Heskett wonders if recent advice to eliminate decision-making biases might have gone too far in an effort to supplant independent judgment with data and probabilities and decision trees:

The replacement of customs and biases with data, “big” or “small,” has been intended, at least in part, to drive out such things as tradition, habit, and even superstition in endeavors ranging from child rearing to professional sports.  After all, wasn’t the book and film, Moneyball, at least in part a glorification of the triumph of statistics and probabilities over intuition and managerial judgment in professional baseball?  …

In fact, if there is a sense that one gets from all of this work, it is that we are our own worst enemies when it comes to making and implementing good decisions.  We need tools to correct the errors and biases of our own judgment.  This is puzzling, because we are frequently reminded that the ability to exercise judgment is what sets humans apart from other forms of life.  (Perhaps judgment is what leads us to adopt recommendations such as those of these authors.)

Every leader has internal biases, some of them subconscious or hidden, which can create especially tricky traps that complicate sound decision making.  So it is important to think systematically and design the decision-making process to account for the zoo of biases managers face.  Astute management of the social, political, and emotional aspects of decision making can help account for the underlying biases of the participants.

On the other hand qualities such as judgment, engagement and strong communication skills are critical attributes because interpersonal chemistry plays a role in any decision involving more than one person.  What we’ve oft said about boards is true of any team:  processes and best practices may be important, but great teams rely on ‘robust social systems’ and mutual accountability among its members to ensure that they function properly.

As we argued in Thinking consciously, unconsciously, and semi-consciously:  the best results often come from a combination of deliberation and intuition.  Too much deliberation can become analysis paralysis; and studies show that those who rely on intuition alone tend to overestimate its effectiveness.  (They recall the times it served them well and forget the times it didn’t.

Furthermore, the more complex and detailed the process the greater the likelihood managers will mistake process for purpose and manage to the rules without exercising any judgment.  In the wake of the last financial crisis, BoE Director of Financial Stability Andrew Haldane argued that this had been precisely the case with regulators, who tiptoed right up to the hot red line at which a crisis can be triggered.

Mr. Haldane deployed an analogy about a Frisbee-catching dog to explain how increasingly complex (and sometimes frivolous) attempts at regulation push the limits of data or modeling or even the nature of knowledge itself.  The dog can catch the Frisbee despite the complex physics involved because the dog keeps it simple:  run at a speed so that the angle of gaze to the Frisbee remains roughly constant.

So while we still do value “good old-fashioned intuition,” it’s also unwise to rely only on one’s instincts to decide when to rely on one’s instincts.  The dog’s doing just fine, but if it involves more than a Frisbee he might want to crunch some numbers too.

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He’s not a jerk, he’s an INTP

In an April 2013 McKinsey Quarterly discussion about new research, fresh frameworks, and practical tools for decision makers, Stanford’s Chip Heath and McKinsey’s Olivier Sibony float a a tool similar to the “personality profiles” widely used in team-building exercises (e.g. Myers-Briggs, DiSC, Keirsey Temperament Sorter).

Example profile: “Visionary”

In this case, managers would be categorized into 1 of 5 decision-making styles:  Visionary, Guardian, Motivator, Flexible, and Catalyst (see “Early-stage research on decision-making styles”).

Rather than telling someone he’s hopelessly biased, you say, for example, “Look, you’re a certain kind of decision maker—a real visionary—so you make fast decisions breaking with convention. The downside is that you could be wrong, so when you make an unusual decision you might want to stop and listen a bit.” Whereas someone else will tend to fall into the opposite trap…

If you and I are around the same table, rather than telling you that you’re out of your mind, I can tell you, “We know that you’re a visionary, right? So you would see things in this way. Well, I’ve got a different style, so here’s how I think about it.” A bit like the Myers–Briggs Type Indicator… People love personality approaches. Psychologists have always had this approach–avoidance relationship with them because we can’t get them to be as predictive as we want, but they provide this tremendous social language.

Is this just HR nonsense or could it be a brilliant feat of social engineering?

…Danny Kahneman and Amos Tversky listened to a group of consultants telling them about the Myers–Briggs. The consultants didn’t know they were talking to two Nobel-caliber psychologists, so they were a little condescending as they explained MyersBriggs to their dinner companions, who should have known about it already. Kahneman and Tversky listened. And they weren’t telling the consultants, “Decades of social-psychology research says that it’s really hard to design a personality test that predicts anything useful about behavior.” Danny Kahneman walked out of the room and turned to Amos Tversky and said, “You know, that was a brilliant feat of social engineering. Instead of saying, ‘So-and-so is a jerk,’ they say, ‘Oh, he’s an INTP.’”

Most executives won’t be interested in using behavioral research to change their processes to overcome biases – no one wants to be told they’re biased because of the negative connotations, even while they’re quick to believe others (e.g. direct reports) are subject to a “zoo of biases.”  But they could be more open to helping their teams make better decisions:

So we will say, for example, “Let’s talk about what works and what doesn’t work in your strategic-planning process.” We don’t talk about biases, because no one wants to be told they’re biased…  Instead, we observe that people typically make predictable mistakes in their planning process—for instance, getting anchored on last year’s numbers. That’s OK because we are identifying best practices…  It’s a lot easier to say, “Let’s build a good process so your direct reports have better recommendations for you” than “Let’s come up with a process for you to be challenged by other people.”

The authors emphasize that it’s important to “see yourself as the architect of the decision-making process, not as a great decision maker enhanced by the knowledge of your biases.”

The analogy (we) like is how we handle problems with memory.  The solution isn’t to focus harder on remembering; it’s to use a system like a grocery-store list. We’re now in a position to think about the decision-making equivalent of the grocery-store list.

 

N.B. – “Fake-O-Backend

Unrelated to the topic but elsewhere in the piece, when discussing broader issues related to decision-making, Heath & Sibony had an amusing anecdote about how Intuit built more experiments into their DMPs:

Before they add a feature, say, to TurboTax, they will test out variations and see how people respond. They call it “Fake-O-Backend.” Imagine that they put up a Web page for a new “deduction analysis” service, and when people plug in their information on the Web site, the company goes to a tax attorney for the answers instead of programming all the computations. The back end is fake. The front end tests whether people would purchase a new service.

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Due diligence: mine, yours, and ours

Via Scale Finance, Nick Hammerschlag of Open View Venture Partners writes about the different expectations a VC and an entrepreneur bring to the due diligence process after the term sheet is signed.  It’s well done and written from the perspective of helping the entrepreneur understand the “timeline and scope” of the typical requests a venture capital firm will make.

We’ve written on due diligence from the opposite perspective:  what types of requests entrepreneurs should make as part of their due diligence.  In The fate of control we point out that most firms will have a good ‘rap’ so it is absolutely essential to verify through your own independent efforts that the partner you choose will be a good fit:

Entrepreneurs who are raising growth capital (i.e. bringing on a long term partner) as opposed to selling their businesses (i.e. get the best valuation) should invest a lot of time conducting due diligence on their prospective financial partner. A credible partner will let you (indeed, encourage you) to talk to as many of their previous entrepreneur partners as you want to get a feel for what they are like to work with. Entrepreneurs should ask for references from successful investments, unsuccessful investments and current investments. Ask for the venture firm’s entire list of previous and current investments and randomly call a number of them. Find some independent sources on your own who weren’t provided as references but know the venture firm…

  • Establish a solid foundation for the relationship early: Will you share the same vision? Agree on ground rules?
  • Once the honeymoon is over, will you collectively put forth the constant effort required to sustain the relationship? How will you resolve conflict? Are communications open and largely free of clashing egos? Does the quality of the arguments make the outcomes better? U2 credits their longevity to a “group ego” that “trumps everything else.(Beginning at 16:45 of the interview, “Edge” riffs for just under 2 minutes on the success of the band’s long term partnership.)
  • Fred Wilson of Union Square Ventures, in an outstanding post at his blog, describes one key to successful long term relationships: “shtick tolerance“. You don’t have to accept everything about your partner – outside of integrity/honesty – but you must be able to more or less tune some things out over the long haul. You’re patient with their shtick because they’re patient with yours. It’s hard work.

The entrepreneur-VC partnership is a long term one, with shared skin in the game, and so the incentive is to communicate good news and bad forthrightly and in real-time, with both partners promoting transparency and honesty.  That begins during due diligence, when it’s critical to resist the implicit pressure to sugarcoat the negative, and carries through to what legendary venture capitalist Bill Draper calls the “Oh sh- meeting.”

“When an entrepreneur has a first board meeting, we called that the ‘Oh sh—meeting.’ That’s when the VC finds out the bad news he didn’t know when he made the investment. How the VC reacts to that defines the relationship – it either becomes more brittle or closer.”

 

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Building a context for better judgment

This book landed on our desks recently and looks promising.  In Judgment Calls, Thomas H. Davenport and Brook Manville share the tales of several organizations that made successful choices through collective judgment.

We’ll consider adding it to our collection in The Library in St.Pete, and based on the reviews and excerpts it sounds similar to another book already found our shelves:  Why Great Leaders Don’t Take Yes for and Answer by Michael Roberto.  Professor Roberto writes that the key to making successful strategic business decisions lies in how you design the decision-making process itself, and how leaders address the inherent biases of that process.

Here Davenport and Manville (in a book excerpt at HBS Working Knowledge) recount how Tweezerman’s CEO Dal LaManga learned that the people around him were a big part of that process:

By his own words, LaMagna was “a risk addict and … a compulsive capitalist,” and deep down knew that he wanted to take his company to this next, bigger level. But he also wanted to avoid turning Tweezerman into one more failure in what had been a previous career of multiple entrepreneurial misfires. What if this last and greatest airplane, which had finally begun to fly—and fly high—now crashed and burned like so many other LaMagna ventures before? …For many of his earlier ventures, he had de facto operated as a solo entrepreneur, so any kind of collaborative decision making was not even an option.

In the early days of Tweezerman, things started out the same. But with the evolving success of the company, and the growth that followed, he began to see things differently. Over time, he had established a group of trusted executives around him, which formed a “steering committee.” And they all had their own points of view, which they regularly voiced. The tension of the big-growth decision was always before them. “For years, I was a like a horse champing at the bit to do this, and the steering committee held me in the corral so we could really think it through,” recalled LaMagna with a smile. “I know how reckless and impatient I can be, and these people kept me in check.” In the end, the CEO and the leadership team made the final decision together—in fact, a series of interrelated and difficult decisions leading to the all-important outcome. What follows is the story of how the collective judgment they called upon was built and embedded in the entrepreneurial soul of this company, enabling what ultimately became a multimillion-dollar enterprise—and wealth for all of them beyond their wildest dreams. Of particular note is the context for better judgment that LaMagna built around him: the cultural values and sense of mutual accountability within this company that he, as founder, encouraged and reinforced steadily.

…Like so many entrepreneurs, Dal LaMagna pursued his new idea with a vengeance, but insisted on doing it all himself. …  As he recalls, looking back, “I sort of had this epiphany. I suddenly realized what my own time was worth, and I wasn’t taking advantage of what I could do when I had to do everything alone. All along I had really just been sort of a promoter, selling this or that crazy idea. And it hit me then. I had to build a company. I needed to… get good at picking people I could trust and who could do the job.

Here’s how we put it last year in Good boards need tension and mutual esteem:

A frequent theme of our writing here, and our conversations with our entrepreneur partners, is board performance:  there is more to strong board performance than best practices.  The critical factor is a ‘robust social system’ in which members’ informal  modi operandi ensure that all the well-designed board processes function properly….

Simon C. Y. Wong,  a partner at London-based investment firm Governance for Owners and adjunct professor of law at Northwestern University School of Law, hits many of the same notes in this past June’s McKinsey Quarterly:

[B]oards that operate to their potential are characterized by constant tensions, coupled with mutual esteem between management and outside directors. Rather than leading to endless bickering, this virtuous combination helps to facilitate healthy and constructive debate and improves decision making.

And here he makes an excellent point about ownership that is especially true in the venture capital industry:

Directors with an ownership mind-set—whether from the family or outside—have passion for the company, look long term, and take personal (as distinguished from legal) responsibility for the firm. They will spend time to understand things they don’t know and not pass the buck to others. They will stand their ground when it is called for. Ultimately, the success of the company over the long term matters to them at a deep, personal level.

In the venture world our long term reward depends heavily on whether or not the value of our portfolio company appreciates.  Furthermore, there are far fewer investors (than in a publicly traded company) so owners are more “meaningfully engaged.”  Owners of private companies get to pick both their investors and their board members.  If entrepreneurs pick great partners (broadly defined) to fund their business and make sure both financial incentives and long term goals are aligned, they will have achieved “high performance” corporate governance that will contribute substantially to their eventual success.

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Manage to the rules (only) and you’ll tiptoe right up to the hot red line

The Wall Street Journal recently reported on the splash made by BoE Director of Financial Stability Andrew Haldane at the Federal Reserve’s annual policy conference in Jackson Hole, Wyoming.  Haldane argued that regulations become less effective as they become more complex and likened it to a playing Frisbee with a dog.  Despite the complexity of the physics involved, catching a Frisbee can be mastered by an average dog because he has to keep it simple:

The answer, as in many other areas of complex decision-making, is simple. Or rather, it is to keep it simple. For studies have shown that the Frisbee-catching dog follows the simplest of rules of thumb: run at a speed so that the angle of gaze to the Frisbee remains roughly constant. Humans follow an identical rule of thumb.  Catching a crisis, like catching a Frisbee, is difficult. Doing so requires the regulator to weigh a complex array of financial and psychological factors, among them innovation and risk appetite. Were an economist to write down crisis-catching as an optimal control problem, they would probably have to ask a physicist for help.  Yet despite this complexity, efforts to catch the crisis Frisbee have continued to escalate. Casual empiricism reveals an ever-growing number of regulators, some with a Doctorate in physics. Ever-larger litters have not, however, obviously improved watchdogs’ Frisbee-catching abilities. No regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight.  So what is the secret of the watchdogs’ failure?  The answer is simple. Or rather, it is complexity. For what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub-optimal for crisis control. In financial regulation, less may be more.

Haldane warned that “fundamental limitations of the human mind” thwart increasingly complex (and sometimes frivolous) attempts at regulation.  Most involve the limits of data or modelling or even the nature of knowledge itself:

This belief is new, and not helpful. As the authors note, “Many of the dominant figures in 20th century economics—from Keynes to Hayek, from Simon to Friedman—placed imperfections in information and knowledge centre-stage. Uncertainty was for them the normal state of decision-making affairs.”

A deadly flaw in financial regulation is the assumption that a few years or even a few decades of market data can allow models to accurately predict worst-case scenarios. The authors suggest that hundreds or even a thousand years of data might be needed before we could trust the Basel machinery.

Despite its failures, that machinery becomes larger and larger. As Messrs. Haldane and Madouros note, “Einstein wrote that: ‘The problems that exist in the world today cannot be solved by the level of thinking that created them.’  Yet the regulatory response to the crisis has largely been based on the level of thinking that created it. The Tower of Basel, like its near-namesake the Tower of Babel, continues to rise.”

We once made the same point in the context of what makes great boards great:  boards who over emphasize the process of good governance, including measures implemented in the wake of previous meltdowns, often fail to foresee the next crisis:

Presumably, those companies and regulatory bodies have boards comprised of accomplished and highly intelligent members with personal wealth at stake.  [They were] paying attention and paying consultants; [they had] ethics codes, audit and compensation committees,  Independent Directors, regular meetings, well constructed board packages…  It’s conceivable that a board member here or there could be corrupt or asleep – but entire boards?  Across multiple companies and regulatory agencies?  Unlikely.  It’s more likely that they were following the current and best practices for strong and effective board oversight.  So, if *all* boards have similar formal systems in place, something else must be at work.

A strong board relies on the ‘robust social systems’ among its members – the informal ways in which they trust and challenge each other – to look beyond formal legal and fiduciary responsibilities and proactively assess the shifting regulatory risk environment.

The end of every boom-bust cycle includes a fin de siècle scandal:  insider trading punctuated the ’87 crash, accounting irregularities (Enron, Worldcom) helped pop the tech bubble of the ’90s, and  “rolling the dice” at Fannie & Freddie inflated the housing market with disastrous consequences.  Each scandal led to an avalanche of new regulations atop the snowpack, which never entirely melts away and – more importantly – doesn’t prevent the next crisis.

Haldane summed it up nicely:  “complex and detailed rules lead regulators and financial institutions alike to manage to the rules, tiptoeing right up to the hot red line at which a crisis can be triggered.”

 

 

 

 

 

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How to recruit a Board of Directors

While the “owners” of public companies often get to pick their board members more in theory than in practice, owners of private companies get to pick both their investors and their board members. Choosing partners who best fit over the long term requires as much rigor and thoughtfulness as any decision an entrepreneur makes.

Many small private companies have no or underdeveloped boards.  We encourage all our portfolio companies to build great boards and then use them constantly.  Entre- preneurs are almost always surprised how much value a good board can bring to their companies, and the best boards are a function of both the quality of the people involved and, just as importantly, how they operate.

Here we share two recent items on the subject of board recruitment – one that deals with the topic in broad terms and one that looks specifically at recruiting “digital” directors.

***

In Recruiting the Digital Director, Julie Hembrock Daum, Greg Sedlock and Dana Wade of Spencer Stuart discuss the implications social media’s growth has for the recruiting process.  Demand for digital expertise at the board level is rising faster than the supply of qualified candidates, who can come from nontraditional backgrounds.  Boards may have to recalibrate their perceptions about what an ideal director looks like, define what digital means for the company, and understand the talent trade-offs:

Recruiting board directors from the digital, consumer Internet or technology fields may mean compromising on conventional benchmarks, such as prior board experience or international expertise, in favor of more contemporary skill-sets, for example, experience with social media platforms or digital advertising. Additionally, boards should understand that directors with digital expertise may not have achieved the same stature as candidates from more traditional fields; many of these candidates have not reached the C-level, for example. These young, ambitious and, oftentimes, time-starved executives can be more transient than more established executives, and they may be less familiar with the customs of a corporate boardroom.

Several questions during the recruiting process must be explored.  Is public or private experience critical?  How relevant is governance expertise?  What core competencies does the board require? Are they seeking broad experience or something specific to a hot technology of the day?  And then, once recruited, the new director must be positioned for success:

(C)arefully define the role that the new director is expected to play on the board. Is the new director expected to contribute in the same manner as other directors, or is there a digital-specific function he or she is expected to fill? Is the new director expected to chair a committee? Answering these questions is important when recruiting any new director, but especially [for digital directors].

***

Firas Raouf of OpenView Partners makes parallel recommendations, with a broader view, in How to Recruit a Board of Directors:

Recruiting a board starts by you realizing that you should recruit a board the way you would recruit employees. Start by defining your needs.  One approach is to examine your skill sets as a founder/CEO… Then think about the skill sets you lack and where a mentor could help in the role of a board member… Then think about your plans for growing the company and the role of a board member in opening strategic partnership doors, whether for funding or business development.

Rauof also describes a few symptoms associated with a bad board:

  • The CEO frequently laments that board meetings take up too much of time for the value added
  • The CEO feels the urge to hide things from them, and/or doesn’t think they’d understand the business
  • Members spend too much time between projects. When you run out of things for them to do, it’s time to recruit their replacements.

Most founders/CEOs think that a board is something that creates a lot of unnecessary work for them, adds little value, and is manned by individuals who will get in the way of running the company.  That can be true if you recruit bad board members. But if you recruit great board members, you will get great value.

 

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Don’t mistake process for purpose

Most research and literature about good governance is developed with public boards in mind, and although the context is a little different than in our business, many of the same lessons do still apply.  Since our long term reward depends heavily on whether or not the value of our portfolio company appreciates, we tend to have a more personal ownership mindset – over and above the legal and fiduciary responsibilities – than public company directors.

Here are two interesting reports on good governance which echo our own thoughts on how to ensure a strong board.  While processes and best practices may be important, great boards rely on ‘robust social systems’ among its members to ensure that they function properly.

First, from Spencer Stuart’s Point of View 2012.  When helping to assemble a board, consider executives who:

…combine integrity with the right mix of knowledge, experience and vision to perform the board’s defined roles with excellence.  Beyond even these considerations, qualities such as judgment, engagement and strong communication skills are critical attributes for every director.  And, just as it is a component in any high-functioning team, interpersonal chemistry also plays a role in every effective board.

And this, from Bridging Board Gaps, by the Study Group on Corporate Boards – a joint effort by Columbia Business School and the John L. Weinberg Center for corporate Governance at the University of Delaware:

Recent institutional failures, surrounded by general economic turmoil, once again sparked the familiar question:  Where were the boards?”  …  But the new rules (e.g. Dodd-Frank) for public company boards are focused on board process.  In addition, boards need a renewed focus on their aspirational purpose and guidance for achieving it… never mistake process for purpose.

That purpose (for public company boards) is stated as “creat(ing) sustainable long-term value for shareholders.”  One Study Group member summed up the report’s conclusions this way:  “Maybe we should rename directors ‘shareholder representatives’ – then they would pull up to the table in the right mindset.”

Naturally this mindset comes a bit more naturally in our field since we are literally a shareholder representative – alongside the entrepreneur and any fellow investors.  (There are also far fewer investors than in a publicly traded company so owners are more meaningfully engaged.)

Owners of private companies get to pick both their investors and their board members.  If entrepreneurs pick great partners (broadly defined) to fund their business and make sure both financial incentives and long term goals are aligned, they will have achieved high performance corporate governance that will contribute substantially to their eventual success.

 

 

 

 

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