Jack and Suzy Welch have a great article in this week’s BusinessWeek titled Directors Who Don’t Deliver. I’ve served on many boards and written plenty of board of directors, including my personal favorite board of director post titled Boards That Are Not Bored.
The Welch’s describe five types of dysfunctional board members: the do-nothing, the white flag, the cabalist, the meddler, and the pontificator. If you’ve ever served on a board, you probably know at least one of these dudes. Hopefully, you (and me) haven’t been one of them.
Eric Norlin – the organizer and host of the upcoming Defrag Conference (Denver – Nov 5 and 6 – hottest ticket in town since the World Series will be over) has a great rant up titled Cycles, Juxtapositions, and Predictions. Midway through the rant, he says:
“Putting it all together, here’s what I’m thinking: Bottom line — Tech innovation is about to get very focused on selling to the enterprise.”
He goes on to say:
“And here’s how it all relates to Defrag: I see a lot of the companies in the “defrag space” (including a lot of our sponsors) starting on the consumer-side of things. I also see nearly all of them making the shift toward the enterprise.”
My regular conversations with my CIO friends, including The Architect, confirms this point of view. Large corporate IT has digested a lot of the innovation from the last cycle and is preparing for adopting and incorporating much of the consumer side innovations we’ve seen explode on the scene in the past two years. Enterprise 2.0 anyone?
If you haven’t signed up for Defrag yet, register and come join us to engage in the conversation and help us figure this out. Enterprise people welcome.
On Saturday, I called a director at a company I’m on the board of to get a reality check on something that is going on. Ten minutes on the phone solved three things: (1) I was able to road test my idea with someone I respect and (2) I incorporated his feedback into my idea, and (3) we were calibrated.
While this may seem obvious, I’ve never hesitated to call another director on any issue concerning a company I am involved in. While board meetings are logical check in points, they are not the only ones and, in many cases, are not the most important ones.
I know some directors (and CEOs) who are uncomfortable talking with other directors outside the context of board meetings. I’ve never understood this. Pascal Levensohn has a nice post up about this titled Don’t Assume That You Have Consensus on Your Board– Make Sure You Do. His simple message is “communicate.”
Reflecting on it, my hierarchy of daily communication is Amy, my partners, CEOs of companies I’m an investor in, and then directors / co-investors of companies I’m an investor in. Ok – I suppose my mom is in there somewhere also.
My partner Chris Wand is finally blogging (even though he’ll deny it) over at AsktheVC – he’s writing a series on what should be in a “board reporting package.” My long-time friend Will Herman – who happens to be hanging out in Boulder this week making the rounds (and getting his bike fitted – whatever that means) – inadvertantly contributed with his post titled Communicating with Your Board: Sales Numbers. Will’s post covers some good ground – I can’t tell you the number of times a clear sales report is missing from a board package. It’s even worse when there is a sales report, but given the fact that I attend N board meetings a year (where N is a large number) the CEO doesn’t create any linkage to historical performance, current expectations or the plan. Great stuff.
Paul Kedrosky has a superb post up today titled Building the Perfect Board Package. The entire post is worth a slow and careful read as it’s “guidance on the subject from a sales-guru colleague to a company’s management on whose board he sits.”
Buried deep near the end is the real gem – metrics for a “perfect enterprise software company” that would trade at 3x revenue (or significantly higher if a SaaS model).
Revenue (License / Service) 55/45
License to Service Gross Margin 75%
License GM 94%
Service GM 55%
Operating Costs 60%
Sales 29%
Marketing 8%
R&D 9%
G&A 8%
Operating Margin 15%
S&M Costs as a percent of Rev 68%
If you run an enterprise software company and need something to benchmark to in your “stable state” (after you’ve become profitable and are growing at a nice clip), here’s a model.
My partner Greg Galanos forwarded me a great article from the Philadelphia Inquirer titled “The Economy Revealed: Why understanding economics is hard” that builds on the more difficult to digest but equally interesting essay / research by Alan Page Fiske titled “The Inherent Sociability of Homo sapiens.” Fiske’s theory is based on the conclusion that all human relationships are built from four types of interactions: communal sharing, equality matching, authority ranking, and market pricing. In Fiske’s theory, these four building blocks (which he calls “relationship models”) result in the entire range of the very complex and diverse social life of humans.
While I’m not going to dig another layer into the theory and the research to decide if I believe that it’s true / valid / complete, it’s very provocative and stimulating, especially when you start applying it to a wide range of situations – especially ones that are filled with conflict or behavior between two people that are operating at cross purposes.
Start with the summary article in the Philadelphia Inquirer. If you are interested, read Fiske’s essay. If you are really ambitious, take it a step further and then use some “communal sharing” and post your discoveries here for all to see.
Oh – and why is economics difficult? Actually, I never had too much trouble with the IS-LM curves. It was all that supply side stuff that confused me.
In the life of most companies with an active board of directors, it occasionally becomes necessary to recruit a new director. In the case of VC backed companies, a new director candidate is often the suggestion of one of the investors. In these cases, the suggestions are often the result of the VC in question having a past, successful working relationship with the proposed candidate. These candidates are often suitable in terms of “knowing the venture drill”, likely a cultural fit, and appropriately skilled for the challenges at hand. However, the relationship between the VC and the proposed candidate can often be seen as “too close.” Therefore, if independence is a highly ranked criteria for you, Jim Lejeal and I suggest you consider a more formal and deliberate process (and we humbly offer this as the latest post in our Board of Directors series.)
Before you start the process of recruiting a new director, consider the following:
Now, let’s assume you are ready to begin recruiting a new director and your board has agreed to do this in a methodical way rather than just get “some friends or experienced execs we’ve worked with before” on the board. Following is a framework for running a process.
Determine who is responsible for running the process: Some companies like to have a formal nominating committee; others are happy to have the CEO work with one director to run the process. In most early stage companies, a combination of a CEO and one director is a great working group, recognizing that one of them ultimately has to take responsibility for getting it done. While “best practices of board governance” typically will put the responsibility on a director, the CEO is almost always heavily involved in early stage companies.
Perform a GAP analysis of your existing board: Begin by taking a look at your existing board and identify where your board’s skill set is strong and where it can be improved. Some key criteria that are often needed for growing companies include independence, financial expertise, and specific product, sales, or marketing skill sets. A great rolodex – especially for customer prospecting or future financing – is often nice to have, but should be not be the only thing you are looking for.
Establish and prioritize your selection criteria: The criteria you determine you need from your GAP analysis are unlikely to be equal in importance given the current state of your company and the nature of your existing board. Make sure you’ve got a handle on the critical capabilities, the nice to have ones, and the ones that don’t really matter much.
Work as a board to create a candidate pool: Engage all your directors in this as they are likely to be the best source of potential candidates. In addition, by getting everyone involved at this point, you’ll be able to confirm the capabilities you are looking for in your new director.
Approach at least three candidates simultaneously: Not everyone will be interested in the opportunity you’re offering. In addition, after the first meeting, you might not be interested in the candidate. By approaching a few candidates at the same time, you’ll benefit from being able to compare the candidates while hedging your bets in case a few of them aren’t interested (or interesting.)
Explain your process to each prospective board member: Be candid and upfront with each potential director that you talk to. Explain what you are looking for, why you are looking, and what your time frame and process is. Explain that the ultimate decision whether to invite the candidate onto the board is a shared decision of a company’s board and that a number of interviews need to be undertaken in order to actually extend an offer to join the board. Emphasize that the diligence process is a two-way street and that the candidate should feel comfortable performing their own diligence on the opportunity. Finally, explain that other candidates are being considered so there are no surprises.
Have more than one meetings: Make sure you spend enough time with each candidate that you are seriously considering. Get to know the person – just like you would with anyone that you would add to your leadership team.
Assist your candidates in their diligence process: Share information with the candidates to assist them in getting comfortable with your company and the opportunity to be a director. Make sure the candidates have good access to all other directors as well as members of the senior leadership team. Encourage everyone to be open – both about the good and the bad. Clearly explain your expectations of time commitment, board attendance, and compensation. If you are comfortable, share the last few board reports. Use this step in the process to understand more about the candidates you’re considering.
Schedule one-on-one meetings with at least a majority of your existing board members: All of your existing board members should have an opportunity to meet the candidates before an offer is extended. Often this isn’t practical, but make sure your existing board members’ expectations are well understood. As part of this step, consider doing reference checks on your candidates, especially if they are not known to all directors.
Observe the natural ranking your process creates: Running a parallel process of talking with more than one candidate simultaneously will give you the benefit of determining who is your top candidate. Collect feedback from other board members that have participated in the process to rank order your candidates.
Invite and Approve: By now you have run a comprehensive process and you are likely at a point where it’s clear who you’d like to have join the board. Typically the formal step of adding the board member is to invite them to their first board meeting where they will be formally added to the board by way of a voting action on the part of the existing board. Check with your attorney in advance on the most appropriate way to do this – especially if you have any specific voting provisions associated with appointing a new director.
Will Herman has an excellent post up titled Board Meetings – A CEO’s Point of View. While I’ve never been on a board where Will was CEO, he and I have been on several boards together, and he’s an incredibly valuable and impactful board member. His “top 11” list of suggestions is a must read for any CEO that has a board of directors. Also – look for some new posts in the Board of Directors series that Jim Lejeal and I have been writing coming soon to a blog near you.
I go to a lot of board meetings. As a result, I’ve reviewed a lot of board meeting minutes. In general, the philosophy among most VC-backed companies – promulgated by the law firms for these companies – is to keep the board minutes “light.” They should cover the substance of the meeting and have any specific votes, option grants, or board level issues documented, but they should not contain extensive details about the presentations giving in the board meeting.
I regularly get asked for “sample board meeting minutes”, especially among newly funded companies that are just starting to have board meetings and might not have their outside counsel present at the meeting (although most outside counsel’s that are credible and used to working with early stage companies will attend board meetings at no charge – just ask as part of your initial interview process with the firm – it’s very useful to them to be there so they can stay up to speed on what is happening at the company.) Following is a template for a sample set of board meeting minutes.
———————————————————————————————-
[INSERT NAME OF COMPANY]
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS
[Insert Date of Board Meeting]
A meeting of the Board of Directors (the “Board”) of [Insert name of company], a [Insert state of incorporation] corporation (the “Company”), was held on [Insert date of board meeting] ([Insert time zone—i.e. Mountain Daylight Time]) at the offices of the Company.
Directors Present:
[Insert names of directors present]
Also Present Were:
[Insert names of other people (mgmt., etc.) present]
Directors Absent:
[Insert names of directors absent]
Counsel Present:
[Insert names of legal counsel present]
NOTE: It’s generally good to note next to the above listing if the attendee(s) participated via telephone (otherwise it’s assumed they participated in person at the above referenced location]
Call to Order
[Insert name of CEO or board chair] called the meeting to order at [Insert start time of meeting] ([Insert time zone—i.e. Mountain Daylight Time]) and [Insert name of secretary] recorded the minutes. A quorum of directors was present, and the meeting, having been duly convened, was ready to proceed with business.
CEO Report
[Insert name of CEO] reviewed the agenda and welcomed everyone to the meeting. Next, [Insert name of CEO] discussed the current status of the company and its progress. A number of questions were asked and extensive discussion ensued.
Sales & Business Development Update
[Insert name] next provided an update on the overall sales progress and sales pipeline of the Company. He also presented the status of business development discussions.
* [Insert name] joined the meeting*
Financial Review
[Insert name] provided a comprehensive update on the Company’s financial plan and forecast. [Insert name] also reviewed the Company’s principal financial operating metrics. Discussion ensued.
Financial Planning
The Board next discussed the timing and creation of the 2007 Operating Plan.
Approval of Option Grants
[Insert name] presented to the Board a list of proposed options to be granted to Company employees [and advisors], for approval, whereupon motion duly made, seconded and unanimously adopted, the option grants were approved as presented in Exhibit A.
Approval of Minutes
[Insert name] presented to the Board the minutes of the [insert date of previous board meeting] meeting of the Board for approval, whereupon motion duly made, seconded and unanimously adopted, the minutes were approved as presented.
*Management was excused from the meeting *
Closed Session
The Board next discussed a number of strategic topics. Questions were asked and answered.
Adjournment
There being no further business to come before the meeting, the meeting was adjourned at [Insert time of adjournment] ([Insert time zone—i.e. Mountain Daylight Time]).
Respectfully submitted,
____________________________
[Insert name of secretary], Recording Secretary
NOTE: Create (and delete) additional headings and sections above as necessary to capture the major agenda items of the board meeting.
NOTE: If attendees join after the meeting start time or leave before the meeting adjournment, it’s preferable to note when they join and leave the meeting as indicated above by the asterisked notations.