Board Meetings (Rule # 18)

May 31, 2010

Most CEOs with outside investors face the ongoing challenge of board meetings – How to organize them, what content to provide to board members, who should attend, what type of agenda to have, and perhaps most complicated,  how to “manage” the board itself.

My friend, George Von Gehr has written about board meetings in his book, “The Effective Entrepreneur: Fifty-nine rules to Create Value Throughout the Life Cycle of Your Company” (Amazon Link) and, with permission, reprint here Rule 18 – Structure Board Meetings.  Here’s George’s background in a previous post.

“Unless the board meeting schedule is mandated by investors, schedule board meetings with a frequency that reflects the pace of company activity.  Since many board members make their major contributions through discussions outside of board meetings, a better approach may be less frequent meetings — meetings held quarterly or semiannually — supplemented by status updates every four to six weeks via conference calls.  The board must be nimble so that conference calls and meetings can be scheduled easily as needed.

To preserve optimal focus and maximize contributions of the board members, the meetings themselves should rarely exceed two to four hours.  Materials should be sent out ahead by e-mail, especially indicating what decisions are to be made at the meeting and what the overall agenda will be.  This approach allows board members to prepare and to ask for additional information in advance; hopefully this will result in more effective decision-making at the meeting.  Board members expect regular updates showing progress and major decision points in the macro issues under consideration.

Presentations at board meetings should be made by a variety of company managers in order for the board to become familiar with a broad cross-section of management.  A major problem is that managers’ presentations often vastly exceed their allotted time; one way to conserve the schedule is to limit the number of PowerPoint slides presented.

Some board members occassionally argue vehemently, over-focus on unimportant issues, miss meetings, or disturb the board’s concentration by taking phone calls.  Action needs to be taken to correct counterproductive conduct.  The chairman or another board member must take the lead to preserve the CEO’s neutral stance.  The issues under contention must either be resolved, the board member persuaded to behave differently or be removed altogether.

Most companies keep brief minutes of these meetings.  What is important though, is to document, in the minutes, the basis for major decisions such as stock option pricing, senior management compensation, and financing.”

I posted a related entry on “Optimizing Board Meetings” in December, 2008.  Additionally, there are a number of interesting discussions and article on this and related topics on ExpertCEO at the links below:

Improving Board meetings

Maslow for CEOs

Firing a board member

“In The Spotlight” (ExpertCEO) articles

There are other discussions about this and related topics you can find on ExpertCEO by searching for “Board Meeting” on the site.

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The Craziness Correlation

September 15, 2009
Kelly Herrell

Kelly Herrell

Another post by Kelly Herrell, one of our guest bloggers.  Kelly is the CEO of Vyatta, “a venture-funded company disrupting the networking industry” and is also a long-time member of ExpertCEO.  You can read his blog at http://kellyherrell.wordpress.com/

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“The best way to get a good idea is to have a lot of ideas.”
-        Linus Pauling, Nobel laureate

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In this blog I’ve previously written about the CEO’s hands-on role as it relates to disruption and innovation.  We discussed owning it personally – the CEO as “Category Evangelizing Officer,” and being innovative and disruptive ourselves instead of relying on the organization to produce it.

But it’s not “Miller time” until the innovation is successfully executed in the marketplace.  And here’s the rub:  The higher the degree of innovation or disruption, the less likely it is to know what the right market execution model will be.  Call it the Craziness Correlation:  Crazy ideas often have similarly crazy execution models.

Why is this?  It’s because industries are structured around the status quo.  Supply chains, partners and sales channels are established around the incumbent offering.  But a disruption is by nature different… so it follows that the greater the disruption, the less likely it will get absorbed into the existing industry structure.  Look at Apple’s iTunes:  The disruption was digitized music, and its market execution model is radically different from the days of tapes and CDs.  It’s also up-ended the supply chain of music by changing the way artists get their product packaged, priced and distributed.  That’s the Craziness Correlation at work.

So if your innovation needs a unique market execution model, and it might be a Crazy one, then you’re going to have to find it.  How?  It’s a creative discovery process.  I was pondering this fact while reading an excellent book on creativity, where the author makes the following point:

  1. When it comes to creativity-based success, no one bats 1,000.
  2. The most successful people are the ones who try the highest number of things.  It’s in that volume of ideas and attempts where success is found.

In other words, the creatively successful necessarily fail – a LOT.

So if you’re a CEO wielding a huge potential disruption, your biggest challenge is how to find your execution model.  And given points 1 and 2 above, it means there will likely be a lot of failures in trying to find it.  But there’s no choice; you HAVE to find it.  And here’s the issue:

a)     Failures mean multiple attempts,

b)     Each attempt costs time and money, and

c)     Organizations reward success, not failure.

How do we encourage rapid explorations knowing they will likely fail?  A few principles come immediately to mind:

  1. Budget for failures.  Otherwise the downstream impacts will produce a cycle of negativity.
  2. Make sure people are aware that failure to execute ideas is the greatest failure, and that it will be punished.
  3. Make sure everyone learns from past failures.
  4. Create a bounty for the one(s) who successfully find the answer.

I’d love to hear other thoughts on how to effectively manage through such a challenge.  The dialogue is going on in here…

Here’s a link to the discussion thread on ExpertCEO (if you’re a member), and here’s more information on ExpertCEO.

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The New Dynamics of Venture Capital

January 5, 2009

A few weeks ago, Scott Duke Harris of the San Jose Mercury News wrote an article titled, “Will Undone Deals Be The Next Big Thing in Silicon Valley?”.   The article evolved from a conversation about two recent ExpertCEO posts. The posts were entitled “VCs Yanking Funding” and  “Series A Deals Getting Undone”.

A friend of mine, who is a general partner of a top tier venture fund, related another “busted financing” anecdote.  His firm is a shareholder in an early-stage company that, like many others, found itself unable to find a new investor when it sought financing about six months ago.  The existing investors agreed, instead, to raise an “inside” round, to be parceled out in two tranches, the second of which would be triggered by the company’s achievement of three milestones.  The first tranche was funded, as expected, in late summer.  Subsequently, the company met 2 of the 3 milestones, and the investor syndicate agreed to loosen the criteria of the third milestone, making way for the last tranche to be paid out.  However, one of the investors also decided to require the company to make a final presentation to its partnership, prior to closing.  The presentation took place in mid-December, but ultimately, the partnership elected not to participate in the final tranche.  This unfortunate surprise left the remaining investors with two options:  put in more money than they had planned to support the company, potentially indefinitely and in the face of a no-confidence vote from an existing, top tier investor, or drop out, leaving the company high and dry.  In the end, the existing investors opted for the second option.

 

Issues Faced by VCs are Similar to Those of Venture-Backed Companies

Many venture capital firms are either experiencing or are fearful of facing their own cash shortfalls (just like their portfolio companies). Their source of funding (their limited partners) have been hard-hit by the market’s precipitous decline.  Venture funds collect or “call” cash periodically as they need it.  As these capital calls are issued, some venture firms are finding that their limited partners are either unable or unwilling to meet their contractual commitments, leaving the funds with fewer resources than they’d anticipated. 

As a result, venture firms, which typically “budget” funds for each of their investments, are being forced to rethink these plans (again, just like CEOs) – because of the possibility of the reduced size of their funds, as well as the probable need for greater total investment in each portfolio company than was budgeted.  And liquidity events will be few and far between due to a less forgiving stock market and a reduced pace of acquisitions at lower valuations.

Facing these new realities, many venture funds are carefully re-evaluating their portfolios, deciding which companies to support with their scarce cash and which to “abandon.”  To conserve cash, venture firms must categorize their investments.  They are requiring those with existing revenue streams, where expenses can be cut to quickly achieve positive cash flow (the Sequoia Capital approach), to survive on their own, while supporting those that are promising but pre-revenue.  Others will be allowed to fail or forced into a sale.  These issues are well chronicled in the following two articles.

The Wall Street Journal – Venture Capital Hits a Cash Call Crunch

Forbes – Venture Capital’s Coming Collapse

What Should Venture-Funded CEOs Do?           

The operational aspects of managing in this environment have been discussed at length (cutting costs, etc.).  A more complicated task for a CEO is how to manage his or her investors!  Assuming you can’t reach cash flow breakeven via the Sequoia route:

1.     Be creative when considering funding sources.  The organized venture community is one, but by no means the only option when seeking financing for your business.  Identify potential strategic partners or large customers with a vested interested in your success.  They can fund development, make large purchases, and provide cash in a variety of other ways.  One company I work with just received a 7 figure (cash) payment on a large product license from one of the big 3 U.S. automakers!

2.     Communicate often and frequently with your investors.  Level with them about your opportunities and challenges.  Let then know you expect the same from them.  Don’t be afraid to probe the extent of their commitment and understand their problems in a respectful way—you owe the diligence to all the shareholders. Most of all, be prepared for necessary financing parameters to change often.

3.     Don’t rule out acquisition as a potential avenue.  What was unthinkable just months ago could well be the best outcome for you and your shareholders.  If you’re flush with cash or have liquid stock to use as currency, acquisition opportunities will be more numerous than your ability to consolidate them—so prioritize!  And if you’re running low on capital, don’t wait to explore possible combinations.  The process is time-consuming, and many more potential marriages are considered than are consummated.

4.     Plan for the worst – hope for the best. Whether you’re seeking funding or a merger partner, assume the process will take longer than you think.  Read my blog entry titled “Crisis Management.” 

 

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Optimizing Board Meetings

December 15, 2008

Making board meetings productive is a challenge at or near the top of every CEO’s priority list.  This holds for all senior executives, whether they lead non-profits, small, privately held companies, or large, public companies.  (Wouldn’t you love to be a fly on the wall at GM board meetings these days?)  An interesting discussion thread on ExpertCEO addresses these topics.  The original thread is excerpted below:

Lyle Lovett has a line in a song: “She wasn’t good, but she had good intentions.” With two funding rounds, my board consists of VCs and an outside director. Most have a tendency to get micro-focused (for example, it’s not uncommon for them to focus on a sub-topic like lead generation.).

I attribute this behavior partially to natural early-stage investor focus … but it is also due to the junior nature of some of the directors. Plus, all too often their focus on managing their investment overshadows their broader responsibility as a director.

As we are beginning to scale our business, I want the board dialogue to elevate as well. I’m looking for ideas on how to invoke and/or manage this desired change.

I have an opportunity to add a second outside director, and I want to select someone who can help elevate the discussion.

There are a number of topics covered in this post, several of which are blog-worthy in and of themselves.  For now, I want to focus on one issue that seems to be of concern of many, if not most, CEOs: finding the proper balance in board meetings between operational issues and strategic issues.

I’ve experienced this challenge as a CEO, as an investor, and as an independent director.  Note that I carefully used the word balance.  It’s not realistic to think that board meetings won’t get into any operational details, especially if the results for the month or quarter aren’t meeting expectations.  By the same token, it’s important to expect that the board should be able to step back and focus primarily on big issues and not try to micromanage the CEO or run the company.

One concrete suggestion was made by a CEO who has established written ground rules for his board that address a) their preparation for meetings; b) the quality and relevance of contributions during the meeting; and c) their ability to remain concise, objective, and constructive when commenting on the CEO’s efforts to date.  And he has created a feedback mechanism – a 1-page evaluation that is completed at the end of each board meeting by all of the directors for each director.

Another comment, posted by a successful former CEO and current VC identifies the best board meetings, meaning value to the CEO and the company, as those that focus on strategic issues first, governance second, and operational details third. He goes on to state that several of the boards he’s on set aside a strategic topic or two as the main agenda item. Operational metrics are provided for review, but are not formally presented.  Instead, there is a short session allotted for directors to ask any questions they may have related to the operational metrics. This method matches the oversight process with the philosophy that boards are supposed to govern and guide the long-term direction of the company, not run the business.

Almost all the participants in this discussion agree that having one or two well-qualified current or former CEOs on your board is critical to balance the financial focus that VCs and other investors offer.  These individuals provide operational and company-scaling wisdom that can also help you predict what’s around the next corner.

My own observations, having attended, led or participated in hundreds of board meetings:

a.    If performance is bad, it will not be a positive board meeting – no matter what else is on the agenda.  Directors will want to drill down into the minutia of operations, compensation, individual customers, lead generation statistics, etc.

b.    Conversely, if performance is great, the board meeting can be conducted on a higher plane dealing with strategic issues.  Bring the issues to them for input, and be clear about how they can best assist as plans are formulated.

c.     The role of the independent director in smaller, venture-backed companies is important, whether counseling the CEO or bridging communication between the investors and the operating executive.  Key decisions on fund-raising and acquisitions, however, tend to be governed by shareholder agreements, not director votes.

Finally, IMHO, the number one thing a CEO can do to improve board meetings happens BETWEEN meetings.  CEOs must have frequent and open communication with the board–brief weekly emails detailing the status of important items at the company; immediate communication with the board about important issues and problems that arise in the company; periodic updates when good things happen; and minimal censorship of management team presentations (except for length).  If the board feels well-informed–that the CEO is timely, open and honest with company status–they are likely more willing to feel comfortable thinking about the big picture.

6 Comments | Board Meetings, CEO, CEO Organization, Executive CEO, General Management, Uncategorized | Permalink
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