the best advisors and directors
|playing the board game
of directors have a greater role to play in the success of a
business than just the fiduciary responsibilities defined by law.
In the words of Mario Morino, “the board should help you grow as
an individual and as a CEO, and it should help your management
team grow. It's there to ask, ‘How are you going to get from
here to there?’” At this Netpreneur Coffee & DoughNets event held
January 23, 2002, Morino was joined by a panel of veterans of the
board game to provide entrepreneurs with an inside view of what to
expect, and practical advice for building and managing an
Crockett, CEO of Crockett Technology Associates
Fernandez, CEO of Dimension Data North America
Marks, Chairman of the Mid Atlantic Venture Association
Shames, Partner at Ernst
Mario Morino, Chairman
of the Morino
Copyright 2002 Morino
Institute. All rights reserved. Edited for length and clarity.
Statements made at Netpreneur events and recorded here reflect
solely the views of the speakers and have not been reviewed or
researched for accuracy or truthfulness. These statements in no
way reflect the opinions or beliefs of the Morino Institute,
Netpreneur.org or any of their affiliates, agents, officers or
directors. The transcript is provided “as is” and your use is
at your own risk.
mary macpherson: welcome
morning. Welcome to the first Coffee & DoughNets of 2002. Best
wishes to you, your families, and your businesses for a great new
Since we're meeting in a movie theater, we thought it might
be interesting to visualize what the marquee might look like if it
were showing movies on the theme of our program this morning,
“The Board Game.” We might look at something like Gladiator,
which could be about a board meeting on a restatement of earnings,
or A Beautiful Mind could be about how a board deals with a
CEO who sees things a little differently than everybody else. Black
Hawk Down could be how a board deals with dramatically
changing market conditions, and Jerry McGuire could be a
discussion of executive compensation. The Godfather, or, if
we were showing HBO original programming, The Sopranos,
could focus on how the board works together and resolves
differences of opinions in a collaborative manner. Of course, we
could not leave out any number of possibilities for an Enron board
meeting that could be called Titanic or Ship of Fools.
As it turns out, we're not here to watch a movie today.
We're here to look at, listen to, and learn from real life. We'll
begin with our panel in a moment, but, first, let me take a moment
to mention a couple of items. In your handout, you can see the
biographical information about our speakers, and a list of resources
on today’s topic that was put together by our teammate Ben
Martin with input from many of you in the community. I also want
to point out that there is a project under way by the Telecommunications
Development Fund to develop website content for early-stage
companies on how to set up and operate a boards of directors. If
you would like more information on the project or to make
recommendations for references or topics to incorporate, you can
contact Jack Moore at firstname.lastname@example.org
or email@example.com. I also want to
remind everybody, including our speakers, that today's session is
and there will be a transcript at our Web site.
Finally, I'd like to thank our volunteers today, George DeBakey
Technology, Jim Pettit of iRoute, Inc., and Dave Rosenberg of BudgetReferee.com.
really couldn't produce these events without our volunteers, so
thanks very much. I also want to recognize our team: Ben Martin,
who put this program together, Fran Witzel, Mitch Arnowitz, Neil
Oatley, Ann Slaski, Linda Shives, Lin Plummer, and Adele Rudolph.
They make it happen each month.
Now, let me turn the program over to John Shames, who will
introduce and moderate our panel, which will be followed by your
questions and answers, and then, speaking of the Godfather, Mario
will do the wrap up. On behalf of the Morino Institute Netpreneur
team, I'd like to thank the panel for being here with us this
morning. Giving back is a large part of how and why our community
works, and it is demonstrated in many ways every day by many
people. John, Raul, Art, and Bruce, thanks for taking time this
morning to give back with your experiences, insights, and wisdom
to our Netpreneur community.
jonathan shames: introduction
Mary. It's good to see everyone here. Hopefully 2002 will be a
much better year than 2001. It's interesting to note that, today,
not only is it going to be 60 degrees in January, but Amazon.com
reported that it is profitable. Hopefully this is a new year and a
new phase of growth.
This area of boards and board advisory issues is of a real
interest to me and to Ernst & Young. My partners and I spend a
lot of time in front of audit committees, mostly, but also boards.
We've seen the entire gamut from small company boards to large
company boards, and we are fascinated by the changes that take
place in a company as it grows through its normal processes. I've
sat on boards and audit committees with people who are there only
to go through a process, and where the average age is 70 years
old. I've had people fall asleep in board meetings. On the other
hand, we've been involved with some young, entrepreneurial boards
where the average age is 30 and it's a much different
conversation. You really have the entire spectrum from here to
there. We have partnered with the National
Association of Corporate Directors (NACD) to come up with a
survey on entrepreneurial boards that will be coming out soon. It
highlights differences between what a small company board focuses
on versus a large company board. Small companies are much more
tactical, focusing on issues like revenue growth, getting
customers, and hiring people, compared to a larger company, which
deals with things like process and legal issues.
Today, we're going to talk about all those issues, and we
have some great people who will talk about them from different
perspectives. We're going to give you some sense of the
differences between a board of directors, which is a legally
required board in accordance with state statute, as opposed to a
board of advisors, and how and why you can use one versus the
other. We'll talk a little bit about why people pick certain board
members, how to recruit them, what kind of backgrounds you want,
and how large a board there should be. After our speakers, we'll
take your questions, and we already have some questions that have
come in through email.
I'm going to plunge right into this, now, and we'll begin
raul fernandez: making the all-star team
you. Good morning. I'm going to give you just a little bit of
background on the boards that I sit on today, then I'll go back in
time and tell you about how I grew our first board of directors
and, later, advisors.
Today, I'm on three public company boards. They're very,
very different boards, not only because of where the companies are
headquartered, but because of what the companies do. I'm on the
global board of Dimension
Data, the company that acquired my original company, Proxicom.
We're listed on the London Stock Exchange and the Johannesburg
Stock Exchange. That has a makeup mostly of insiders. The majority
of the board members are operating executives and a couple of
retired operating executives, with the exception of a few people.
That is one of the things I've noticed. At least on European or
international boards, they tend to have a bigger percentage of
insider representation. The vast majority of boards in the United
States strive for outsider representation.
I'm also on the board of a company called Critical Path. It's
a restart, a company that had some accounting issues late last
year. We got a new management team in, and a new infusion of
dollars through General Atlantic Partners, the venture capital
firm that invested in Proxicom. As part of that investment, I
joined their board with a partner from General Atlantic. Critical
Path is San Francisco-based and is a NASDAQ-listed technology
company doing about a $100 million. Dimension Data does close to
$3 billion globally, profitably. Critical Path is just about
Then I'm on the board of a very, very different company
based out of New York, Liz Claiborne. You know it for the traditional
brand, but we also own a lot of more progressive brands like Lucky
Jeans and many others, which people don't realize. That is a $4
billion retail company listed on the New York Stock Exchange.
Each one of those board experiences, plus growing my own
board at Proxicom, has given me a point of view and allowed me to
build some best practices. Hopefully, I'll be able to share some
of them with you today.
As you go from being an entrepreneur, a time when you're
doing absolutely everything, to the time when you start building
your board, you move from a democracy of one -- which is you -- to
a democracy of many, which is you and the board members that you
I think that one of the most valuable things that a
professional investor can do for you is to lay out structure and
give you coaching and guidance on the appropriate type of
representation. That is what General Atlantic did for me when they
invested in Proxicom in 1995. We had a board of directors that was
made up mainly of executives from inside the company. We started
with two General Atlantic partners who joined the board. They had
rights to one, but I wanted the other individual on as a
placeholder while we went off and brought in other talent. I
viewed it -- and I think you should view it this way -- as
building a team. You are building a team of coaches and players.
When you are building a team, whether it's a management
team or a team of developers, you don't want six or seven people
at the same position. When you've got seven draft picks, you don't
draft seven quarterbacks or seven running backs or seven goalies,
or seven power forwards. You want balance. You want to make sure
that the individuals you are looking for have certain strengths
and that they're not overlapping so that you can go to them for
particular issues. What I mean by coaches and players is
that you want board members who will get their hands dirty on
specific issues. I'll give you a couple of examples.
The board we put together over time was built with that
philosophy in mind. Proxicom was a young services company that was
creating a new market space, a space that combined technical
services, traditional ad agency services, and traditional strategy
services all into a brand new type of professional services
company. We wanted people who had different backgrounds, but we
also wanted people who had functional backgrounds. We wanted a
real all-star in marketing, positioning, and branding, so, for
that, I was able to convince Ted Leonsis [of America Online (AOL)]
to join our board very early in the process.
Since probably half of the time we were selling our
services to technology buyers and the other half to buyers from a
business background, we wanted somebody who was hard core on the
technology side, but who also understood business processes.
Through an investment that General Electric (GE) made in Proxicom
when it was private, I was able to convince the CTO of GE Capital,
a gentleman by the name of John McKinley, to join the board as
part of the investment; then to ultimately stay on the board when
he moved on to become CIO of Merrill Lynch. John McKinley's
background -- running the IT infrastructure for one of GE's
largest and most profitable companies -- brought a great point of
view, but, more importantly, he had come up through the ranks at
Ernst & Young, had been a developer, so his background in
professional services was very good. He could understand issues of
utilization, visibility, hiring, training, scaling, etc. His skill
set was very valuable, and we had to do a deep dive on those
issues. I would pull John out separately and would have separate
meetings with him when I had to. When we had to deal with market
positioning, what sort of campaigns to do, or how we wanted to
spend our dollars from a branding standpoint -- TV marketing, etc.
-- we'd spend separate time with Ted Leonsis. One of the lessons
that I learned was that you want to get different strengths and
make sure that the board members’ expectations are set so that
you can have that one-on-one time between you and the board
member, or your management team and the board member.
As we started to grow more of our business on the
international front, it became clear to me that while all of the
people on my board had international experience, I wanted to get
somebody who had really led the charge in building an
international presence. I again reached into America Online and
got the retiring founder of AOL International, a gentleman by the
name of Jack Davies, to join the board. That was done as an
expansion of our board to specifically help us address a business
issue that we had.
Of course, I remained on the board. I was the only insider
on the board. I think that is one of the most difficult situations
as an entrepreneur. You feel like you're losing control. It's
something that I felt, but, as I got more and more of the
value-add from these individuals, I got more and more comfortable.
General Atlantic remained with one representative, David
Hodgson, who was there through the whole period.
Then, in terms of rounding out, if I couldn't get into an
account, I wanted to be able to have individuals who could pick up
the phone and get us into a particular Fortune 500 company. I
wanted somebody who had that kind of general business and general
brand recognition. In this case, it came with the person’s third
career, because his first career was football, his second career
was politics, and he continues to be generally well known in
business circles. That was Jack Kemp, who I had worked for four
years on Capitol Hill. After his failed attempt to run for Vice
President with Bob Dole, I convinced him to join our board. He
wasn't the Vice President, but he got to be on our board, and I
think he's made more money that way.
Finally, I was very, very fortunate because, before there
were events like Coffee & DoughNets, it was a matter of
reaching out and talking to people who had been through the
business process from startup, to venture, to IPO, acquisitions,
and sale. There was an all-star in that category, my good friend
Mario Morino, who joined our board very early on.
As you see the team I built, I think you see that each
person has different strengths, and, frankly, I used them for
help, including help in very difficult situations. For example, I
had many people who had grown in a company that went from a few
million dollars to $200 million in a short period of time. As you
know, in work environments, a lot of people expect to continue to
be at the top, even though you have the opportunity to bring in
more seasoned individuals. Being able to deal with that growth --
especially being able to sit down with somebody who expected to be
President, but who wasn't going to get the job -- I was able to
get certain board members who had personally been through that
kind of experience to help me through a difficult situation with a
There are some things that I've learned that are just
tactical, and I thought I'd share a couple of those. More will
come out in the questions and answers.
Get information to your board members on a timely basis.
Make sure that it's readable and usable as you start your dialogue
and your relationship with your board. You've got to make sure
that the information you are giving them is relevant so that they
can get as much out of it as possible in the time they have. Don't
be afraid to adjust it and change it over time.
Communicate with board members both during board meetings,
but also independently.
Don't say yes to every idea or recommendation. I think
there are some things that you acknowledge, and you acknowledge as
great input, but you don't want to acknowledge as something that
you promise to do. If you do, then you build a list of activities
and you, as a CEO, become a board meeting to board meeting
Make sure that the committees, the structure in the
committees, the communication between the committees, and the
communication between the rest of the board and the committees and
the key individuals in your firm are absolutely open and
transparent. One of the things that the Enron scandal has taught
us is that transparency is king. It is absolutely critical that
the audit committee has full access to the accountants and the
CFO, and that you make sure that information is flowing freely in
Let me stop there so that we save some things for the
Shames: Thanks, Raul. That was great.
We'll turn it over to Bruce now to talk about his experiences.
bruce crockett: a few fewer mistakes
morning. We didn't coordinate our talks in advance, but I must say
that many of the points that Raul made, I'm going to reinforce. I
will also try to be brief so that the real fun comes in the
questions and answers.
I serve on big boards -- $200 billion financial service
institutions and $30 billion offshore insurance companies -- down
to private companies that are begging for angel financing -- let
alone venture financing -- as well as the whole spectrum in
between. I can give you a lot of different perspectives, and I'm
going to share with you some of my experiences over the years on
boards. I think that what it really means, mostly, is that I'm
The experience that Raul was talking about is really
important -- having the diversity of experience on your board. I
have a favorite saying, “experience is what you get when you
don't read the instructions,” and I have a lot of experience. It
means that I learned a lot of things the hard way.
It turns out that directors, with their wizened visages and
gray hair, can often contribute a lot, especially if they can just
help you make a few fewer mistakes than you otherwise would have
made, either because they made them themselves or because
they’ve seen other companies make them. It's amazing how often
companies want to repeat the mistakes of history persistently and
consistently. I figure, on any one of the boards I'm on, if I can
just save them one or two of those brutal mistakes a year, I've
earned my keep and then some. Interestingly, when I was a young,
brash division manager and CFO and COO and CEO on the way up, I
thought, “I want a young board just like me. I want everybody to
be an Ivy League MBA. We'll go out and kick butt and really be
successful.” At least at that point, I missed the notion that it
was the diversity and the perspectives from the life experiences
of the very different people on the board that would make them my
board and have them be part of the team. It would make me and the
company a lot more successful. Without spending a lot of time on
it, I think that the board is a perfect place, in terms of life
experiences, to consider diversity and ethnicity. People from
different cultures and genders bring a different perspective. It's
that collection of experiences that leads to a good board.
Board procedures. As companies get bigger, they get
more into process. In terms of frequency of meetings, as the
company gets bigger, there tends to be more meetings just because
of processes -- although very, very small companies can also have
a lot of meetings, because they're acting more like a management
team. One of my great accomplishments at COMSAT, where I worked
for close to 20 years, was to bring down the number of board
meetings from 12 to six. I must tell you that reducing the number
of meetings for a big company is incredibly hard. One of the first
lessons you have to learn is that you have to make sure that the
total compensation of the board members doesn't go down in the
process of reducing the meetings.
Set dates and stick to them. If you have a board of
high-powered directors and you want to change the date of a
meeting, you'll find it physically impossible to find an alternate
date that will serve everybody within two weeks on either side of
when you’re trying to move it. The only way to be assured of
having your gang there is to set your meetings as much as even two
years in advance. As unreasonable as that may sound, it's to be
assured of having everybody. That way they can conform their
schedules to you and tell everybody else that they can't change,
rather than telling you.
I think it's important to have a mandatory retirement age.
The reason I say that -- Jonathan mentioned having a board of
directors member falling asleep -- I won't name names since I'm on
videotape, and this thing is being transcribed, but a former US
senator and presidential candidate from one of the two major
parties in our country was on our board without a mandatory
retirement age. We're at a board meeting, and, at one point, his
head went back, his mouth opened, and he just stared up at the
ceiling. The meeting kind of went on, and everybody was afraid to
touch him, because one of two things would have happened. If you
woke him, it would be embarrassing, but everybody is back there
thinking that he might be dead. What do you do if somebody dies in
the middle of a board meeting? We sat there, and just continued
on. He woke up, and we went back to normal.
All kidding aside, mandatory retirement age is very
important, as is the whole process of self evaluation of a board.
You have to create a mechanism for a board to measure how well
it's doing and measure its collective effectiveness. Then, if
possible, and it's not always easy, measure individual board
members' performance. One of the reasons is that once you put
somebody on a board, they're basically there forever. It just
isn't easy to get board members resign or retire prematurely. It
just doesn't work that way, so you really need a process to help
Insiders versus disinterested directors. Obviously,
with little companies, there tends to be a lot of insiders. By the
time you get up to big companies where process is king, it usually
winds up being the CEO and everybody else is independent. The
problems that you see with Enron and others are just reinforcing
that, and you will see progressively fewer insiders on boards as
we go forward, in my opinion.
Not everybody is going to like this, but you don't need to
put your accountants, your lawyers, your investment bankers on the
board. You're already paying them a fortune, you're getting their
advice, and they do everything they need to do. What you need are
people who have different experiences and perspectives who can
work with you and help you move the company along.
Another former board member who was the President of NBC
among other jobs in his life -- he was a very wise guy and I was a
young division manager making presentations to the board, standing
up there with my knees knocking -- he said to me, "Young man,
just remember, a board meeting is no place to make
decisions." I'm not sure that I totally understood what he
was telling me, then, but I learned. What he was trying to tell me
was not to put yourself in a position where you have four-to-three
votes. Get things worked out in advance. Grease the skids so that
by the time you come to the board meeting it is just process to a
certain extent and the decisions are formalities. It
doesn't do you or the company any good to get yourself into a
contentious situation if you can avoid it. That may be a lot truer
for a bigger board where things are more formal, but it sure is
Board effectiveness. The effectiveness of a board
goes down as the size goes up. I've never seen a board that had
more than 15 people that was truly effective. I'm on the board of
my alma mater and there are 40 members of the board. It’s not
that it's not effective, but it really doesn't do the work. The
committees do the work. The reason there are 40 members on the
board is because, when you go on the board of a university, it's
really a fundraising mechanism so they can twist your arm and get
more money. It just gets too big. You just can't make decisions
and you really can't be effective.
Governance versus management. Obviously, there is
the spectrum. As the company gets bigger, it tends to be more
process and more governance. Governance is good, as opposed to
management. You don't need the board to do your job for
you. You need the board to help you do your job, but they
can't have their hand on the tiller. Make sure that they
understand that. I have seen boards that will nitpick press
releases. In my opinion, that is not the role of the board, but
sometimes that happens.
What is important for a board? What are a board's
responsibilities? There are the legal issues, the bylaw
requirements, and so on, but, in my mind, there are only a couple
things that are really, really the responsibility of the board.
One is to make sure that there is a succession plan in place, in
particular that there is a replacement for the CEO as well as the
senior managers; and the board also has to approve the strategic
and business plans. They have to be sure to ask the questions so
that they understand how and why and where the company is going,
to serve as a sounding board for the management team, to make sure
that they're going in a way that would seem to make sense. Then
the board holds people accountable to accomplish those goals. That
is really, in my mind, what a board is all about.
Committees. You’d better just get used to the idea
that as a company gets bigger, everybody on the audit and
nominating committees are going to be outsiders. You don't need
Enron to see that trend coming. You just can't have insiders on
The most important committee of all, the one that I like to
be on and to be chairman of, is the compensation committee.
Everybody loves you if you are chairman of the compensation
committee. [Laughing] It really is an important committee.
Another kind of committee, and it could have all different
kinds of names, but I see a trend towards what I'll call “the
committee on directors.” It's kind of a combination of the
nominating committee, the compensation committee, and the
board’s self-evaluation process. In other words, it's the
housekeeping committee of the board that helps run the process of
the board itself. Clearly, that winds up being disinterested
directors, and makes it a lot easier for a CEO to run his or her
company if he has that kind of committee.
I personally don't like executive committees all that much.
An executive committee tends to be a subset of the board that
makes decisions in between meetings. It invariably leads to some
board members feeling like second-class citizens because they're
not part of it. It's a lot easier to appoint a special committee,
if you need one, to handle things like a pricing for a debenture
or an equity or something like that in the intervening period.
Then bring things to the regular, formal committees, either
prospectively or retrospectively.
Recruiting board members. While the nominating
committee may be all disinterested people, it is important that
the CEO be a part of that process, working with the appropriate
committee to be proactive, to manage the process, and to go out
and help find the right directors. As Raul was saying, you want to
put together a diverse group of people who can help make you more
effective as the leader of the company. As surprising as this may
seem, don't be afraid to use a headhunter, if necessary, because
they can unearth the kind of talent you need, the right people who
have the Fortune 500 Rolodex, or the marketing experience, or
whatever it is you need to complement your people and help put you
in the position to have a better and more effective team.
I personally like to have sitting CEOs on a board, because
it's lonely being the CEO of a company, especially if everybody
else is disinterested. If nothing else, a sitting or former CEO is
empathetic to you and understands how lonely and how hard it is.
He or she can serve as a sounding board and possibly even be a
friend, as ironic as that may sound given the roles of governance.
It's about having people that can help you be more effective, and
having somebody you can talk to is incredibly important. The
problem with sitting CEOs is that normally they can be so busy
that either their company won't allow them to sit on other boards
or they just don't have the time. Being on a board is an
incredible commitment of time, and don't ever underestimate the
importance of finding the appropriate way to compensate board
members. They wind up being incredibly inexpensive consultants
that go on the board and have to do a lot of work. Thank you.
Shames: Bruce, that was great. Art . . .