the best advisors and directors
playing the board game
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There is an association, the National Association of Corporate Directors (NACD),
that just put out a board member evaluation process. I was very
skeptical, but after looking at it, it's excellent. They did an
absolutely fabulous job working with the industry, and it is a
terrific start for doing board evaluations.
Many startup firms can't afford D&O insurance. How do they
deal with this conundrum of wanting to attract experienced board
ďCan't affordĒ is relative. You have to decide whether you
want to attract good board members or give up coffee for
everybody, or whatever it is that you have to give up. It's not
At least prior to Enron it was relatively inexpensive. The cycle
was such that you could get plenty for very little money.
Obviously, rates have hardened.
I agree with that. For smaller companies it is based on a sliding
scale. Companies really need to afford it at the beginning.
Next question: How do you ensure that a board member shares
your vision of where the company should go? What if they don't?
The key is openness, especially through ongoing communication. You
don't want to present a new vision at a board meeting. You want to
have that dialogue over email, over coffee, over telephone calls.
You want to get their views and make sure their input is factored
into it. It's critical to have that ongoing dialogue and
communication. It's very important to talk about the big
decisions. What are the big decisions? To sell, to buy, to merge
outright. That is an ongoing discussion, not just a focus of your
board meetings. So is an ongoing discussion of where the industry
is, where are you versus your competitors, how fast is the
industry growing or decelerating, etc. Talking about some of those
big, big decisions before the day comes -- which is always a very
difficult day -- makes it go a little bit more smoothly.
Member: Iím Neeran Saraf with SARAF Software
Solutions. How do you start the process? Do you sit down with
your partner or executive team, and decide what is it that you're
actually looking for in a board? Who do you go to? Bruce, you
mentioned a recruiting company. That might be expensive. Is
there an advisory group you can go to?
As a first step, Raul hit the nail on the head when he said that
you have to decide what you need or what would complement the
existing management team. From there, itís seeing who you know,
or who they know who can find somebody who fits that criteria.
When I was talking about using a headhunter, that tends to be for
a little bit bigger company. They are not inexpensive. Maybe you
can get them to take some equity or to do some work at a reduced
cost on the chance that you will become a bigger company. There is
a logical way through associations and friends to figure out how
to get people in the right category.
There really isn't an organization you can go to, per se, although
Netpreneur and other organizations try to help. You need to do a
lot of networking. You need to figure it out. The right answer is
to start out with what you think you need, then go after certain
people and use whatever contacts you can.
Look at your competitors. You want to get the best in class of the
companies you'll be competing with. Look at who they have on their
boards and what their backgrounds are, and that will give you some
ideas as well.
Member: I'm Jamey Harvey of Cubestream.
I have the curse of being a serial entrepreneur. Raul, I was very
impressed when you were telling the story about forming your
board. Itís a rock star board. How do you do that? What
separated you from all the other people asking those guys to join
Get them before they're rock stars.
You have to build credibility. The first step in building
credibility is having a very credible set of financial backers,
people who have been proven winners in that particular space. They
are the anchors, and those anchors help you build your story in
terms of the credibility and excitement around your company.
After that it's a sale. It's a sale like it is for whatever
product or service you're involved in. You've got a moment in time
where you are trying to convince an individual to join your cause,
to be excited about your cause. You have to connect with that
individual when you have the opportunity. You have to treat it
like a sale. You have to be prepared. You have to know the
background, and you have to know what their decision-making
factors are. You have to approach it that way, and you are going
to have to try like you do in business. You are going to have to
have a pipeline that is bigger than the target you need to close.
I think the point is that you manage the process very, very well.
There are a lot of people out there who would be honored to serve
on boards. The question for you is to figure out who they are and
ferret them out. That is part of managing the process. If you
really work at populating your board with the kind of people you
want who can turn into the future rock stars, they're there. It's
up to you to make that enough of a priority. You want to have a
world class board just like you want to have a world class
management team. If you spend the time and devote the energies,
you can do it.
I'd just like to make a comment. I think that what Raul did is
unusual. It's not easily repeatable. I would also say that I'm not
sure rock stars are necessarily the best board members. Sometimes
their entourage gets in the way of decisions. I do think that
understanding what you want, looking for the best people, and
trying to recruit them by offering them an interesting opportunity
is very good advice. I don't necessarily go for rock stars because
you want the company to be the rock star. You want people who can
really help you, and some of them are not going to come with
lights and limos, so you won't have to roll out red carpets.
Member: Iím Gary Heurich of Old Heurich
Brewing, brewers of Foggy Bottom ale and lager. Are there any
examples or case law that suggests any liability on the part of
advisors? Also, is it a continuum? That is, if you compensate your
board of advisors more, is there a greater likelihood of
I'd certainly like to get a lawyer's advice and not have the
liability of giving legal advice, but I would say this: The board
of directors has special protections in this whole set of case law
because it's got certain boundaries that are pretty well defined.
They're able to make decisions; the board of advisors is not. So,
in structuring them, in each case I would seek legal advice about
what the liabilities are.
I was just going through this process with our board. We're listed
on the London and Johannesburg stock exchanges, and we're going
about building a regional board of advisors. When you look at the
responsibility and activity that those individuals are supposed to
be engaged in from a geographic standpoint, they have liability.
So, in our case, we have to get D&O insurance for our board of
advisors because the scope of what they're being asked to do would
give them some liability. I completely agree with Art. It all
depends on the particular scope, and it's dangerous to be a
lawyer, so you should go talk to one about that specifically.
Member: My name is Arnie Currie with the
Tech Venture Partnership. The advice that a lot of early stage
companies are getting -- I mean very early stage, pre-funding,
possibly pre-incorporation -- is that in order to get advice they
ought to consider a board of advisors, recognizing that it doesn't
necessarily transition into a board of directors. We encourage
that in my program. Do you believe that is an appropriate approach
for very early stage companies? They're just looking to assemble
some folks to give them good, solid advice.
What you want is value. You want value out of the individuals, and
you want value out of the group. While I agree that there may be
some value in running that structure ahead of a board of
directors, frankly it may be too early, in my opinion. I didn't
have one in the beginning. I just went out to people. Many of them
were clients or senior managers in companies when I was starting,
and I got advice. I think people get a little bit too caught up on
form sometimes when what you're looking for is substance. As long
as you get that substance I don't care what you call it, and I
think the least complicated the better early on. What Art said was
correct in terms of operating like a public company at a certain
stage, but you have to pick that stage correctly. If you start
acting like that too early, you are putting too many procedures in
place when what you should be doing is figuring out how to sell
your product and doing that every single day. That is the only
thing in the very beginning that you have to be worried about.
Thank you. Now, we're going to turn it over to Mario.
mario morino: wrap-up
first of all, thanks to all of you for being here this morning.
Thanks to Raul, Art, Bruce, and Jonathan for what I think was an
What I want to do is share with you some of my experience,
and I want to summarize what I think are the salient points that
came out of the discussions.
First, I want to address Bruce's question about what to do
if somebody in a board meeting dies. In the early 1970s, there
actually was a CEO in this region -- I'm not recommending this as
a course of action for those in the audience -- but his nickname
was Napoleon and he was called the "Rug Eater" because
he actually feigned a heart attack to avoid a critical vote in a
Let me talk a little bit about what you don't want
in a board, and let me give you some real situations without
naming the firms. The first thing is conflict. There was one firm
that I think had some of the best technology ever developed, at
least on the East Coast. What took them down was their board. The
board was so dysfunctional that directors were calling clients to
ask how the company was doing. You can't get any more destructive
than that kind of distrust in a board and management structure.
The second thing you donít want is a totally disengaged
board. There was a company that went as high as it could go, then
crashed and burned big time. The founder lost everything. I
interviewed him in 1994 and I knew within four minutes that we
would not go any further, although the meeting went on for two
hours. In the first four minutes he told me how he can't stand his
board, how he has to constantly educate his board, and how they
slow him down. He said that he knew exactly what he needed to do,
and it was a waste of time talking to them. That meeting was
actually over after four minutes, although we politely kept it
going. He had a board that was totally disengaged and never
governed him. Consequently, he took this company right to the
brink of failure, then failed entirely, and lost his own personal
net worth in the process. He had no governance and support around
The third thing is a dictatorship. The board has to keep
you in your place. You cannot drink your own Kool-Aid; you cannot
breath your own fumes. If you are any good at all, the notoriety
or publicity will make you think you are better than you are. One
of the board's responsibilities is to help you stay in place when
you are successful and to make you be paranoid, rather than
letting you think that you are as great as everybody says you are.
Do not have a board of all VCs. It's a shame to watch a
board comprised of seven people, where six are VCs from various
investors. The VCs have value, of course, but the point is, who is
running your company at that point? You need diversification.
Those are classic errors -- conflict, disengagement,
dictatorship, and what I call ďvested interest.Ē You have to
I personally think that putting your board together may be
one of the most important things you do. Good boards have saved my
neck several times. The relationship you have with your board will
be absolutely critical to your personal and business growth.
Invest significant time in getting the right people, no matter how
long it takes.
I love Artís advice to act like a public company from day
one. How you do your numbers, how you compensate people, how you
communicate, doing all of that right from the outset will help get
you ready for going public.
I want to do a quick segue and quickly run through several
points that were mentioned today. The first set of points is about
recruiting a board; the second set is about how to run a board.
There has been great advice given here, and I'd also recommend the
NACD publication that Art mentioned about the board evaluation
process. It is an excellent piece to help people in their board
planning and composition.
First, recruit a board according to your needs. Raulís
coach and player analogy is a great one. Do you need ties to
certain markets? Technology or distribution understanding? What do
you need to help you grow the business? Recruit accordingly.
Recruit needs, not personalities. Sometimes everyone wants
to get a certain name on the board. It may be someone with a
tremendous intellectual base, but they may not fit the needs you
have, so you have now wasted a board slot. To Art's point, make
sure that you are getting the right person, not necessarily the
right name. If you can do both, then you have a grand slam
Board members must see value. Raul is right about selling
your firm and the opportunity to candidates. You want to convince
somebody enthusiastically that being on your board is going to be
something good. Being a board member needs to be intellectually
informing. People want to learn something, so, whether itís
keeping in touch with the market or some other goal, the board
members need to learn from the experience.
The chemistry of a board is critical. When you see a
dysfunctional board, it's often a board in conflict. A board can
have disagreements and still work well, of course. It's how you
look at the chemistry of your board. Don't bring a stray in that
is going to disrupt the chemistry of how that board functions. To
this day, years later, I can call anybody from our old Legent
board and have a very good dialogue. We were close, and that board
had a strong chemistry. Certainly Raul did the same thing with
You want financial remuneration for your directors. There
has to be something at stake. It's not so much that they need the
money, but it's how people keep score. To Jonathan's point, you
have to make sure that the right insurance is in place. A board
member can have a lot to lose. If somebody sees deep pockets,
they'll pass on you and go right after that person.
Consider a search firm. You probably have to be further
along than a startup to do that, but, when we did a merger to form
Legent, we brought Russell Reynolds in and they did a good job for
us. We did a national search, and three outside directors were
identified in the search process. Let me tell you, it paid off
beyond belief because we got the right kind of talent we needed
for our board.
As Raul mentioned with John McKinley, I would strongly
encourage you to have somebody who represents your marketplace on
your board -- a top client. They always bring a grounded
practicality to what you're doing, and they leverage their
network. John McKinley was really great. He understood Proxicom's
business and had a wonderful Rolodex to the CIO world. Raul's job
was running the business. If Raul needed information, John could
go out and get timely information on trends and issues that were
relevant to board decisions.
Get a board that is going to challenge your thinking and
hold you accountable, though not in a conflict mode. You want to
make sure that they are going to push you to grow. Don't get a
passive board. You don't need suits, you need somebody who is
going to help you, somebody to learn from.
In terms of process, Art's point about learning how to run
a meeting sounds basic, but it's management 101. Many people do
not know how to run an effective board meeting. Take your time
organizing it, get your information out in a timely manner, and
manage it. Make the meeting effective, timely, and valuable. There
is nothing worse than an eight-hour, boring board meeting. That's
a great way to lose your board.
Keep the board engaged. Part of that is providing timely
information, of course, but also by staying personally engaged
with each individual member. Certainly, you have to do that in the
emerging years. When you are with a public board, way downstream,
your model may change somewhat, but there is no excuse for not
being in touch with each of your board members on a fairly
As was said, never allow a decision to occur in the meeting
-- you want to be confirming or finalizing them. If you are
walking into that meeting naked as a jaybird, you deserve a
decision against you. Know the outcome before you walk in. You
have to work the process with every member of the board so that
they're all in synch with you, or, at least, so that you know
where the disagreement is so you can resolve it in advance of the
Use the board. That is why you got them. Be open with them,
be honest with them, show them the cupboard, show them the warts,
share your problems. It's the only way they're going to be able to
help you. That means that you have to have people who you can
trust on the board. Without that, you are going to lose a lot.
Iíll say it again. Be very open, inclusive, and
forthright in dealing with the board. Get people you can trust and
who, in turn, can build trust in you.
Ensure that the board knows your business and your market.
Don't take that for granted, even if you have to spend time
bringing them on customer visits or giving them prep material.
It's a shame to watch a board member give you great advice that is
counter to what is needed because they don't understand the basics
of your business. Itís also a very important part of your
Bruce brought up a great point, especially as you start
growing: Set schedules well in advance. If you get a good board,
these people are busy. You want them there, and the two years lead
time is not unrealistic in some cases. Certainly, you have to do
it a year in advance, and, of course, you expect flexibility. And,
avoid last minute schedule changes, unless truly necessary.
Another great point was not to confuse advisors and board
members. Exactly right. Your accountants and lawyers, they are
advisors, not board members. You use your board slots for the
maximum intellectual capability you can get for your business and
the board should have the benefit of your advisors.
Empower your board committees. I can't begin to stress the
importance of an audit committee, whether it's a formal audit
committee or a board of directors. There are firms here in the
region that no doubt would have liked to have had a stronger audit
committee. You want somebody in the audit committee who is
going to get in your knickers and make your life absolutely
miserable. If you are on precarious ground with something like
revenue recognition issues, you want people who are experienced.
When you recruit to the board, you'd better be recruiting people
who can help you on the audit committee functions and the
compensation committee functions. Those are of absolutely critical
value to the CEO in driving the business, especially so that the
CEO and other top executives will learn and grow.
The board is about governance and advisory assistance, not
management. If the board is managing your business, youíve
defaulted your job. I think that was stated very clearly.
In summary, what you're facing is that 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, ďHow are you going
to get from here to there?Ē As Art said, it's not the woulduh,
coulduh, shoulduh, itís about where youíre going. You don't
want to be moaning about what has happened, you want to be
I remember a session we had in a Proxicom board meeting.
Raul brought a wonderful business plan, and Dave Hodgson said,
"Raul, you're showing us wonderful growth for where we're at
today, but the growth has to be double that." Everybody went
silent, and, to his credit, Raul, based on his own thinking, then
went out and took action above that business plan. You want that
kind of constructive push from your board to make that happen.
The question was asked about what you're looking for from a
board member. One of the things that was very attractive in the
relationship Raul and I had, and I know that Hodgson felt the same
way, is that Raul used the intelligence of the board well and
often, but he made his own decisions. A board will quickly know
whether you're using them or not, and how you're using
them. You don't necessarily expect your input to be used or
accepted all the time, but you expect it to be heard and to be
factored into the CEO's decision. That is all a board member can
To wrap up, never forget one point: The board member's
responsibility is a fiduciary one, not to you, but to the
shareholders. We were once in a merger where my counterpart forgot
that. He appointed a person, and, when push came to shove, he
expected that person to vote his way. Finally, that person simply
said, "Young man, I have a fiduciary responsibility to
uphold.Ē It was over. Remember that. No matter how close they
are to you, no matter what kind of friend they are, there is a
legal issue, and they have to do what is right for the
shareholders -- and thatís what you want in a board.
Know what you want and need. Get people you can trust.
You're placing your firm and your career in their hands when you
create a board, especially when you hit the public markets. They
are your governance. You are going to live and die with them. You
are going into a battle with them, and you had better have them on
Give this great attention. What you heard today from these
four gentlemen was wisdom. Building your board is one of the most
important actions you'll take. Good luck in doing it. Thank you
very much, and thanks to the Netpreneur team.