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selecting the best advisors and directors
playing the board game
page three of three | previous page

Mr. Marks: 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.

Mr. Shames: Many startup firms can't afford D&O insurance. How do they deal with this conundrum of wanting to attract experienced board members?

Mr. Marks: 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 expensive.

Mr. Crockett: 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.

Mr. Shames: 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?

Mr. Fernandez: 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.

Audience 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?

Mr. Crockett: 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.

Mr. Shames: 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.

Mr. Fernandez: 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.

Audience 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 their boards?

Mr. Marks: Get them before they're rock stars.

Mr. Fernandez: 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.

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Mr. Crockett: 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.

Mr. Marks: 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.

Audience 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 suggesting liability?

Mr. Marks: 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.

Mr. Fernandez: 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.

Audience 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.

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Mr. Fernandez: 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.

Mr. Shames: Thank you. Now, we're going to turn it over to Mario.

mario morino: wrap-up

Well, 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 excellent dissertation.

          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 board meeting.

          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.

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          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 him.

          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 avoid them.

          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 homerun.

          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 Proxicom. 

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          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 frequent basis.

          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 session.

          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.

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          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 recruiting.

          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 proactive.

          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 ask.

          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 your side.

          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.

[End]

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