Month: December 2021

32. Impact investing: Capitalism created this mess. Capitalism has to fix it!

Bob Rosenfield was the CEO of the second largest company in the $4 billion US auto glass repair replacement and claims services market, and during that time he learned that “it isn’t as hard as you think to do the right thing and doing the right thing can be very good for business if you do it right.”

He has since founded and is managing director of Cape Vista Capital, a family office investment entity focused on renewable energy, sustainability and broadening the availability of housing, healthcare, and a healthy food supply chain.  The goal: to realize excellent returns on investment and to use the leverage of Cape Vista’s investments to change the shape the environmental issues that we have created.

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Links

The Energy Switch

Global Impact Investing Network.

Global Impact Investing Principles

Cape Vista Capital

Quotes

Capitalism messed this up, capitalism can fix it.

My first experience with impact investing (while a CEO in the auto glass industry) was a tremendous learning experience in two ways: number one, it isn’t as hard as you think to do the right thing, and number two, doing the right thing can be very good for business if you do it right.

What we see now are vast billions of capital being deployed in an effort to fix problems created by the prior model, which considered all this stuff in externality.

Our public equity investments are really segment investments in renewable energy, for the most part, in companies that we think have been and will continue to be more committed to going from fossil fuel energy generation to renewable sources. It’s kind of that simple in the public equity space.

We have found that companies that are engaged in combating climate change are finding the cost of capital in issuing private bonds to be desirable for 5% and we’ve made several investments in solar and other combating climate change items or initiatives that help us generate a solid present income and yield.

Big Ideas/Thoughts

Bob  Some people are still going to believe they could get better than market returns in non-impact, so I think we still need to label it as such, but least in my opinion regular impact investing and non-impact investing are truly converging.  Companies that do not pay attention to what were previously called “externalities” will be outcompeted in the marketplace, so in that way, it’s fundamentally capitalist driven.

Raza I think, as you have said earlier, the externalities are realities, and I hope that the two worlds keep converging and I think that you’re rightly pointing out that that’s the fix of the capitalism, that capitalism actually needs to do.

Joe The “holy grail” is to be able to do the best thing for the economy, for the environment – for whatever area in which you’re involved – and also have it be good for your business, because the financial incentive is going to drive people to do “the right thing.”

Engine No. 1

The whole Engine No. 1 issue is: “ExxonMobil might be paying a 9 or 10% yield now, but if I hold this stock for 30 years, as opposed to another energy company that is paying attention to the future and doing better things, I’m better off with an investment elsewhere.”

There are three things that Engine No. 1 did.  First, in general point out that having a carbon-based, fossil fuel-based strategy might just be a losing strategy as an economic argument. But they did two other things to sort of turn that viewpoint into action, and I thought they were really valuable and important lessons in both.

They engaged with the Wall Street analyst community because there were institutional investors in there that couldn’t decide, do I go left, or do I go right? They helped quantify in the financial analyst community, how do you run the numbers? I mean, every securities firm that has an analyst that follows a company is going to do a 5-year projection or 10-year projection, discount it back, the stocks are undervalued the stocks are overvalued, so they engaged with the analyst in the meantime and pushed them, “What are you doing with these numbers? How could you project that up? That’s not likely. Here’s why.”

They also partnered with another firm, and the business proposition of their partner basically says: “Come to our website, and instead of giving us 100 bucks to support the cause of environmentalism, spend a $100 to buy a share of ExxonMobil and let us vote this year for you.” It’s democratizing the voice of stockholder constituency. I thought that was really, really, really smart tactics.

Transcript:

Joe: [00:00:00] Hello and welcome to On Boards, a deep dive at what drives business success. I am Joe Ayoub and I’m here with my co-host Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically-important aspects of any company or organization, its board of directors or advisors as well as the important issues that are facing boards, company, leadership and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Bob Rosenfield. Bob is founder and managing director of Cape Vista Capital. Cape Vista is a family [00:01:00] office investment entity focused on renewable energy, sustainability and broadening the availability of housing, healthcare, and a healthy food supply chain.

Raza: Bob is a lifelong entrepreneur and describes himself as a committed challenger of the conventional wisdom in business. Prior to Cape Vista, he was the CEO of Truroad Holdings and JN Phillips Auto Glass, guiding the company’s growth from an 8-store local business to become the second largest company in the $4 billion US auto glass repair replacement and claims services market. That business was acquired by the number one industry participant in August 2019.

Joe: Bob was born and raised in Greater Boston where he developed a fondness for all things nautical and for the Boston sports scene. Near and dear to my heart, he is an avid and knowledgeable Celtics fan. Welcome, [00:02:00] Bob, it’s great to have you to join us today on On Boards.

Bob: Great. Thank you. It’s great to be here. I really appreciate the work you guys are doing to strengthen private company and public company boards, but near and dear to me, being the CEO of a private company, and it can be lonely at the top, and having a good circle of advisors and solid board is so important, so thank you for the work you guys are doing.

Joe: Thanks for saying that. I appreciate the kind words. Before we start to talk about impact investing, could you give us a little bit more background about your role as CEO? For how many years was it that you were CEO in the auto glass industry? And just talk a little bit about that.

Bob: Yeah, that was 23 years as the CEO at what was originally JN Phillips, 34 years all told with the company and in that industry. The industry, when I entered it was in a state of[00:03:00] moderate consolidation, but accelerating, and so when you’re an entrepreneur, you have to embrace change. There were 30,000 auto glass shops in the country, and that number was going to go down. The biggest player maybe had one or two percent of the market. We were a small player in Massachusetts, and I wanted to have some fun. I wanted to grow it. I wanted to be on the right side of the consolidation line.

 I guess when I started, we were about 30 people. When I exited, we were about a thousand and I learned a ton. I loved the people I worked with, I loved the challenge. And the industry did consolidate, and you know what, the industry got better. It got more professional. It had a greater chance to raise capital to improve the service offering, and it was a good ride and I love that industry, but it was time for me and the company to move on to something else.

Joe: Great. Thanks for giving us that context. Now, you [00:04:00] became involved in impact investing while you’re still CEO in the auto glass business. Can you tell us how that came about?

Bob: Yeah. I realized in 2010 or maybe a few years before that, that when people think about glass, they think about recycling it because you take the bottles and you go back to the supermarket or wherever. In some states, they give you a nickel and others still, it’s part of their recycling stream.

But a windshield isn’t like bottled glass. It’s a sandwich of glass and plastic. The conventional wisdom was, “Oh, you can’t recycle that because you can’t separate the glass from the plastic that was originally joined in a lamination process. And as you mentioned at the outset, I like to challenge the conventional wisdom and said, “No, there’s got to be an answer.”

We became the first auto glass company in the US to recycle the windshields, it’s called post-consumer, that we took out of your car when the old [00:05:00] windshield was broken, and that was a tremendous learning experience in two ways. Number one, it isn’t as hard as you think to do the right thing, and number two, doing the right thing can be good for business if you do it right.

One of the steps we took in that project was to hire an environmentally-focused marketing firm, and the first thing they said to me was, “We have to be sure as a client you’re not going to do greenwashing.” And I said, “What’s that?” This was in 2010. And they said, “You can’t go out and make promises just to think you’re going to get more customers and more business and not back it up. It’s not the right thing to do. We won’t do that for you. And, in fact, the more you can do to verify your efforts, the better.”

We actually joined with UL, Underwriters Laboratory, and they audited our process so that we could prove that the windshields really were being [00:06:00] recycled. We could prove the things we were saying in our consumer and B2B marketing. That learning experience taught me a couple of lessons about impact investing.

Joe: When we spoke earlier, you’ve mentioned that once you started to do the recycling and you were the only auto glass business doing it at the time, you made a radio ad that says something like, “Go to anyone you want, but here’s what we’re doing,” and that, as I understand it, attracted a lot of attention. To your point, you were doing the “right thing,” but it also did generate business because people wanted to hear that and wanted to be a part of that. Is that fair to say?

Bob: That’s absolutely the case. I would walk through our contact center. In our radio ads, we promoted our toll free number and when people called it, it would ring in our contact center and I would walk around and talk to the agents and ask them. What I didn’t tell them[00:07:00] at the time was, you may know I was the spokesperson for the company, so I was just wanting to hear if any of the messaging was, “Could you get that guy off the air? I’m tired of hearing him or something like that.”

But fundamentally, they said, “Yes, the phone is ringing and Bob, more people than I would have expected have said about the copy in our ad wasn’t different between glass companies. I chose you because recycling the windshield is something I’d like to be a part of.”

Joe: That is the holy grail, to be able to do the best thing for the economy, for the environment, for whatever area that you’re in, and also, let it be good business for you because obviously the financial rewards, the financial incentive is going to drive people to do this.

Now, when you first did it, and before you knew it was going to be something that would be well received by [00:08:00] customers, how much support from your board of directors did you have? How much of a factor was that support in whether you did it or not, or did you just kind of take the initiative on your own and hope that you could convince them it was a good idea?

Bob: It was interesting. We had two tracks to go. One involved a significant capital investment, and one did not. And as I thought about risk return for the company, aside from operational issues, just kind of risk return, I was like, “Well, I don’t need to go to a board and ask for a capital plan, like this is just a transaction. We could start it, we can try it. If it works, great. If it doesn’t work, we don’t have a long contractual commitment to make it work.”

I was a bit of a maverick. Now, as much as I’m delighted at the work you guys are doing, I think I learned about the [00:09:00] effectiveness of boards by, in a lot of ways, not having a highly functional board. So being a CEO in an environment where I spent a lot of time educating my board members/family members how they could be effective board members at 10 in the morning and VP of this at noon, and of course, as you guys know, that takes a ton of work. Truth be told, I probably did more asking for forgiveness than asking for permission.

Joe: Got it.

Raza: Bob, I want to switch to the impact investing that you do. The first thing I want to understand is, your thoughts on what is impact investing? And I put this in context of is it that the underlying assumption as we’re kind of talking that the holy grail is that do good and you make money, but is the underlying assumption for impact investing is [00:10:00] concessionary returns. How do you define impact investing and how do you see that?

Bob: Yeah, that’s a good place to start. I think if you asked 10 impact investment professionals, you might get 12 different answers. But one of the textbook answers is, well, you look at ESG, you look at the ESG score, and you use that as a filter.

There are some industry standards starting to come about. There’s a group called GIIN, Global Impact Investors Network, and they have yet another acronym, IRIS+, of how to measure the impact that an organization is having. There are efforts at quantification.

I look at it in a simplified fashion, which is that the way we got in this messy situation of environmental and social disequilibrium was a motto [00:11:00] of capitalism that was sort of defined in the 1930s in micro and macro economics. And these other issues, environment, climate change, global ice melt or polarized melt, I should say, those were not in anybody’s equation and it’s been too slow to have them factored into traditional economic model.

The schoolyard way I would say that is capitalism created this mess. Capitalism has to fix it. What we see now are vast billions of capital being deployed in an effort to fix problems created by the prior model, which considered all this stuff in externality.

Raza: Bob, in that thought process of regular investing or capitalistic investing versus impact investing, do you think or feel that these worlds are converging and should converge, or regular capitalistic investing [00:12:00] is still a little separate than impact investing where people are looking for impact in addition to investment returns?

Bob: Yeah. I think while they are converging, they need to continue to be well-defined. And what I mean by that, there’s a segment of investors that think, “Well, I can get disproportionate returns investing in bad stuff.” the dividend rate at ExxonMobil is pretty high or had been, and so some folks said, “Well, I’m going to be a non-impact investor and I’m going to get higher returns on account of that.” That may be true or it may not be. That was the whole engine number one issue. They’re saying, “Well, you might be paying a 9 or 10% yield now, but if I hold this stock for 30 years, as opposed to the other energy company that’s doing better things, I’m [00:13:00] better off over there.”

But some people are still going to believe they could get better than market returns in non-impact, so I think we still need to label it as such, but they are truly converging because, at least in my opinion, companies that do not pay attention to what were previously called externalities will be out-competed in the marketplace, so in that way, it’s fundamentally capitalist driven, but that’s in the long term. In the near term. I think things should be labeled as clear as possible.

Raza: I think, as you have said earlier, the externalities are realities, and I hope that the two worlds keep converging and I think that you’re rightly pointing out that that’s the fix of the capitalism, that capitalism actually needs to do.

Joe: I wanted to just jump in for a second and ask you, to what extent you [00:14:00] observed the pandemic having an impact on the whole concept of impact investing? When we talked to you earlier, there were a few things that I think you considered to have really brought it to the forefront.

Bob: Those of us at least in this country and probably many other countries, I’d say we were conditioned in certain ways that every problem gets solved in either a half-hour TV show or a one-hour TV show, like everything resolved, and so they’re sort of like no problem bigger than us and so all the assumptions we have hold into perpetuity.

They’re good. There’ll be minor aberrations, but you know the field of play and the frame of reference. Nobody is moving the foul line from 15 feet to 16 feet over night, and then we all realized that that’s not exactly true. [00:15:00] That’s not a reliable set of assumptions. Things can change instantly and they do, and this may not be the last pandemic. And what else will happen to shift the assumptions of my world? Maybe that scientist who says melting of the polar ice caps might be linear, but there could be seminal events and the dam breaks, so to speak, and I think that just became reality. It was probably the biggest impact .

Raza: Bob, we want to talk about how your firm Cape Vista does impact investing. Is it investing in public markets, private markets, startups? How is Cape Vista investing?

Bob: Yes. Thank you for asking. Really both.

Our public equity investments are really segment investments in renewable energy, for the most part, in companies that we think have been and will continue to be more [00:16:00] committed to going from fossil fuel energy generation to renewable sources. It’s kind of that simple in the public equity space.

We are not using ESG scores in the way that maybe others are. We are also investing in some public income instruments, the Calvert Social Income Fund, a company called CNote. There are a couple others, and those are CUSIPs that you can go out and buy and they’re going to pay you an interest rate and a duration and you can trade them, and we found that to be a balance to our equity portfolio as well.

In the private segment, also fixed income and equity investments. We found that companies that are engaged in combating climate change are finding the cost of capital in issuing private bonds to be desirable [00:17:00] for 5%. If they get the money from it as equity, it’s going to cost a lot more than that, and so we’ve made several investments in solar and other combating climate change items or initiatives that help us generate a solid present income and yield.

Joe: Are the returns as good as they would be if you are not at all focused on the impact your investments were having?

Bob: Well, the fixed income market is crazy. We consider the risk return profile on corporate bonds to be out of whack. And government bonds, I heard someone the other day say instead of it being risk-free return, it’s return free risk. Maybe we could get 3% on a bunch of junk bonds, so to speak. If we get 4% loaning money to a company or buying a bond from a company that’s putting [00:18:00] solar into low-income housing, houses of worship, other places that couldn’t access that capital, that 4% or 4-1/2%, well, yeah, they were borrowing that money at 7 or 8 two or three years ago and maybe a conventional commercial bank might charge them a little more, but we feel like relative to the public fixed income market, we’re doing well and we’re good with it. We don’t consider it concessionary as much as picking a segment of the market that is not as worked over.

Raza: How do you determine a good impact investment? Now, this is going back to the thing that we alluded earlier, a score, data, frameworks, standards or is it subjective and based on pieces that the impact investor wants to help with?

Bob: When I got out of business school, it was just [00:19:00] when the spreadsheet was coming into its own, and good for the Boston economy because originally if you remember, it was Lotus 1, 2, 3, and it was here at Cambridge and it was a tech star and a rocket ship. Anyway, like the confluence of those two things said, “Well, everything could be figured out in this spreadsheet, just do a 10-year discounted cashflow and the answer will pop off the page because now we have those great tools for that.” Over time I just sort of learned to understand that, but trust my instinct and try and make a read on people.

We explore a lot of private deals. First, what segment are they in? Number two, how competitive is the marketplace? How big is the marketplace? Therefore, the third layer, how realistic are their goals? And number four, do we think this team can execute? Do they have marketing skills, [00:20:00] sales skills, operation, technology, and those are the four layers of the filter.

We went through that and one investment we’ve made. is with two young persons who had about ten years’ experience in developing a large community and small utility scale solar, which is a lot of jargon words. It’s basically go see the farmer in Augusta, Maine who’s got 50 acres that are not useful. Go to the city of Augusta, tell him to start to put a bunch of solar panels in the field and feed that energy back into the city of Augusta homeowners or to the power company in Maine and everybody wins. To us, well, we need more solar, that’s the highest and best use for the land, these guys have a track record and they’re the kind of people that [00:21:00] are going to own what they do, so to speak.

Raza: What is that company called?

Bob: It’s called East Light Partners. They’re based in Cambridge and this is their second fund, and two things are happening. Number one, they’re doing that. And number two, what happens in that project is you get a power purchasing agreement. Let’s say Central Maine Power will take 20 megawatts a year at this price, and then that becomes securitizable and there’s a lot of demand for that as a derivative.

Raza: Bob, on the ESG, if we break it into E S and G, is it that you mostly focus on the E part? Do you also look at the S and maybe even the G part of investing in the ESG sector?

Bob: Our history has been mostly around the environmental. I think that the social is harder for a [00:22:00] small shop to sort through and we are hopeful that better quantitative information will come out and help us think about that segment. I would say 80% of our energy is in the environmental focus.

Raza: Any interesting companies, sectors or deals that you want to mention that you’ve recently done that you are excited about?

Bob: There are a couple of things. One we’ve invested in, and it was a bit of a leap for us to support crowdfunding opportunities, but we came across this organization called Raise Green. They’re a platform. We learned of them first through a company called BlocPower, and it’s a really interesting entrepreneur/CEO leader, Donnel Baird, but their business model is really simple. They’re based in New York City, in the boroughs of [00:23:00] New York City, and they will go to a large multi-family building or multi-office building that’s got a big boiler in the basement, oil boiler, maybe gas if they’re lucky and say, ” we’re going to help you take that boiler out of the basement and we’re going to put those systems on the wall. They’re called split systems you’ve -probably seen them, Mitsubishi or someone else- and just throw the remote and you get heat and you get air conditioning in the summer and it’s electricity, and we’ll get panels on the roof if we can and get clean electricity, but we’re going to get you off of fossil fuels and we’re going to do it fast and we’re going to do it efficiently, and that’s all we do. We’re now solving every climate change problem.”

They’ve had two capital raises in fixed income. They’ve done really well. This is not a guy who came from Westinghouse or came from [00:24:00] some Fortune 100 company and went out and classically raised capital. He said, “Hey, this is feet on the street kind of initiative that can make a huge, huge difference.” I really admire that company and the approach they’ve taken.

Raza: Talk about that crowdfunding platform that you mentioned as well.

Bob: Raise Green. Someone could go and subscribe and get alerts and get updated, or they could see the current financing opportunities that are available and just subscribe. It could be, I think, as low as a $1,000 and sort of as high as that particular organization it sets as a maximum limit.

Raza: Bob, the impact investment family office unit, how is the governance and decision-making of that unit working? How do you guys make decisions on investments?

Bob: I’m the one-man investment committee at this point.

Raza: Wonderful.

Bob: Yeah. [00:25:00] And I try and keep my network active, not just people in the space, but people that I trust, people that I’ve known from the auto glass industry, people that have been other entrepreneurs who’ve been successful, because everyone needs a reality check from somewhere. To say “Well, I make the decisions on my own in a vacuum” would be a disservice to me and a disservice to someone who is listening. It’s really important to sort of take in commentary, like from the side, not straight ahead. Do you know what I mean?

If I’m going to make a solar investment, yeah, you talk to people in the solar industry, but they’re biased. I’ll go ask someone in an industry that isn’t that, but maybe a real estate development where land up development of something else, and I just kind of always try and triangulate too whether my instinct and logic is [00:26:00] betraying me.

Raza: Bob, that triangulation and crowdsourcing of wisdom is such a great idea. We as angel investors do that all the time. We don’t know everything, and I think as you’ve mentioned, the pattern of industry insiders are the biggest naysayers for, “Oh, this can never work,” so you really have to get multiple perspectives into the equation to make your decisions.

Joe: The best thing to do is talk to your kids. They’ll give you a reality check.

Bob: No doubt about that. My daughter did a middle school project about the way that meat is produced ,and the net result is she got the principal of the middle school to go from being a mediator to being a vegetarian.

Joe: I love it. And that actually leads me to go back to a question that Raza asked about how one would determine whether certain companies or certain potential investments really are going to have a positive impact. You talked about [00:27:00] ESG scores as something that really isn’t reliable yet. What is out there that is reliable, and what is coming out that might allow people to have something to look at that would be very reliable?

Right now, it sounds like you really just have to do a very deep dive into the company and make your best judgment call. Are there things that are happening that will make that easier for investors?

Bob: I think that’s one of the reasons when I started out at impact investing and I canvassed the industry for advisers, it sounded as much like conventional investing as impact investing, which what I mean to say is, “Okay, we’re a wealth manager focused on impact, so we go and pick investment managers who are good at what they do,” and they go out and pick 30 companies and say, “Don’t worry about it.”

I realized I was more of a hands-on kind of [00:28:00] person and to be impactful in impact and value, at least for me, I needed to pick the spaces in which I thought I could accumulate some industry knowledge and make a difference. Anyone that’s interested in what’s happening in renewable energy, I’d encourage them to find the book called “The Energy Switch” by a local Boston guy named Peter Kelly-Detwiler.

A smart guy, he spent 30 years in the industry and wrote this book to explain to a lay person, “Here’s how the electricity grid works in the US, and here are the things that are going on that could impact it. Here’s the good news about solar. Here’s the challenge about solar. Here’s the good news about wind energy. Here’s the challenge, and how is this all going to play so everybody gets electricity at the right [00:29:00] cycle so that it comes in their house and does what it’s supposed to.

I spent hours and hours with that book, so I would understand the assumptions in the narrow slice of renewable energy I’m interested in providing capital to.

Joe: That sounds great, but it also sounds very, very labor-intensive. My question I am going to go back to it is somebody isn’t willing to read a couple of books and talk to a bunch of people and really do it, are there things out there that are either in existence or being developed? What are the things that might happen that make impact investing easier for a range of people?

Bob: Yeah, I think there are three sources. One I mentioned earlier, the Global Impact Investing Network. They publish a lot of information and they’ve put a lot of work into this [00:30:00] sort of standard. I talked with you guys earlier about kind of, can this be made similar to a GAAP accounting? They’re working hard at that.

There’s another consortium that have published. I think it’s called Global Impact Investing Principles, and they have recruited corporations, large and small, to say, “We will operate our business in accordance with the seven principles of impact management.” And I think that together with the UN has published their sort of standards and priorities around climate change and impact. Those three sources, I think, would give someone a really good start at, “Okay. Who’s committed to what, and what is the score card? Even if it [00:31:00] isn’t refined down to the decimal place, what is the score card that’s starting to emerge?”

Joe: Another way to have an impact through your investing is to be active. You mentioned earlier a very well-known example, Engine Number 1, which through very careful thought and strategy got three members on the board of Exxon. They made it a point to use their money to have an impact on one of the largest corporations in the world to change how they are managing their company in the future, and the principle is “we think you’re not taking the risk of the way you operate fully into account. And unless you do, your company is going to be worth less at some point, and we’re going to put pressure on you to do that because that’s better for us as investors. That’s better for stakeholders in general.”

It’s something similar to what you said earlier, Bob, we’re now looking at a longer term impact. That’s true [00:32:00] in most successful companies, family-owned businesses, that can look 5 or 10 years down the road. CEOs of public companies who are not completely bound by the quarterly report, but are thinking long-term for their company. This kind of activism is another way to put pressure on companies to think about the big picture, to think about what you refer to as the externalities that, in fact, are an integral part of what companies should be taking into account as they develop their strategic plan. What are your thoughts about that?

Bob: Yeah, I think that’s a great example, in particular, because of how public it is in was and how everyone kind of knows the brand ExxonMobil and kind of what they do and what they bring to the marketplace.

But there are three things that they did. You mentioned the first one, which is just in general point out [00:33:00] that having a carbon-based fossil fuel based strategy might just be a losing strategy as an economic argument. But they did two other things to sort of turn that viewpoint into action, and I thought they were really valuable and important lessons in both.

One, they engaged with, let’s say, the Wall Street analyst community, because there were institutional investors in there that couldn’t decide, do I go left or do I go right? What it really did is it helped kind of quantify in the financial analyst community, how do you run the numbers? I mean, every securities firm that has an analyst that follows a company is going to do a 5-year projection or 10-year projection, discount it back, the stocks are undervalued the stocks are overvalued, so they engaged with the analyst in the meantime and pushed them, “What [00:34:00] are you doing with these numbers? How could you project that up? That’s not likely. Here’s why.”

The second thing is they partnered with another firm, and I’m going to paraphrase it and I might not get it exactly right, but this is my recollection of the website and the business proposition of their partner. It basically said, “Come to our site, and instead of giving us a 100 bucks to support the cause of environmentalism, spend a $100 to buy one share of ExxonMobil.” And maybe it wasn’t a 100, maybe it was 300, maybe it was 65, I don’t remember, but it was buy one share of ExxonMobil and let us vote this year for you.”

It’s kind of democratizing the voice of stockholder constituency. I just thought that was really, really, really smart tactics. Blackstone is going to own [00:35:00] a million shares, and they talked to Blackstone and said, “Here’s why.” But they’re like, “Well, if I can get a hundred thousand people to buy 10 shares. if we’re right, the stock will go up. The stock is not going to crash, and the stock is better than a $100 just given away to a donation.”

I think that’s a good model going forward to try and cause the CEO of that company, the board of that company, to say, “Well, we have to do more. Our shareholders are demanding more than short-term profits, and in our next investor call, some analysts might say, ‘Well, I’ve got a question about Year 8 in your projections,” And that’s what has to happen, and that’s the sort of the blood and guts or the nuts and bolts of turning capitalism. I doubt you’d find an analyst on Wall Street who doesn’t have a methodology [00:36:00] for trying to address the cost of ignorance in de-carbonization.

Joe: No. I love the story you just told about the 3-pronged approach that Engine 1 took.

Last question. In looking at boards of directors, how can they put pressure on their company to take a longer view in how they’re running the company? And specifically, when companies we’re saying Exxon, as an example, I’m not accounting for the risk they’re taking, whether it’s through their audit committee of they have a separate risk committee, but they’re not accounting for the risk that, as you said, having a total fossil fuel program might be. How can boards put pressure on senior management to do that, to stop taking the short-term and to look long-term and to [00:37:00] take into account and report on risks that might arise from the type of strategy that they have used for years that are continuing? ,

Bob: I was probably further over to the strategic side as an executive, and I was fortunate I had a great team and they would remind me that someone had to dot the I’s and cross the T’s. But I always thought my job was to make sure our business survived and thrived and earn better than market returns, but when you’re running the shop and it’s like you got to make payroll every Friday and you really should check in to see if big customer number one paid on the fifth of the month like they always do. And if they didn’t, I better go get my line of credit. The CEO often has to be totally engaged in the moment.

But in the boardroom, [00:38:00] the board is best to help the CEO put that in the drawer for a couple of hours and say, “Let’s just assume that all those exigencies happen next week and then next month and the next four years, you’re going to handle because you have for 15 years, so let’s talk about where we need to fly this rocketship to that’s going to be of more value to our customers, either in the product and not be a commodity to earn a better price so we can make a better profit and reinvest in our company. And number two, position ourselves so our competitors, current or future, have a harder time by taking a bite out of us.”

If I were advising a board member, I would say spend the time with the CEO to say, “Where are environmental social issues going to impact our ability [00:39:00] to deliver a product that’s of increasing value to customers or going to put us at an advantage or disadvantage to our current or potential competitors?”

In that way, introduce to my CEO two things. Number one, yes, there are exigencies in the business and maybe asking our suppliers to tell us how their supply chain works and cut carbon by 10%, seems like a distraction, let’s turn that around and let’s visit it and say, “How do we make all of this into an advantage?”

that would be the kind of discussion I’d ask boards to foster with their CEO like, “Yeah. I get it in the short term. It might be a little bit of a hassle. There might be a cost, but what are the winning strategies associated with changing the direction of our company, and how do we implement it through [00:40:00] the organization? Is it sales? Is it marketing? Is it operational cost reduction?” And just make it a central part of the business’s long-term strategy.

Joe: Thank you.

Bob, it’s been great speaking with you. Thanks for joining us today. And thank you all for listening to On Boards with our special guest, Bob Rosenfield.

Raza: We have a request for our listeners. Please take a moment to rate and review On Boards Podcast on Apple Podcast if you enjoyed listening to it. It really helps others discover this podcast. Also, you can visit our website at OnBoardsPodcast.com. That’s OnBoardsPodcast.com. We’d love to hear your comments, suggestions, and feedback.

Joe: Please stay safe and take care of yourselves, your families and your communities as best you can. And Raza, you take care, too.

Raza: You too, Joe.

Joe: Thanks.

31. Joe Hurd: Every company is a technology company

Joe Hurd is a public and non-profit board director and early-stage investor. As an operating executive, Joe is the Operating Partner at SOSV, LLC, a $1B early-stage venture fund, where he leads strategy and business development efforts for the fund’s life sciences, deep tech hardware and mobile portfolio companies. In this episode, we talk about how technology is impacting every business and differences between US and UK boards.

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Joe Hurd Bio:

 Joe Hurd is a public and non-profit board director and early-stage investor.  Currently, he is a Non-Executive Director of Trustpilot Group plc (LSE: TRST; Audit, Nominations, Trust & Transparency), Hays plc (LSE: HAS; Audit, Nominations, Remuneration) and an Independent Director of SilverBox Engaged Merger Corp I (NASDAQ: SBEAU; Audit, Compensation). He spent three years as a Non-Executive Director of London-based GoCo Group plc (Remuneration, Nominations) until its successful acquisition in March 2021. 

As an operating executive, Joe is the Operating Partner at SOSV, LLC, a $1B early-stage venture fund, where he leads strategy and business development efforts for the fund’s life sciences, deep tech hardware and mobile portfolio companies. He is also a Venture Partner for Good Growth Capital, a female-led venture fund; and advises innovative Silicon Valley-based pre-seed and seed stage startups on go-to-market strategy, revenue models, and international expansion through The Katama Group, LLC, with a particular emphasis on diverse founders.

Joe built his business career leading strategic business development, strategy and sales teams globally for Facebook, Gannett, and AOL/TimeWarner. During President Obama’s first term (2009-2012), he served as a senior political appointee in the U.S. Commerce Department, where he helped implement the National Export Initiative, a successful effort to double U.S. exports over five years. Active in his community, He is on the Board of Trustees for Menlo College (Development Committee), and the Computer History Museum (Audit Committee); and the American Swiss Foundation Board of Directors.  Currently, he is a life member of the Council on Foreign Relations (Membership Committee, Co-Chair of the Diversity Subcommittee), the Trilateral Commission, and the National Association of Corporate Directors.

Joe graduated from Harvard Law School (J.D.), Columbia University (Master of International Affairs), and Harvard College (A.B. cum laude, East Asian Studies / Government). He is a member of the New York Bar and a Solicitor of the Senior Courts of England and Wales. Married with one daughter (16), two sons (13 & 6) and one Cavachon (1), Joe enjoys running, traveling (50 states; 62 countries), and reading historical biographies.

SOSV is a $1B multi-stage venture capital investor. The firm runs multiple world-class vertical startup development programs, and provides seed, venture and growth stage follow-on investment into superstar companies. Its unique full-stack model has delivered a net IRR over the last 20 years that puts SOSV in the top 10% of all venture funds worldwide.  SOSV has funded over 1000 startups to date, and currently funds over 150 startups per year through five startup programs: HAX (hardware and connected devices), IndieBio (life sciences), Chinaccelerator and MOX (cross-border internet and mobile in Asia), and dlab (blockchain, data and decentralization).  In addition, SOSV provides the seed capital to get founders moving, a global staff of hands-on engineers, designers, accountants, and scientists to speed up product development, over 1,000 global mentors with deep market and technical expertise, and an unparalleled network of fully outfitted laboratory and maker spaces to help startups go further, faster.

Quotes

My role as an operating partner of SOSV is to work on an ongoing basis with six or eight of our top portfolio CEOs. I tend to focus building on my 20 years of experience in digital media, on strategy, corporate development, business development, sales, and helping them penetrate the market. We want entrepreneurs that will make the world better.

“Deep tech” is a phrase that’s come into vogue over the last three or four years, and the focus is on technology companies that combine three things. The first is, for our purposes, hardware manufacturing, something tangible, something that you make, something that requires engineering and engineering skills, and then there is software. And, most importantly, mission and purpose -these are companies that are solving problems where it may not be clear for another 3, 5, 7, 10 years, whether you’re actually on the right path.

UK PUBLIC COMPANY BOARD vs US

When you’re a director of a UK public company, you need to think about all of the stakeholders of that company, not just the investors, but the employees, the suppliers, society as a whole. I had to really take a step back and put my legal hat on for a minute and really understand what the fiduciary duties of a director are and work the interests of all the stakeholders into my decision process when I was in boardroom conversations.

The first and the biggest difference between the US and UK is when you look at how governance is approached in the United States, it tends to be, as I alluded to earlier, shareholder first. You have fiduciary duty as a director to the corporation, the shareholders, sometimes the creditors.

In the UK, it’s much broader. It’s more of a stakeholder-first approach where you’re looking at, not just the investors in the company, the shareholders, but also the employees, the suppliers, the customers and society as a whole.  The UK corporate governance code actually enshrines this in law and regulation where it is a very broad principles-based approach to governance as opposed to a very specific rules-based approach that you get in the United States.

It’s hard to say whether the UK is better or not better, but it seems to me if the law has codified the need to take into account all stakeholders. If the law has mandated certain kinds of diversity, gender and/or racial, I would say that is better. I don’t think it is just reflecting what your cultural background is. It would seem to me that that is better because it forces those companies to move in a direction that is likely to make them stronger, is likely to make them more responsive to their stakeholders – and that is a very good thing from a capital point of view at the end of the day

Employees Voice in UK

In the UK,  they have said that directors and boards of directors have an affirmative obligation to reach out to the employees and bring the employees’ voice into the boardroom, whether they nominate a director to be the workforce net designate or even bring employees on the board in some cases. The code says that either one of your directors needs to be explicitly designated as the director that interfaces with the workforce or, if you want to take another model, you can bring employees onto the board and bring the employee voice in in that way.

Compensation for UK companies

 Part of the corporate governance code required that directors of UK companies are paid a salary. There is no equity component to the compensation and that is in keeping with the independent maximum, that you’re not running the company for the benefit of the shareholders only.  There’s nothing stopping me as a director from purchasing shares, provided that you adhere to the relevant purchase windows. So, that’s a pretty big difference between US and UK boards.

Big Ideas/Thoughts

When I say: “every company’s a technology company,” what I mean is that over the last 20 years technology has become so pervasive as to how companies operate that even if you’re involved in a non-tech sector, you still need to integrate, rely on and be mindful of companies that have more of a tech-focused approach than your company.

Whether it’s brick or mortar retail, travel or leisure, or oil and gas, companies are now realizing that technology is integral to all parts of their business: how they measure the business, how they measure productivity, how their competitors are able to scale and acquire customers, how they are using HR to bring benefits to the companies – technology is a factor in virtually every facet of their business.

Transcript:

Joe Ayoub: [00:00:00] Hello and welcome to On Boards, a deep dive at what drives business success. Hi, I’m Joe Ayoub, and I’m here with my cohost, Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization, its board of directors or advisors, as well as important issues that are facing boards, company leadership and stakeholders.

Raza Shaikh: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges, and how to make your board one of the most valuable assets of your organization.

Joe Ayoub: Our guest today is Joe Hurd. Joe is the operating partner for [00:01:00] SOSV, a one-billion plus dollar global venture fund that provides seed venture and growth stage funding to startup companies in the technology sector.

Raza Shaikh: Joe is a long-time Silicon Valley investor in technology and has focused on digital transformation across content distribution, and brand advertising for two public companies.

Joe Ayoub: Joe is also a seasoned board member, including several public company boards in the UK, and very important: although he was born in the shadow of Yankee Stadium, he is a lifelong Red Sox fan. Joe, welcome. It’s great to have you join us today on On Boards.

Joe Hurd: It’s a pleasure to be here, Joe and Raza. Thank you for having me.

Joe Ayoub: Let’s start off with what you’re doing currently, because it has a real bearing on some of the things we want to talk about; your role as operating partner at SOSV. Talk a little bit about that and what you’re doing for them, and then we’ll take it [00:02:00] from there.

Joe Hurd: Sure, by all means. So as you noted, SOSV is a billion dollar early stage venture fund. We focus primarily in two main areas; life sciences and healthcare, and hardware and engineering, otherwise known as deep tech, and we tend to be the first institutional money in to investors that are starting companies to solve issues of human and planetary health. We want entrepreneurs that will make the world better.

We have over 1,100 companies in the portfolio. We’ve been around for 14 years with operations in China, the United States and Europe. My role as an operating partner is to work on an ongoing basis with six or eight of our top portfolio CEOs, and I tend to focus building on my 20 years of experience in digital media, on strategy, corporate development, business development, sales, and helping them penetrate the market.

Because these are early stage companies, oftentimes you’ll have CEOs that have good product market fit with [00:03:00] the company, and they’re now just trying to create and generate a pipeline of major corporates that want to partner with them. So, the firm, Shawna Sullivan and the rest of the general partners have brought me on board to really spend time in depth with our CEOs, and if I can help them generate a five hundred thousand dollar or a million dollar portfolio line of business or pipeline of business, we can have a materially-outsized impact in that company’s development, so it’s a pretty fascinating role.

Joe Ayoub: Sounds great. Could you just talk a minute about why it’s called deep tech? I know some of the listeners will know, but it will have a bearing on some of what we might want to talk about here.

Joe Hurd: So, deep tech is a phrase that’s come into vogue over the last three or four years, and the focus is on technology companies that really combine three things. The first is, for our purposes, hardware manufacturing, something tangible, something that you make, something that requires engineering and engineering skills along with software. And [00:04:00] most importantly, mission and purpose, these are companies that are solving problems that may not be clear for another 3, 5, 7, 10 years, whether you’re actually on the right path, but you’re starting to work on them now.

The classic deep tech example is the hyperloop by Elon Musk where he’s creating a tube that would go either over or under the ground to transport people at very fast speeds unlike anything that exists on Earth today, or all the space exploration projects that are going on right now. These are big gnarly problems that have an outsized impact on humanity that require hardware and software, but have mission and purpose at their core.

Joe Ayoub: So, one of the things we talked about is your first board seat, which came about in a somewhat unusual way. Could you tell us about how that took place?

Joe Hurd: Yeah, yeah, by all means. So, I had the good fortune to start my legal career. I trained as a lawyer and went to law school in Boston, but started my legal career in London, of all [00:05:00]places, with the UK global law firm called Linklaters, and I went there as one of the earliest American hires to help them build their US-based corporate securities practice.

I spent five years in London. I had the chance to really get to know the market and know the law. I qualified as a solicitor in the UK. My friends who know me know that London and all things England is an important part of my personal story.

So fast forward, 15, 20 years later, I’m in Silicon Valley and got a call out of the blue from a headhunting firm in the UK. There’s a company called GoCompare, which had just gone public, and they were looking to add some directors that had sort of Silicon Valley of technology experience to the board.

GoCompare was an insurance price comparison website that had a deep technology plate, classic two-sided marketplace business and they wanted people on the board that had digital tech transformation experience to help other management in its transition from private to public company. [00:06:00]

So, I was never planning on being a director. I never thought about being a director. I was 46, 47 years old at the time, but because of my London background and my current Silicon Valley expertise, I was on this recruiter’s radar screen, and I must say that Peter Wood and the team at GoCompare opened up an entirely new world to me, fascinating experience.

Joe Ayoub: Well, it’s interesting because you have, of course, very important, a Boston background, but you’ve been in Silicon valley for a long time, you spend time in London, you’ve been investing in tech for years, and so you’re able to bring all of that, including, in my view, the kind of investor mentality which is not typical in a public company.

So, it would seem to me that that would make you very valuable. How did that aspect of your background play as you sat on your first public company board?

Joe Hurd: It’s really a good question. So, the important thing that I had to learn moving from the [00:07:00] tech investor world to the public company director world in the UK, I know this is going to touch on a few areas that we might get into later in the conversation, when you’re a director of a UK public company, you need to think about all of the stakeholders of that company, not just the investors, but the employees, the suppliers, society as a whole. This isn’t trying to be corporate governance code, a duty on the directors to consider the company in toto.

That’s a lot different than being an investor where you are maximizing decisions for an investor return as a shareholder. I had to really take a step back and put my legal hat on for a minute and go back and really understand what the fiduciary duties of a director are and work the interests of all the stakeholders into my decision process when I was in boardroom conversations. It’s incredibly important.

Joe Ayoub: Yeah, different perspective.

Your background in technology though must have been extremely valuable to them. And one of the things you said when [00:08:00] we talked not long ago was every company is a technology company, which really did strike me as being right on the money. Could you talk about that a little bit?

Joe Hurd: When I say every company’s a technology company, what I mean is over the last 20 years or so, technology has become so pervasive in how companies operate that even if you’re involved in a non-tech sector, you still, as you go about your everyday business, need to integrate and rely on and be aware of and be mindful of companies that have more of a tech-focused approach can very quickly disintermediate.

So, whether you’re a recruitment company where it used to be the recruiters would search your company directories and go to conferences to look for potential candidates to recruit and place, now all of that is online. There are platforms like LinkedIn that can dramatically accelerate your ability to do business.

If you’re not familiar [00:09:00] with, A, how to leverage those platforms through partnerships where you leverage those technology platforms, big partnerships or B, if you’re not keeping an eye on other upstart companies that have technology more at the fore of what they’re doing, you can very quickly find yourself on the back foot and potentially disintermediated.

So, a lot of the interesting conversations I have are with directors and operators at companies that historically have been, whether it’s brick or mortar retail, or travel or leisure, or oil and gas that are now quickly realizing technologies, integrating all parts of their business; how they measure the business, how they measure productivity, how their competitors are able to scale and acquire customers, and how they are using HR to bring benefits to the companies, technology is an every individual facet of these businesses.

Raza Shaikh: Joe, well said, and McDonald’s is a software company and so is FedEx in some ways and technology is [00:10:00] impacting everything.

Joe Hurd: Yeah, that’s right. McDonald’s is a data company, what and how much, what are the trends. By all means, that’s exactly right.

Joe Ayoub: Do you think it’s essential that boards have people with tech backgrounds as board members, people that can actually identify the kind of risk that falling behind in technology might raise?

Joe Hurd: I guess this is going to come across as quite self-serving, but yes I do. We all know that diverse boards and diverse groups make better decisions, and when you take a look at a board and you look at sort of the skills matrix on a board, I think every company should have someone that has digital transformation or technology transformation or information security/cybersecurity, some sort of tech background on the board, much like you need people that have CEO leadership experience or financial experience or HR experience or sales experience, what have you.

I think it’s an incredibly valuable skillset to have in the boardroom, but you have to walk a real fine line, because I think as with any director that [00:11:00] has a particularly relevant skillset, I think it’s just good corporate governance for all of the directors to lean in and be part of the conversation and not overly defer to the quote unquote, “digital director” to carry the conversation. I don’t think that’s good for the director or good for the company

Joe Ayoub: No, I think that’s true, but I think what you said earlier, when you’re creating the skills matrix for a board, if you looked at it 15 years ago, you’d see three or four really important items; CEO, maybe C-suite, maybe CFO, couple of other things, but it was pretty limited. I think in the new world, it is much broader, and boards that don’t have the kind of, we say, diversity of perspective, and that covers a lot of ground, but tech is definitely part of that.

Obviously, it includes diversity of various kinds – gender diversity, it includes racial diversity, but it definitely includes areas that companies might not have traditionally [00:12:00] considered as part of their board, but you guys were just talking about McDonald’s you would not think of necessarily as a quote, “tech company,” and yet technology is driving so much of what they do that without that on their board, they would really be missing something that is undoubtedly critical to their future.

Joe Hurd: I couldn’t agree with you more. And I think what bringing technology into the boardroom also does is because many of the employees that have these skillsets may not necessarily be C-level employees. They may be younger, they may be more geographically, gender, racially diverse.

And again, going back to my earlier point, getting all of those different perspectives in the boardroom I think is an incredibly important thing in this day and age when technology and the competitive landscape is changing so quickly. For example, who would have thought 18 to 24 months ago that supply chain would have risen to the fore as being such an important issue for boards to consider with the onset of the pandemic and coronavirus, or [00:13:00] procurement in the wake of everything we’re seeing with the pandemic and Black Lives Matter and the focus on corporate diversity. All of those backgrounds are relevant to the boardroom now, I think.

Joe Ayoub: Yeah. The last two years raised a lot of issues about what boards really need in order to update the skill matrix of their board of directors. No question about that.

Raza Shaikh: Joe, as a Silicon Valley guy, you ended up on a board for a UK company. So, you have a really good perspective on both sides of the pond, if you will. What are some of the differences of governance and perspective from both sides of that? Maybe we can start with that and dive a little bit more into it.

Joe Hurd: Sure. I’d be happy to. There are some pretty important nuances and differences in perspective when you are a director of a UK public company as opposed to on a US public company board. And I think the [00:14:00] first and the biggest is when you look at how governance is approached in the United States, it tends to be, as I alluded to earlier, shareholder first. You have fiduciary duty as a director to the corporation, the shareholders, sometimes the creditors.

In the UK, it’s much broader. It’s more of a stakeholder-first approach where you’re looking at, not just the investors in the company, the shareholders, but also the employees, the suppliers, the customers and society as a whole. The UK corporate governance code, actually enshrines this in law and regulation where it is a very broad principles-based approach to governance as opposed to a very specific rules-based approach that you get in the United States.

Raza Shaikh: That is different. Here in the United States with the Business Roundtable’s statement of corporate purpose and many other things, the needle is trying to move a little in that direction.

Joe Hurd: That is true.

Raza Shaikh: But legally, it still is the shareholder primacy that’s required [00:15:00] from the board.

Joe Ayoub: I was just going to ask, how far advanced do you think governance in the UK is on company boards in terms of recognizing the importance of all stakeholders versus the United States? So, there’s a stake in the ground, it started to move, but are we a decade behind? I mean, I don’t know if you can put it in terms of years, but how far advanced is the UK, since it’s incorporated in their statute or in their laws, I should say.

Joe Hurd: I think you hit the nail on the head. The linchpin is the current state of the law, both as passed by Congress and as derived through the courts. It’d be very difficult to put a timeframe on it, but what I will say is a lot of the advances that you’ve seen, Raza, you mentioned Larry Fink and the BlackRock letter and all the conversations around ESG and all the debate that we’re having now around bringing employees’ voices into the boardroom. That’s already been codified in statute in the UK.

How long would it take for that to [00:16:00] happen in the United States? Oh, that that’s a couple of years, at least, and I wouldn’t necessarily say it’s better or worse because you have to have laws that reflect each country’s individual culture and approach to doing business, but what is interesting to see is serving on a UK corporate board where we are now having conversations around what are the financial metrics going to be to apply across all companies to account for climate change and the impact of climate change, the TCFD disclosure regime?

I don’t know if we’re there in the US on that level. In the UK, they have already said that directors and boards of directors have an affirmative obligation to reach out to the employees and bring the employees’ voice into the boardroom, whether they nominate a director to be the workforce net designate or even bring employees on the board in some, cases. I don’t know if we’re having those specific conversations in the US at that level of law and statute.

Raza Shaikh: Some ways to go. What would be other differences that [00:17:00] you can highlight?

Joe Hurd: There has been in the UK for the last two-plus years an important conversation around racial diversity on boards. It’s called the Parker Review. Racial diversity in the UK is slightly different than how racial diversity is defined in the US just owing to the historical patterns of immigration in the UK versus the US.

But the Parker Review has gone through the FTSE 100 companies, and then even below to the FTSE 250, and they’ve sent the precept that by the end of 2021, there should be at least one ethically-diverse member on UK company boards, and that’s become a maxim and those companies that do not have an ethically-diverse member will have to explain or comply and factor that in. And that’s completely in keeping with the leadership on gender diversity five, seven years ago that the UK and other European boards took, so I think that’s one interesting development.

The US is also having conversations about diversity in boards, and whether it’s Goldman [00:18:00]Sachs or NASDAQ, or again, Larry Fink of BlackRock pushing US companies to be more diverse, but having that commitment across publicly-listed companies in the UK with a time period and then explain why it’s not happening, that I think is a pretty interesting development, pretty forward-thinking

Joe Ayoub: It’s hard to say better or not better. You said that earlier, but I’m going to put this out there that it seems to me if the law has codified the need to take into account all stakeholders. If the law has mandated certain kinds of diversity, gender and/or racial, I would say that is better. I don’t think it is just reflecting what your cultural background is. It would seem to me that that is better because it makes those companies, it forces those companies to move in a direction that is likely to make them stronger, is likely to make them more responsive to their stakeholders, and that is actually a [00:19:00]good thing from a capital point of view at the end of the day.

Am I going too far with that do you think?

Joe Hurd: No, listen, I think, no one will think you’re going too far. I think it is certainly a valid thing to debate and discuss. Another way of looking at it is the world has changed since a hundred years ago when a lot of these laws were written. Society has changed, the nature of who is in leadership and who is able to be influential in society has changed, and one would only expect that those societal changes would have a knock-on effect.

At some point, the law will catch up to society. I think we’re in the midst of all of those conversations now. Diversity is just one proxy, but there are others as well, whether it’s gender or sexual orientation, or even socioeconomic diversity, people are having those conversations, so what it means to bring people with varied backgrounds and skillsets into the boardroom. Those are good, healthy conversations to have. It doesn’t mean that any one approach is right or wrong, but let’s debate it and thrash it out and [00:20:00] eventually we’ll get to the right place as a society. That’s the hope.

Raza Shaikh: What about on the compensation side, especially for independent directors?

Joe Hurd: Yeah. It is really interesting again for UK companies, and again, this is part of the corporate governance code, directors of UK companies are paid a salary. You’re paid and compensated in cash. There is no equity component to the compensation and that is in keeping with the independent maximum, that you’re not running the company for the benefit of the shareholders only, and there’s nothing stopping me as a director from purchasing shares, provided that you adhere to the relevant purchase windows.

But I’m doing that on my own account and by my own volition, there’s no shareholder requirement to be on a board, and as I said earlier, you can’t be compensated with shares. So, that’s a pretty big difference between US and UK boards.

Raza Shaikh: It does make the independence part like much more serious. Does that play out as intended, that the directors in UK are more objectively [00:21:00] independent and building companies for that?

Joe Hurd: Yeah. I don’t know if I’d be able to answer that because I don’t know what the data is that you would look at to determine whether directors who are compensated in salary truly make more quote, unquote “independent decisions,” but what I will say is that if you are trying to adopt a stakeholder-first approach and at least hold up to the public that the directors are acting on behalf of all of these stakeholders in the company, then, yes, removing the stock-based compensation probably is one step in that direction, if that is your goal.

And that also, by the way, it’s not just for directors, but it’s also for operating executives. Another thing that I had to get used to as you look at executive compensation, and I saw this as I served on the remuneration compensation committee on the boards, the executives can be compensated with stock, but when they leave a company, there is a mandated, you need to hold onto those shares for [00:22:00]three to X number of years after you leave the company. You can’t just leave the company, sell your shares, take your money and go buy a house somewhere.

And that again, I think comes to just differences in culture that the UK society has towards executive compensation and US society has towards executive compensation, but there are those sort of structures built into the compensation philosophy for highly-compensated executives that does take some getting used to if you’re coming from the US.

Joe Ayoub: Yeah, it seems to me though, between the rules that apply to executives to hold their stock and the rules that apply to board members who can’t take equity as compensation for serving on a board, that those two things combined really change, if nothing else, the optics of what goes on at a board, that the board and its executives aren’t in some way colluding or even if it’s not intentional, moving in a direction that [00:23:00] will benefit them, maybe more than outsiders, so that they’re doing something to the company the last 90 days, the last year, whatever it might be, that will absolutely have an impact on their pocketbooks, but may not be good for the public at large and it would seem to me that particularly if you’re serving on a public company board, that isn’t a good thing.

It is not a good thing for non- insiders to feel like the insiders have a certain control over what might happen to their detriment. Now, we’ve seen lots of cases where it has been really abused , and I’ll just talk about WeWork. We’ve talked about this a few times, what that board put up with and that CEO for so long had to be at least in part driven by the fact that their stake in the company was increasing astronomically and they probably changed their approach, the people in that board, some of them were very experienced, but it feels [00:24:00] like they changed their approach in catering to the CEO because they didn’t want to mess up the IPO and the numbers they were talking about for that IPO before everything fell apart, it was a stunning number.

So, it’s hard to believe it doesn’t change how board members operate, it doesn’t change how senior members of the management team operate, and is that really okay? I mean, isn’t what the UK is doing, doesn’t that make more sense?

Joe Hurd: So, I would argue there’s probably a big difference between a privately-held company, which is the WeWork example or Uber or any of the venture-backed companies that exist in Boston, in Silicon Valley, and elsewhere, and a publicly-traded company.

 If you want to compare apples to apples, publicly-traded UK to publicly-traded US, I could make just as good an argument that the US model is plenty effective in whether it’s the whistleblower statutes from the SEC or the insider trading laws that for [00:25:00] the US model and US culture and US society, they’ve got a legal regime that, by and large, works, by and large right.

But I don’t know if I could, if I would get into the WeWork example where you have a set of rules that don’t necessarily apply to the same degree as they would for a publicly-traded company, and look at that as being a like for like comparison.

Joe Ayoub: Well, I would say two things. One is you’re right. It’s public versus private, but it does highlight board member activity and how they’re likely to behave under certain circumstances. So, that is an extreme example there’s no question. And the amount of money that was, if you will, lost during that time is hard to say.

But if you want to look at public companies, let’s look at Boeing. Let’s look at what the Boeing board did or did not do for a long time and the litigation that’s going on with them. It doesn’t feel like they were paying as much attention to what they needed to [00:26:00] be paying attention to for a period of time that was pretty significant.

Joe Hurd: Yeah. So maybe the fix is for, and this would apply to private companies and public companies alike, the examples that you just mentioned are perfect examples of why you want to have diversity on the board where for privately-held companies and the board is comprised entirely of investors in that company, maybe the fix is bringing independent directors into those companies at the earlier stage and in sufficiently high enough numbers where they can bring those diverse thoughts, not be completely tied to the share price and keeping the CEO happy and have a really robust debate in the boardroom about the actions that the company is taking.

You can make a very cogent argument that when you’re an investor in a company and particularly working in venture fund and your ability to get into the next deal is based upon your reputation on working on the car deal, ” go along to get along” is probably not the phrase that I would use, but it probably wouldn’t be [00:27:00] too far off. You want to be founder friendly and obviously that can go to an extreme.

And I think WeWork was extreme, just like Uber was extreme, but if you want to create a system where you’re bringing more and varied and diverse voices into the boardroom at an earlier stage in the company and therefore open up more opportunities for people who want to serve on boards, private boards, public boards, what have you, maybe you do think about bringing independent CEO into a board earlier on and don’t make it just one because one person will get outvoted all the time, but you make it two or three, some sufficiently high number, where those voices can have an impact.

Joe Ayoub: Raza, what do you think?

Raza Shaikh: Yeah, but in the end, the incentives and alignment of incentives matters, and I think we’re all trying to figure out a best system that works for us. It’s not perfect, but I think it gets there.

Joe Hurd: Yeah, you’re right. And like I said, I think that the challenge and the opportunity is to at least put these issues on the table and have conversations like this on podcasts like this and other [00:28:00] forums where people can weigh in collectively, then we all get to a better place. I don’t know if we were having these conversations five or ten years ago. I don’t know.

Joe Ayoub: I think that might be true. I think the conversations are happening, but I also do think that the way that US companies, both public and private, look at their boards is in fact changing. It’s slow to change and that’s okay, but it is changing. And what you said about investor-backed boards, we’ve heard from several people who really focus on investor-backed boards, and the idea of bringing in a couple of independents, really it’s part of what we’re saying. It’s part of diversity of perspective.

It can’t be bad to have someone who’s thinking from a different perspective and knows the company and understands the company and understands the finances, et cetera, to be part of that conversation because you’re bound to miss something if you have people all who are in the same boat together. It just can’t be as strong. You can’t have five centers on a basketball team. Even though they’re all [00:29:00] very talented people, you really got to mix it up.

Joe Hurd: Ursula Burns, and I don’t have the article in front of me so the stats aren’t exactly at my fingertips, but Ursula Burns, the former CEO of Xerox, issued a study in August or September where she took a look at 18 of the top private equity funds and the companies they had invested in over the last 15 years or so. And I believe the number was 800 companies and of those 800 companies, there were 4,000 or so board members, and of those 4,000 board members, 1% of them were Black. And these are privately-held companies by the top private equity companies in the United States.

And granted, we’re only talking about African-American directors, but if you then extrapolate that to women and people from other races, this gets to your diversity point. These boards are not that diverse. And when you have, which is like your five centers analogy, you have to query really how much new and original and groundbreaking thought [00:30:00] is going on when everyone’s coming from a similar background and motivated by similar economic interests.

Joe Ayoub: Yeah. I think so. Did we talk about a director as an employee designee? Did you mention that?

Joe Hurd: Yeah. So, the director’s employee designee, that’s the workforce net. So, when you go back to the UK corporate governance code, you need to bring in the employee voice, that code says that either one of your directors needs to be explicitly designated as the director that interfaces with the workforce or, if you want to take another model, you can bring employees onto the board and bring the employee voice in in that way.

The reason why I highlight that is there is no explicit obligation on directors in the United States to be accountable or take into account employee thoughts. If anything, it’s something that may be actively discouraged. That’s what’s meant with management as opposed to governance being a director.

Joe Ayoub: And from your observation, how did that play out?

Joe Hurd: So, I’ve now been on three UK boards; GoCompare, Trustpilot and Hays, which we just [00:31:00] announced ten days ago. All three of those boards have a director who is nominated as the workforce net, the workforce non-executive director.

So, some companies will pay an additional stipend for taking on the work. Others have it built into the overall director’s fee. But in all cases those companies has said to their employees, “This is the director who’s been nominated as the workforce net.” And what I’ve seen play out for me as a net is I often will go to brown bag lunches with the employees or go to site visits and make myself available to the employees, because I think it’s important, one, for me to get better understanding of the company and the culture, but I think also, particularly as a black director, it’s important for the employees to see me and be able to interact with me and know that I exist.

I think that just makes for better input from me in the boardroom, but I think it also getting to culture makes the employees feel, hopefully they feel a connection with me as a director that this is their company too and I’ve got as much of a vested interest in their wellbeing and they are [00:32:00]important as employees as they do.

Raza Shaikh: Despite the compensation differences and limits on those, would you still be recommending that people take UK board seats?

Joe Hurd: Hands down, hands down. To emphasize once again the need for diverse perspectives in the boardroom, it’s incredibly important. I think having the opportunity to work internationally and have that international perspective, that global perspective is important for any company.

 If all companies are technology companies, all companies are global companies as well almost from the very beginning, just given the internet and platforms and the fact that competition is coming from all quarters.

So, having that global perspective is incredibly important, and then as ESG becomes more and more important and climate change becomes more and more important to affecting decisions made in the boardroom, I do think that Continental European companies, UK companies have a slightly different [00:33:00] approach to how they are accounting for and governing for and legislating around all of these issues.

So, for an American who wants to get early exposure or earlier exposure to these issues, which are eventually going to make their way across the pond, I think serving on a UK board is incredibly helpful and rewarding.

The other thing I would point out is, and I don’t know how long this is going to last, but I’m certainly seeing it now, people are much more comfortable. Boards are much more comfortable now meeting virtually as opposed to meeting in person. So, most UK boards will meet anywhere from six to nine times a year, which is much more frequent than many US boards, although privately-held companies sometimes meet monthly in the US. But for the six to nine meetings in a year, you’ll now see we’re going to meet in-person four times and virtually five times, and that type of a meeting cadence, I think, is a lot easier for US-based directors than it may have been three, four years ago when the expectation was that every six weeks you’d be in the UK attending a [00:34:00] meeting in person.

Joe Ayoub: Yeah, I think the advent of some virtual board meetings, because I think there’ll be a mix going forward, is going to help a lot of boards, because even in US companies, you can be far more geographically diverse a lot easier of your four or five meetings, two or three are virtual because you’re not really asking someone from California to come over, to come to Boston for five, whatever meetings a year. I think that gives companies a broader reach in the pool from which they can draw their board members.

Joe Hurd: I completely agree. Although I will say virtual is not a panacea, I still think that there’s no substitute for being in the room together and forging that personal relationship. And more importantly, having a pull aside and being able to take someone by the elbow and really understand their point of view and where they’re coming from, that you may not be able to do when you’re six or nine boxes Brady-bunch style on the screen.

Joe Ayoub: Yeah, there’s got to be a mix and it’s got to work for whatever the group is, and we’re all going to have to figure that out one [00:35:00] case at a time.

Joe Hurd: Exactly.

Joe Ayoub: Joe, it’s been great speaking with you today. Thanks for joining us.

Joe Hurd: Joe and Raza, thank you very much for the opportunity. One person’s view as always, but I really appreciated sharing my thoughts and observations with you and your audience.

Joe Ayoub: And thank you all for listening to On Boards with our special guest, Joe Hurd. To our listeners, we have a request. If you enjoy our podcast, please take a moment to review and rate it on Apple iTunes. It really helps others find and discover this podcast.

Raza Shaikh: Also the easiest way is to go to our website, onboardspodcast.com. That’s onboardspodcast.com. All episodes are available. And if you have questions, comments, or suggestions for us, please, we would love to hear from you. You can do it right on the website.

Joe Ayoub: Please stay safe and take care of yourselves, your families and your communities as best you can. And Raza, you take care, too.

Raza Shaikh: Joe, thank you. You as well.

Joe Ayoub: Take care. Bye bye.[00:36:00]

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