John Hession, legal advisor, business advisor and angel investor, holds the world land record for number of board meetings attended. He’s been working with emerging growth companies for over 35 years and he has seen it all.
He talks about the discipline, tough love and results required if investor backed companies are going to be successful. It is a message that all boards would benefit from listening to and following.
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Well, if they’re investor backed (companies), you know, there’s an insistence on having a good strong board and that often means that simple phrase: tough love. 3:01
If you don’t hire a good board and build a good board, you don’t have great guidance for the company. ….an investor-backed company, it needs results and oftentimes they’re going to be a more difficult, they’re going to be more challenging on management strategy. 4:00
Investor backed boards, are much more conscientious, much more deliberative, much more demanding on management (than most private company boards). “You need to solve this problem.” 8:33
I’m delivering this advice (to you as CEO of the company), Joe, and it has to come through everything. Because I would like to see you succeed. And even if I have to give you tough love, it’s not personal. It’s because I want to see you succeed. 15.47
You can’t have the CEO/founder be the chair. If you’re going to build an outside board, the chairperson, usually has to be someone who’s got a lot of scalps on the belt, a lot of scars, a lot of experience, and been involved in boards. 16.29
Bill Moffitt, was probably was one of the best chairs I ever worked with. He had a way to drive the discussion, drive the agenda, to stop tangential discussions to stay focused on those action items that I talked about and demand performance and, on the action items.
He was the most masterful, yet at the same time, urbanely diplomatic chairman I’ve ever had the pleasure of working with. He was just so good about assigning tasks, not only to the management team. But to other board members. 17.13
What if you don’t find Mr. Perfect (as a Board chair)? How do you find the next level? How do you find a chair that you can make it work? Because the person you described, you just said he was one of the best chairs you’ve ever seen. Not everyone’s going to deliver all the goods. What do you do if, you can’t find that person or the chair is not that person? 18:49
1202B stock (capital gains stock) …. is the heart and soul and sinew of American capitalism. Why? The first $10 million of gain is zero capital gains tax. Now, who said the uncle Sam will, they’ll give you a gift from town to town Joe. 23:09
The disciplined approach used to identify board members in investor backed companies should apply to all private company boards as well. It can be a board of five, seven, eleven – it doesn’t matter. Exactly what do we need? What are the skills, expertise, attributes that we need in this person and let’s go find him or her.
It also applies to off-boarding unproductive board members. It happens that there may be a more definitive incentive to do it in investor back companies. But what’s the difference between those companies and a really productive, successful family company board where some of the board members really are just mailing it in?
Transparency and trust are fundamental to the management/board relationship, no matter what size company, what type of company. And “brutal honesty” goes both ways. So a founder has to be brutally honest with himself or herself.
Joe: [00:00:00] Hello and welcome to On Boards: A Deep Look at Driving Business Success. Hi, I’m Joe Ayoub I’m here with my cohost Raza Shaikh. How are you doing Raza?
Raza: [00:00:10] I’m doing pretty good, Joe, and I’m very happy to be hosting with you.
Joe: [00:00:14] Good to be with you.
On Boards is about boards of directors and advisors and all aspects of board governance. Twice a month, in 30 minutes 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.
Raza: [00:00:32] Joe and I speak with a wide range of guests and talk about what makes great boards great, what makes a board unsuccessful, how to be a good board member, and how to make your board one of the most valuable assets of your company.
Joe: [00:00:46] Our guest today is a legal advisor, business advisor and investor extraordinaire, who’s been working with emerging growth companies for over 33 years.
Raza: [00:00:56] He has worked with over 500 companies at various stages of growth for a variety of industries ranging from life science, medical devices, clean energy, to software, hardware and healthcare information systems, and through every stage of the company’s growth.
Joe: [00:01:14] We’re very excited to have John Hession is our guest today. Welcome, John, we’re excited to have you here on On Boards.
John: [00:01:21] Thanks for having me. It looks like it’s going to be a fun afternoon.
Joe: [00:01:24] We’re going to do our best.
John, you know, people exaggerate all the time. It’s the society we live in, but when you tell me that you average one board meeting a week, because I know you, I actually believe you. That means that you’re attending 50 board meetings a year. How many does that, come out to over the last 10 years of your career?
John: [00:01:44] Well, I think the math is simple. You take 50 times, 10 and you got a lot, several hundrerds, if my new math shows me right.
You know, I would say it can be different. Like this week I’m only here for a short week, but I have three board meetings, a quickie tomorrow, a long one tomorrow afternoon, and then a conference call on Friday. So that’s a pretty typical week and you multiply that by, 45 48 weeks a year.
Any number of companies. Some require more than others. I have a company in Ayer, because of extreme condition, financial condition it was in board members need to navigate and monitor carefully. We literally had a board meeting a week from September through end of November until things got straightened out.
So they can vary. But on average, you figure at least 50 board meetings a year.
Joe: [00:02:36] So the sheer volume of board meetings you attend must give you a perspective that most people simply don’t have.
On this show we say a board of directors or advisors is one of the most important aspects of any company or organization.
Mostly you work with investor backed companies. Do you think that is true of those companies as well?
John: [00:03:01] Well, if they’re investor backed, you know, there’s an insistence on having a good strong board and that often means that simple phrase, tough love.
I am usually on investor backed companies. They could be angel investors, like classic angel syndicates in Boston: Boston Harbor Angels, Launchpad, Hub Angels . It could be venture backed companies, with classic venture funds, anywhere from Flagship to Comcast, and in between. So it’s all over the map.
I urge young companies, cause often times, young companies walk through my door and they don’t have a board formed and I urge them, look, you need to get one or two good outside people with strategic advice, with operating experience, for the challenges you’re going to face in the next 6 months to 18 months. So you want to hire somebody that has expertise or experience addressing the same challenges you will face.
So yes, it’s important because of what you just said. If you don’t hire a good board and build a good board, you don’t have great guidance for the company.
Joe: [00:04:05] Hmm. You’re singing my song. That’s great.
You started doing this work, I think, but Dick Testa in the 80s that must’ve been a pretty interesting time.
John: [00:04:13] It was a fun ride. It really was one of the more memorable experiences of my life. I actually worked for Dick Testa, George Thibeault and Steve Huwitz. I affectionately referred to him as the three Amigos of Testa, Hurwitz and Thibeault. I carried their bags on and off for five or six years. I cut my teeth and burned my elbows at the knees of George Thibeault, Dick Testa and Steve Hurwitz and I got great incomparable education that very few young associates, second through fifth year would ever see in their lifetime.
Joe: [00:04:48] What did you learn then that still resonates today because there must be some differences, but there must be some things that don’t change with the decade or the economy.
John: [00:04:58] Well, I think the best advice I ever had, was Dick Testa saying, John, understand the business logic first, then you can think about the legal strategy. Understand the business problem first, figure out a business solution to the problem, then figure out the right legal strategy. . So I’ve always approached problems, not from a legal perspective, but from a business solution perspective. And I think that stood me well, both, for what I do now, which is both a business and a legal advisor to companies, but also as an angel investor.
Joe: [00:05:34] You know, it seems like obvious advice but it also is one of those things that some people don’t really get it, I think
John: [00:05:44] That’s a fair comment because I think particularly in the legal industry, there’s a tendency to come up with, hidebound solutions. They’re not creative, that don’t analyze the business problem, pull out the textbook, pull out the last form, pull out the last document.
Maybe that’s a solution. You have to actually listen to the problem first and then you try to craft a solution that addresses the needs of the company.
Raza: [00:06:12] And John, for investor backed companies and startups, I have a saying that they are their own category of boards.
Let’s talk about what some of the differences are, there are of course similarities as well. But, what do you think, makes them different than large public company boards or, other nonprofit boards?
John: [00:06:29] That’s a great question, Raza ,cause I have sat in on public company boards during that time and, I think the difference is with a private company, the outside board members, the non-management board members tend to get more actively involved in the company.
I’m not suggesting that they are getting their knees bruised by day to day tactics, but they are getting knee deep in the strategy of the company. They’re trying to figure out ways of their networks, their connections that can advance the business proposition for the company.
They’re more nimble. They’re often not there just at a board meeting. They’re there showing up, on a weekly basis to see how the company’s doing. So they’re contributing more than the four quarterly meetings a year where you get the tried and true investor presentation and then you go off for another quarter.
The really good board members that I’ve worked with, they’re actively involve, elbow to elbow, with management of the company to try to help drive strategy, make connections.
Joe: [00:07:32] So some of what you said sounds like it applies to all private company boards, but some of it sounded like it was more tailored to investor backed boards.
Can you just talk about the difference that you see in the investor backed boards versus private company boards generally?
John: [00:07:49] Maybe just doing a dramatic metaphor, an investor-backed company, they need results and oftentimes they’re going to be a more difficult, they’re going to be more challenging for management strategy.
They’re going to be more knee deep in the data and the information. Whereas I have seen private company boards that are not investor backed and for lack of a better bromide, you might say, their golf buddies are on the board and they kind of rubber stamp what the owners want to do.
They’re listeners, they’re not active participants. And I don’t mean it to be disrespectful because for everything I say, there’s always the exception that swamps the rule. But for an investor backed boards, they’re much more conscientious, , much more deliberative, much more demanding on management. You need to solve this problem.
You got this problem. How can we help? Who can we bring to the table? You know, what other advisors should we be hiring. There is a much more concerned attitude towards driving the company forward.
Joe: [00:08:57] I think the discipline you described that applies to investor-backed board should apply to all private company boards as well.
Would you agree with that?
John: [00:09:05] I absolutely. You use the right word I didn’t think of: discipline. It is a much more disciplined process with an investor backed company, and you often see a minimum of six and sometimes as much as, eight meetings a year, certainly every quarter.
A lot of companies, when investor backed companies, they do staggered board meetings. In other words, one will be in person, live several hours. I have one tomorrow in Quincy that’s gonna run from two to six, but intermittently followed by a one hour conference call update. Okay. Where are you from where, when we last met, that usually is just a fast synopsis of where the company is. What every good board, the outside board members usually create an action item plan, either before or at the end of the meeting say, okay, next board meeting we have these five things to solve. And usually they demand that the beginning of the next meeting, first 15 minutes are, okay, where are you on the five action item points?
What have you done? But what’s interesting, Joe, is in between the good board members are talking to the company on a weekly basis about driving that process. But discipline and tough love are two good words. Three good words to use.
Raza: [00:10:20] John when you work with companies, what role do you, like to play or how do you help companies?
John: [00:10:27] Well, I like to think of myself as a connector. So what did I do yesterday morning for breakfast? You know, greasy spoon in Newton? I brought two people together. One who has two outside board members. We’re doing a recapitalization of the company. It’s a digital therapeutics. I introduced, in December, someone that they need on the corporate development side.
I asked him because of this corporate development person, and I have a 20 year experience working with companies together. And then, probably a week ago I said, Hey, look, Dave, would you do me a favor? Did you have breakfast with me and the founder of this company? There’s a lot we gotta solve here.
Maybe you can see a way to get active or get involved. So I do things like that from time to time. I spend my weekends with clients or others, off the meter. As long as I’m home before 9:30 and they pay for the greasy eggs and the bad coffee. I try to put people together.
I try to connect people that can be helpful to the business. Some of them end up as directors of the company.
Joe: [00:11:27] I want to go back to a couple of things on investor backed boards.
Talk a little bit about the difference in composition of an early stage company. Who is likely to be on it? What are you looking for in that kind of board member and do they have different expectations. You’ve talked a little bit about maybe more frequency, are there other expectations that a board member on an early stage or investor backed company is likely to have?
John: [00:11:58] So you would see typically, a five person board for investor backed company in the first couple of rounds, seed, Series A, Series B. It’s generally five. It’s usually indubitably, the CEO, whether a founder or otherwise has a seat at the table. You want that. You have to have that. That person’s usually, maybe not the chairman, but he or she is usually driving the agenda for a board meeting. . You also would have, if you have investors, typically two investors, and then you may have a representative of the common, so it’s two, two, and one.
What do I mean by that? CEO and maybe a founder, director, two investor directors. Usually the anchor tenant, the lead investor, and maybe you know, someone who’s written them second or third largest check. But the first thing they all agree on is :what are the problems this company will need to solve? Will need to confront, will need to attack in the next two years? And what type of problem is that? So I’ll give you, without naming the company, I’ll give you an example.
The company that I was talking about on a Sunday breakfast, we need, we’re now at a point where we need to take this product, it’s a digital therapeutic, through the regulatory cycle, but it’s not a drug. It’s digital therapeutics. And so the problem is that’s a tough industry right now because it’s brand new. It’s virginal frontier. Who is the right person to help drive this company as an outside board member, because we have to solve a regulatory problem. So the person needs FDA experience, but not in the drug space.
We have to solve a growth problem. So that person, he or she needs operational experience. And most importantly, the universal element in all of this is we’ve got to solve a funding strategy. So you sort of want to an outside board member who’s , skinned his elbows, has some gray hair, plenty of it, or none whatsoever, addressing those challenges over the next 18 months, two years, you bring that person to the table. You actually have to pay some equity, give up a little bit of equity. Finding that right individual who’s going to help the rest of the board solve the problems I just identified: regulatory, clinical proof of concept, funding – cause we’re going to need $10 million – and operational growth. We’re going to have to help recruit and drive a team. That’s a tough proposition in an industry that’s brand new.
Joe: [00:14:38] So I think that kind of disciplined approach to identifying board members runs across building any kind of board.
It can be a board of five, seven, eleven it doesn’t matter. It happens that in the size you’re talking about, that first independent is probably more critical, but as you build any board, I think that approach is exactly right. Exactly what do we need? What are the skills, expertise, attributes that we need in this person and let’s go find him or her.
John: [00:15:13] With one important ingredient in that recipe.
I fully endorse what you’re saying. The diplomacy is very important here because you got to deliver tough instructions, tough love, and you have to do it. so it’s very paramount. Look, I’m doing this. I’m delivering this advice. You know, Joe, you’re the founder. I’m delivering this advice, Joe, and it has to come through everything.
Because I would like to see you succeed. And even if I have to give you tough love, it’s not personal – it’s because I want to see you succeed.
Joe: [00:15:48] So let me ask you this. If the founder/CEO is also the chairman of the board, but not particularly well suited to be chair, do you in a situation where the board is small think about having a lead outside investor like you would in a larger board or how do you deal with that if that happens to be the case? Cause I’ve seen that and I’m positive you have too.
John: [00:16:10] Yeah, that’s a great question because you can’t have the CEO/founder be the chair. If you’re going to build an outside board, the chairperson, usually has to be someone who’s got a lot of scalps on the belt, a lot of scars, a lot of experience, and been involved in boards.
I will tell you a great story company Firstlight Diagnostics. The founder realized what they needed at the board level. They had a ton of investors all moving in different directions, and they really needed someone to help someone with a lot of street cred, a lot of deep credibility and an enormous amounts of diplomacy.
And so they brought in this guy Bill Moffitt, who probably was one of the best chairs I ever worked with. He had a way to drive the discussion, drive the agenda, to stop tangential discussions to stay focused on those action items that I talked about and demand performance and, on the action items.
He was the most masterful, yet at the same time, urbanely diplomatic chairman I’ve ever had the pleasure of working with. He was just so good about assigning tasks, not only to the management team. But to other board members,
Raza, you gotta just, you know, here’s the five action items that come out of this program.
Don, founder, you gotta solve this regulatory issue. Understand this government contract matter, and look for somebody in this. Raz, he’s an outside board member. Or he’s an investor board member. He’d say, Raz, you got to go check your contacts and, and, and look for this, check for that. See who can be likely strategic partners here that we can bring in.
So he would assign responsibility to everybody that made a board be very active, very participatory, and also it drove, attention to detail where a lot of board members, sometimes just, and not on this company, but a lot of board members sometimes show up, and that’s about it.
Joe: [00:18:13] He sounds like the perfect chair and it sounds like not only did he have all the qualities that you have suggested, but he also worked well with the founder, which is, yeah, why are they important?
What if you don’t find Mr. Perfect? How do you find the next level? How do you find a chair that you can make it work?
Because the person you described, you just said he was one of the best chairs you’ve ever seen. Not everyone’s going to deliver all the goods. What do you do if, you can’t find that person or the chair is not that person?
John: [00:18:49] Well, number one, what you have to do, and here’s the problem I have also witnessed. If a board member, an outside board member, we can’t get rid of investor directors.
You’re not going to be able to get rid of the common founder, director, you know? So I’m, let’s say Joe, I’m the CEO of the company. The founder director has a seat at the table as long as that person owns X percent of the company. The investors wrote the check. There is no way they’re not having a seat at the table.
It’s the last person, the independent. It’s just like making a decision on a C-level executive. If that person, he or she, is not performing in six months, you need to move on. You need to get rid of them and find another, Cause the worst thing you can do, and the same discipline applies to a board member. A Board member who’s getting equity, but not contributing, you need to let that person go.
Joe: [00:19:42] I’m going to say something I said before, the discipline you just described about off-boarding, unproductive board members should apply to all private company boards. It happens that there’s a more definitive incentive to do it in the kind of companies you’re working with. But what’s the difference between those companies and a really productive, a successful family company board with some of the board members really are just mailing it in?
John: [00:20:12] I would agree with and you will see that, those companies are usually prospects for a private equity takeover. And what the private equity firm usually does is bring in the type of person I just described. Someone who can lead from the outside. be encouraging, to the inside management team but at the same time, demand discipline, demand, action, demand results, and that’s, that’s unfortunately the way you have to drive that.
Raza: [00:20:41] And John, can we switch to talking about for these investor backed companies that are early stage, can you also talk about how the compensation for board members work – is there a cash component? Is it always just restricted stock or it depends? What’s the norm for compensation for board members?
John: [00:21:00] Well, it’s actually over my 35, 36 years. It’s really within a band. It depends on the company. You might. See if it’s a more mature company, let’s say two, three rounds of financing, the outside board member might get an annual stipend.
A public company’s entirely different. Public company that outside board members usually getting a very attractive stipend, for a guaranteed number of meetings, as well as restricted stock units. If it’s a public company. Private company, and its odd, Raz, the data is so uniform. I don’t care what anybody says.
The universal metric is this: non-qualified options, unless the person can buy and prefers to buy restricted stock. If it’s an LLC, it’s a different comp structure but for a C corporation, the only mechanism you generally have is a non-qualified stock option.
This is all technical guys and, and I, I see you guys are glazing over, but I’ll give you some medication later because here’s the thing, there’s a, there’s, if there’s one thing you you would leave an outside board member with is think about 1202B. Cause if you can get stock, you know, it’s a gift from Uncle Sam.
Raza: [00:22:10] That’s the Qualified Small Business Stock (QSBS) and the 83B all investor backed companies know to file their 83B, don’t forget to do that.
John: [00:22:21] Absolutely. But the good, the great thing about 1202 and now I’m getting legal and technical and you can dope slap me in 30 seconds is: it is the heart and soul of American capitalism
1202 B stock, which is capital gains stock. The company has to have less than 50 million in assets at the time you get it. You have to hold the stock for five years. When people exercise an option, they’re usually cashed out.
They can’t run the five years, 1202B stock. In my best Southern accent. Is the heart and soul and sinew of American capitalism. Why? The first $10 million of gain is zero capital gains tax. Now, who said that Uncle Sam won’t give you a gift from time to time, Joe.
Joe: [00:23:09] Well, that sounds good.
Raza: [00:23:13] John, it just so happens, I know founders who have taken their entire windfall tax-free 100% with the 1202B .
Joe: [00:23:23] Let me ask you this though. Could you talk a little bit about how the boards of these investor backed companies change as they grow, become more successful, have additional rounds of funding.
It starts maybe with the five as you describe it, but then given the changes, assuming it’s successful, it must really evolve into something else.
John: [00:23:46] And the interesting thing is that also creates the challenges. Because I have found, in my experience, you get a board of nine people or more. I mean, it’s like Caligula. It’s like a Roman orgy. There’s a lot of grape eaten and nothing gets done.
Oftentimes when you do that, Joe, you have a subcommittee to focus on, let’s say operations or audit or nominating new directors or particularly compensation committee. You typically see it’s the same, you know, logic that prevails.
The CEO, he or she always has a seat at the table. The founders, depending on the size of the founder faction and particularly if the founders are still active in the company, if they’re no longer active in the company, the common might net not get a seat. But if the founders are still active, typically you see common getting a seat.
So there’s two. The problem you have is if you have too many investors on the board and they, they don’t represent a diversity of opinion and I’m sure the investors will excoriate me for saying this, but you can get too, lost and not thinking about the longterm strategic thing.
So if you had a board member of seven, I really recommend, two, minimum, outside directors, preferably three. So if you said three outside directors, each of whom can help solve some of those challenges, maybe separately, one in a life science company, maybe one’s a regulatory person, one’s a clinical person, one’s a funding person, there’s your three, and then your other four are, you know, CEO and a founder and two investors.
The other element in this, in this landscape is, do you have new investors? And those new investors who are writing bigger checks, a bigger evaluations may say, hey, time for change on the investor side, that’s even a more challenging discussion cause you also have to be willing to have existing investor directors who are also willing, knowing that the price of money requires a seat at the table.
And if those investors are writing bigger checks, maybe it’s time for a Series A board member, preferred investor, to step aside and bring in. And that’s a challenging discussion as well.
Raza: [00:26:05] But John, you’ll often also see that and at later stage Series C or D that, At this point. Now on the board, there’s a Series B investors and a Series C investor and common stock investor and time comes to sell the company.
And depending on what the offer is and the how the waterfall is going to play out, there’s going to be a very divergent possibility of interest between the board members. Although the board collectively supposed to represent.
John: [00:26:40] All shareholders, shareholders, not just …
Raza: [00:26:42] What do you see there?
John: [00:26:44] And that’s often the tension that you have, not just with management and investors, it’s the entire landscape.
What do I mean by that? As you just described? Let’s follow up on your scenario. You’ve got, you know, later around investors that have come in at a price, at a good valuation, maybe it’s the valuation’s 4 or 5X, the Series A valuation, the Series A investors who are still sitting at the board and they’re in their five years, if they’re in the tech space, then they’re desiring liquidity. Why?
Cause their blended return might be 5, 6, 7X. Whereas you sell the company too early after the Series B or C or whatever the later round investor is, the return is not as significant. So there is a natural tension on the investor side. The other problem you have to look at is, and most entrepreneurs don’t pay attention on this, where is the fund in its life?
Because, for example, universal math, that has been for all my 35 six years, most funds have a lifespan of 10 years with two to three years of unraveling extension. If the fund is in its seventh or eighth year, and it’s a Series A investor, that fund has enormous pressure to harvest, to get to liquidity. If it’s a Series B investor and they’re in their third year, well they got a 7 year horizon for a liquidity harvest.
They want to be more patient to get a better return and management -where are they in the process? If they’ve been slogging in the trenches for the last 5, 7 years and they looked like their equity is under water, you know, they may want an exit to just to get out, but they’ll have a separate carve out plan.
So that the dynamic and the tensions among all of these elements of the landscape really have to be carefully managed and being honest. Part of my job. What I do.
Joe: [00:28:41] I want to go back to something you said before. ,You talked about the quote “difficult conversation” that you have to have when it’s time for an investor, or any board member, to leave the board.
It could be an investor that has been on the board for a long time and a new investor has come in and cut a bigger check. It could be someone that just not as relevant to the issues the company’s facing. Who has the conversation?
John: [00:29:09] I think this is where having a good chairman, you know, I mentioned that fellow, Bill Moffitt, having someone who appreciates those issues, but, can talk to, and this is a one-on-one conversation.
You never have this conversation at a board meeting. So that person might talk to the founder, might talk to the other investors, you know, particularly. And get a consensus and then, you know, go back to the earlier investor and say, look, I think it’s time to step aside or you haven’t been contributing.
The easiest case is the person is not contributing as also not paying attention and frequently not showing up. If that happens, you really need to take more direct measures.
Joe: [00:29:53] Sure. That makes it easy, but let’s assume someone’s showing up. And let’s also just assume for the sake of this conversation that you don’t have the perfect chair, but the board looks around and the founders look around and the investors are looking and thinking, this board is not what it needs to be.
Who provides the impetus to make the changes that need to happen?
John: [00:30:16] That’s a good comment. You know, I think part of it is, my job is to sit down with the CEO or the founder. Usually face to face. You’d never do this on the phone, usually over a meal, breakfast or dinner and say what you just said.
Look, we’re just, we’re not making progress. It’s time for change. People are, are, have lost interest, you know, if they’ve lost interest, it’s in your own best interest to find someone who’s going to be, become more passionate Maybe if they’re not fully vested in the option, you know, you let the, the rest of it, like almost like severance in the employee context. You let it forward vest to the end because you’ve asked them to leave.
Joe: [00:30:59] Does it sometimes take more than one to have this conversation? In other words, will you sit down with, so will you sit down with the chair or the founder or some combination? A couple of folks will sit down with the board member and have that conversation?
John: [00:31:15] I think for human interaction purposes, a lot of psychology here, I think separate one-on-ones. Why? You put three people, four people at a breakfast meeting, you know, three across the table from the non-performing board member.
Nobody likes to be in that scenario, so it’s going to take a while. You do it diplomatically and you do it over, and that may take three or four meetings over three or four weeks. You try to do it probably within three to six weeks maximum because that person has to, it’s the tough love that’s often delivered by the board, the independent board member to management. Now it’s the tough love delivered by management or founder an investor director to a non-performing board member. Absolutely.
Raza: [00:32:02] John, another topic we want to talk about.
We’ve seen investor backed companies such as Wework or Theranos where there’s a huge blow up in the end and there is a visionary CEO or a founder involved. How does the board let the situation get to that point and how do you see that in general? Not, not necessarily specifically for any of these.
John: [00:32:27] I haven’t witnessed that, you know, that kind of behavior. I think what happens there is big bold ideas. Everybody’s investing; prices constantly rising; board members sitting there, well, management must be doing a good job the last round was, you know, $100 million pre-money. The next round is $400 million pre-money and the third round is $750 pre-money and everybody’s writing a check so why should I care?
And it comes back to the word you use, Joe, when we started this and the word I used: discipline. And tough love. And usually what happens when the valuations riding North at an ever -increasing pace, some of those basic elements start to wither.
I haven’t been involved in it that often, once or twice, actually, one of them was a public company. It shall remain nameless. The outside board members didn’t challenge management. That’s what they’re supposed to do. Challenge management. Why is this? ‘
I will tell you, because I had a friend from a venture fund that looked at Theranos and early on and said to me, John, there’s no way they can do this scientifically.
I’m a venture investor. I’m a former, you know, three times serial entrepreneur. I’m a scientist that ran a lab, one of the best grant producing labs in a major hospital in Boston. I’m knee deep in science. And I asked them endless questions about the science and I kept getting poo-pooed and told, look nobody else is asking these kinds of questions. you know, do you want to invest or not? Because we have plenty of others.
And he and he wanted to do the diligence. And he said, you know what? When somebody responds to you that way, what kind of relationship you’re going to have, even as a board member? So he passed.
Joe: [00:34:24] So I think that what you said is exactly right. Transparency and trust, I think are fundamental to the management/board relationship, no matter what size company, what type of company.
I do wonder though how, what I’m going to just refer to as “Theranos Syndrome” because it was such an egregious case and we know so much about it. The entire board were comprised of very experienced people. They’d all been on boards before. They had all sorts of really impressive background. Not one of them knew anything about a regulated industry.
How does one protect against a board that appears to be so well, so, so experienced, and yet is completely unwilling to hold the CEO accountable?
John: [00:35:17] That’s because the board was composed of people who didn’t solve the quote “challenge “problem that we started this conversation with a half hour ago. Pick a board member that know what your challenges are.
A good board member will ask them. I asked them, what do you have to solve in the next 6 to 18 months for a young company that’s two lifetimes. What do you have to solve? What capabilities do you have to bring to the table? What are the most challenging aspects that are inflection point events. You solve it, you get to an another inflection point, and then you have to find people who have solved that problem before, who, or have had enough experience solving that problem.
So if you look at Theranos and you look at all their outside board members, you know, Henry Kissinger’s, an intelligent human being. Well, he doesn’t know anything about clinical technologies and taking products to market in an FDA -regulated industry. No offense, Henry, if you’re hearing this. They didn’t find they, they found board people with reputations, not the person who has the experience to address the immediate challenges of the company.
Joe: [00:36:34] Which was constructed to raise money.
Raza: [00:36:36] Yeah, that’s the problem. It was that that was the challenge they were supposed to solve .
Joe: [00:36:41] So on the smaller boards, doing a self-assessment may not make sense. I think you’ve described kind of a, a more granular, personal process.
What about boards that are nine people? Should there be a regular self-assessment, a real assessment ,where board members are required to really look at themselves. Other board members maybe are weighing in on their, their fellow board members . What are your thoughts on that?
John: [00:37:11] There probably should be, but there never is. Number one. people are, people are too busy.
But I think if you fundamentally care about the management team. And it’s usually the CEO who he or she’s bringing you in. If you care about the CEO and want that person to succeed, you’ll assess your own performance. You know, one whether or not you have the time. You’ll make recommendations for other board members, that goes on all the time.
Good board members are always making recommendations for other board members. You know, and it’d be honest with ya, what do you do for the company that’s struggles, that’s slipping, that’s banging its head against the wall, you have to find an extraordinary person who’s willing to jump in, get a lot of mud on himself herself and, you know, wrestle at some tough problems and it’s a lot more work than, you know, typically entails. It’s the company that’s struggling that really requires the most help.
Joe: [00:38:08] Yeah. There are a lot of boards out there that are struggling. I deal with those boards regularly. And while I appreciate what you’re saying, that in a perfect world, board members who like the company, like the CEO, like the founder will self-assess and do the right thing. That is a very, like I said, that’s the perfect world. The perfect world doesn’t exist mostly in governance, unfortunately.
John: [00:38:32] Yeah, and just about everything else too, Joe. So, but I think if you have people who believe want the company to succeed, and it’s not just about money, it’s not just about increase in valuation.
If you work with good people and bring in good people who want to see others succeed, and also serve as good mentors, particularly for younger people, who need that coaching and guidance, they just haven’t. You know, you know, they haven’t been bruised often enough. So that’s important.
Joe: [00:39:03] John its been great speaking with you. Thanks for joining us today.
John: [00:39:06] All right. Thank you. Thanks for having me.
Joe: [00:39:09] And thank you all for listening to onboards with our guest, John Hession. Take care Raza.
Raza: [00:39:15] You too, Joe.
John: [00:39:16] Thanks for having me.