67. Michael Greeley on the trends in composition of boards in investor backed companies

Michael Greeley has extensive experience in venture capital and significant board experience across a multitude of investment boards. In this episode, he shares his experience and lessons learned, emphasizing the evolving nature of board governance, the strategic importance of independent directors and the future of healthcare.

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Flare Capital

Michael Greeley Bio

Big Ideas/Thoughts/Quotes

  1. Evolution of Board Composition of investor-backed boards
    • Changes in the composition of investor-backed boards over the past 25 years, emphasize the need for a broader range of competencies beyond financial performance. The trend is to include diverse perspectives to help mitigate boardroom “groupthink.”

“Boards today are very deliberately trying to have the right competencies… Today the pressure on boards is to have a much wider range of expertise; cybersecurity, sensitivity around DE&I issues, and we’re seeing that reflected in our term sheets.

  1. Challenges in Board Compliance
    • Discussion on the difficulties boards face in complaining with term sheets guidelines, particularly around independent directors and diversity.

“We did an audit… and said, ‘How many of our companies actually have complied with that (term sheet requirement)?’ And we were surprised, it was probably maybe half or two thirds… and frankly, if I could be just brutally honest, I think there’s a little bit of an apathy to address deficiencies of boards.”

  1. Importance of Independent Directors
    • The role of independent directors in providing an unbiased ‘voice of the customer’ to help guide company strategy and product market fit.

“The power of that [independent director] is a little bit sector specific but I think it cuts across all sectors, the principal risk we take as healthcare tech investors is around product market fit, and independent directors are the voice of the customers.”

  1. Governance and Board Dynamics
    • Michael’s advocacy for more effective boards and the potential pitfalls of having too many observers or management members “in the room.”

“I’m a traditionalist in the sense that the board should not be stacked with management because it is meant to be the body that opines on the strengths and shortcomings.”

  1. Future of Healthcare
    • Michael’s optimistic outlook on the ‘golden age of healthcare’ driven by technological advancements, regulatory changes, and innovative business models.

“Arguably, the golden age of healthcare is upon us as the sector embraces novel and impactful solutions to improve outcomes and lower the cost of care.”


Joe: [00:00:00] Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub and I’m here with my co-host Raza Shaikh. Twice a month, On Boards is the place to learn about one of the most critically important aspects of any company or organization – its board of directors or advisors – with a focus on 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 means to be an effective board member and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Michael Greeley. Michael is co-founder and general partner at Flare Capital Partners and was formerly the founding general partner of Flybridge Capital Partners.

Raza: Michael currently [00:01:00] serves on boards of nine companies, and over his career has served on 50 company boards. He has also served on various innovation and investment advisory boards, including Advocate Health, Boston Children’s Hospital, Cleveland Clinic, MedStar Health and MGB Ventures. He was past chairman of the New England Venture Capital Association and was on the board and executive committee of the National Venture Capital Association.

Joe: Michael also authors a blog focused on venture capital, innovation and healthcare called On the Flying Bridge. Michael, welcome and thanks so much for joining us today on On Boards.

Michael: Thank you, Joe. Thank you, Raza. And Joe, it’s great to be reconnected. I think we’ve known each other for 25 or 30 years.

Joe: I think so. Could be even longer, but we don’t need to go there. First, just talk a little bit about how [00:02:00] you got into venture capital and tell us about your current fund, Flare Capital.

Michael: Sure. I was an organic chemist in college many years ago, and rather than going to medical school, I ended up in business school which quickly put me on an investor track. I graduated from business school and was on Wall Street for a few years and then have ended up in Boston, which is really, as you know, the cradle of venture capital and we’re surrounded by interesting, fascinating people trying to change the world.

I’ve started now three venture firms over the course of my career. Flare Capital is a firm that I started about 10 years ago with a colleague of mine that manages today about a billion dollars focused solely on the healthcare technology sector, so software and services and healthcare.

And again, we have the great fortune of being in a city, we’re in Boston today, that is at the intersection of IT and healthcare and life sciences, and so it’s just been an incredibly interesting time in that sector, time in [00:03:00] the investment business, to be trying to help partner with great entrepreneurs to start interesting new companies.

Joe: And you’ve been doing it for a pretty long time, including having served on 50 boards, many of which I’m guessing were investor-backed boards. What I wanted to ask is, how has board composition of investor-backed boards changed over, let’s say, the last 25 years?

Michael: Yeah, I think all of the companies other than the nonprofits and some of the advisory boards have been investor-backed boards. I think the changes have been maybe in isolation look more subtle, but in total, I think I’ve been quite profound. Boards today, and I see it reflected in our term sheets, for instance, are very deliberately trying to have the right competencies and oftentimes investor directors look through a very narrow aperture of the world, which is really around the capital structure of the company or how the financial performance of the company is.

[00:04:00] Today the pressure on boards is to have a much wider range of expertise; cybersecurity, sensitivity around DE&I issues, and we’re seeing that reflected, Joe, in our term sheets. If I went back to some of the early boards that I sat on, I think there was just a lot less attention paid towards the totality of the board’s competencies.

New investors tend to ask or demand a board seat and they tend to be populated by an investor, and today, I think there’s just greater sensitivity to having a much more diverse set of lived and professional experiences and the challenges facing a lot of our early stage companies are so multivaried, multivariable, the whole specter of cybersecurity has introduced a whole new set of risks that a financial investor board member may not be the best equipped to handle.

Joe: I think when we talked last week, you said that you started to put the requirement, actually, [00:05:00] that boards have at least one independent about eight to 10 years ago, but when you recently did an audit, you found that a number of them weren’t complying. Why is that, and what can you really do about it?

Michael: Yeah, so we inserted in our term sheets, actually, probably 10 years ago, the requirement, although not a legal obligation, and you’re the lawyer, Joe, so you would be able to discern the differences, to use best efforts to have independent directors on the board.

And for us, the power of that, again, it’s a little bit sector specific but I think it cuts across all sectors, the principal risk we take as healthcare tech investors is around product market fit, and so the attribute that I think we’re trying to solve and that independent director is a voice of the customers, how we refer to it.

Ideally, that director also is a little bit of a lightning rod so it helps with recruiting. There may be an experience set around compensation committee activities, but ultimately, it’s voice of the customer, [00:06:00] so help the management team think about product market fit. When we have that voice around the table, that’s been a very powerful voice.

We did an audit, you’re alluding to, at the end of last year, end of 2023 and said, “How many of our companies actually have complied with that?” And we were surprised, it was probably maybe it was half or two thirds, but it wasn’t unanimous, and frankly, if I could be just brutally honest, I think there’s a little bit of an apathy to address deficiencies of boards. They don’t meet every day. You see deficiencies or gaps in management teams every day. You don’t necessarily see the gap in a board every day. You see it much more episodically.

I think we’re slow to remedy that. Even though we do feel it’s an important request that we’re making, the remedies are difficult other than just continually reminding your fellow board members and the CEO, “Hey, this is important. It’s in our collective interests to have a well [00:07:00] represented board with a lot of different lived experiences, particularly for us around voice of the customer.

Joe: Yeah, that makes a lot of sense, but one of the things you said when we last talked was this, it’s a quote, actually, “I’m a traditionalist in the sense that the board should not be stacked with management because it is meant to be the body that opines on the strengths and shortcomings,” and that sounds a lot broader than just healthcare, although I understand why it’s particularly important in the sector in which you currently invest.

It’s really but certainly true for all boards, but the fact that you have been on so many investor-backed boards and see this and have seen a shift, and I guess I’d be curious as to whether you think that venture-backed boards or I should say investor-backed boards are generally trending in this direction and whether in the foreseeable future the idea of having at least one independent will really stick.

Michael: I’d like to think that [00:08:00] this is something that will be enduring. There’s a power dynamic here, that I’ll just put it on the table, that is at play. Founders are very leery, which I perfectly understand. I’ve founded three venture firms and I’ve been an entrepreneur. My business has been an investment business. You don’t want to give up that control easily and you certainly don’t want to give up control to a new investor that you’ve got to know over the course of a couple of months or two or three quarters, so I’m very sympathetic.

The power of an independent director is they also can sort of mediate to the extent there’s any disagreements and not that it’s adversarial anyway, but if there’s a disagreement that could be relatively benign around just product strategy or pricing or hiring, independence provide just another perspective so it takes away some of that adversarial tension that might build up.

I’d like to think that that is going to be an enduring feature of a really successful board. I’ll say one other thing that evolved or [00:09:00] we put into our term sheets on the heels of the George Floyd tragedy was a DE&I clause, which is, again, the legality of it is hard to enforce, but it’s using best efforts that at the board level, it is a diverse set of board members wherever possible at the senior executive ranks and that’s different, obviously, than an independent director, but an independent director could embody all of that, could be a diverse director, and, again, for us in the healthcare sector, it’s the aggregation of a lot of different lived experiences that I think over time will make for better decision making, so we really feel very strongly about that.

I don’t think that was the case necessarily 20 or 30 years ago, and the problem with how early stage boards evolve over time with each round of financing, the new investor that leads the subsequent round wants a board seat so you quickly see board scale and size and that dynamic is tethered to the financing, not [00:10:00] to the needs of the company.

Raza: Michael, I’ll read from that parts of that clause that you mentioned about DE& I in response to George Floyd. It starts by saying Flare Capital believes diverse teams lead to superior outcomes and is committed to improving diversity, equity and inclusion within the venture capital industry.

Subsequently, it basically says as such, Flare Capital expects its portfolio and we expect them to adopt these policies. I think you’re right, it’s basically showing the intention or showing the commitment to diversity, but you can’t legally enforce it. In your audit, did you also find a similar compliance ratio for your DE&I clause?

Michael: That’s a natural and obvious question, and sadly, it was even less compliant and the feedback that you hear is they’re just fewer candidates. We don’t accept that and so we’ve developed [00:11:00] a list of names of people that we are always constantly putting forward as appropriate candidates. But sadly, shamefully, the compliance rate on that dimension, now we only inserted it three or four years ago, is less than just the straight independent director requirement.

Raza: Michael, do talk about a little bit of how do you find these independent board director candidates to make the board stronger and well composed.

Michael: Yeah, it’s multifaceted. Not surprising, certainly, our own personal networks and the firm here has 15 employees, some of them are very senior executives that have run big businesses. So, as we literally crowdsource a list, and we have a list of probably 75 names, so that’s one channel of developing, just bringing out our own personal networks.

There are published lists by trade journals that track these types of lists, that develop lists of the top 100 diverse candidates, and then in our companies where there are [00:12:00] diverse senior executives that we think have the potential to serve as appropriate independent directors, we will often try and bring those ideas to them.

We typically invest in Series A. We have seated a bunch of companies. We have a pre-seed program, and I think we’ve made 20 of those in the last couple of years, and so there is sort of a ladder of where you can on board talent. If it’s somebody’s first board, maybe you invite them on to a pre-seed. Ironically, they can have a much bigger impact on a pre-seed company than a Series C company, which is an important dimension.

The failure rate for the pre-seeds tend to be higher so that you also want to be mindful when you’re trying to recruit board members that oftentimes in venture, sadly, these companies don’t work out and so you’d hate to see them waste a lot of time on something that’s not productive, but they certainly appreciate being considered, if not added to some of these boards. But like anything, Raza, it’s a little bit organic in how you develop these lists.

Raza: The independent has to be selected by [00:13:00] both the investor board members and the common board members representing common so they may be sourcing candidates as well.

Michael: Yeah, there’s artful language that not to be unreasonably withheld approval so that both sides are throwing a bunch of names into a bucket and you’ll run a little bit of a process. It’s not directly analogous to hiring a senior sales executive where they know they’re in a competitive process. It’s a little awkward to run a competitive director search process and then turn somebody down, so you tend to do it serially and not in parallel.

Joe: One of the things that surprised me actually was that you said in your Monday morning meetings that open board seats is almost always a topic of discussion that some of your companies have had open board seats for actually quite some time. I am surprised to hear that actually because I thought it would be something that many people would want to do.

Why the difficulty? Is it [00:14:00] because some of the early stage companies fail? Is it the pool is small? What is it that leads to empty board seats at a time when there are a lot of qualified people who I think would be interested, but somehow that’s not connecting

Michael: Yeah, I wish I had a great answer. What you’re alluding to is we have, like many firms, written Monday meeting agenda. Venture firms tend to not be open for business on Mondays because the partners are all together reviewing in process deals. On that agenda, we have a section for our open slots that we’re trying to fill in our portfolio.

We probably have 35 or 40 active companies right now so it’s a pretty long list, and we flag where we have independent director opportunities. I think to your point, I wish I had a great answer, Joe. I think it is a little bit out of sight, out of mind. The issue only resurfaces typically around board meetings where we’re like, “Geez, we didn’t fill that slot. Let’s go do it,” and then the next fire drill, It gets deferred until the next board meeting. That’s not a great answer, and I think intellectually, if you pulled the founders, the management team, the investor [00:15:00] directors, we know that the company is better served by a diverse set of experiences on the board.

You raised something earlier, which I don’t want to leave kind of unaddressed. I was a traditionalist in the sense that it’s hard to be judge and jury of your own performance, and this is where I think the tension being adversarial starts to set in. It’s not meant to be adversarial, but a board should be able to step back and look at the performance of the company, look at the effectiveness of the team and identify gaps and be able to fill those gaps.

Naturally, again, this is a perspective in early stage investors, these companies scale, they go through sort of an S curve, the competency or the needs of the leadership team, the CEO, CFO will change over time, and it’s hard to have those same people sit on the board and have that kind of awareness where they would actually look to augment or replace themselves.

Again, the board represents all shareholders, and I think the burden of a [00:16:00] board to represent all shareholders, not just my LPs as an investor or not my common stock ownership as the founder, and so there is naturally the risk of a tension emerging there.

Joe: Well, given the importance of independent board members and, as we’ve discussed, diversity of perspective of board members, what can you do to change kind of the investor board structure, which is kind of at the beginning, it’s a lot of two to one? Is there some way to that that would actually change or does it really need to wait till it gets to seven before people are going to take it more seriously?

Michael: Yeah, so the pushback that you’ll hear from investors is we have an obligation to our underlying fund investors to actively manage their capital and that more often than not comes from being on the board, and so it’s hard for investor directors to give up board seats that they secure.

Now, we’re also mindful [00:17:00] of proportional representation, so the company goes on to raise a lot of money and our ownership is 5%. I’m making these numbers up to make the math right. It’s a five-person board, so we’re 20% of the board, but 5% of the ownership. Well, yeah, that probably makes sense to transition the off ramp, which is pretty tried and true is to move to an observer. I’m on a number of boards now where there’s two X the number of observers as there are board members, and that makes for a terrible boardroom dynamic.

Joe: I was going to ask you about that. One of the problems that I’ve seen is that sometimes whether it’s board observers or sometimes too many people from management in the board, the room changes and the dynamics of the conversation change.

Michael: Dramatically. Big fans of smaller boards, the team should come in and present, and then the team should leave the room. I get why we have observers. We do it. It’s a little bit of a training wheels for younger investors to get board exposure, and [00:18:00] it’s an off ramp for early investors who are being diluted down, but it absolutely stifles the boardroom conversation.

In the cases that I’m thinking of, we have this really calcified board agenda where people are kind of coming and going through the course of the meeting so you can get it down to a small manageable group.

Raza: Michael, you’ve had plenty of war stories and real board examples to go through. Can you share some of the bad governance stories that you may have encountered.

Michael: Yeah, I can do that reluctantly, and not for attribution, but I think one of my worst board experiences has been where the founders actually retained governance control of the board, and in the face of a really poor performance, it was impossible for the company to make a change, and the performance was unambiguously poor, and still as a company, we ultimately did fix it, but that absolutely should [00:19:00] exist, it’s serving a really disenfranchised population, bringing really novel solutions so there was a lot of passion around the table to help really build this company, but we had a legal framework that made it virtually impossible to affect any change.

An even worse outcome is where the board is at loggerheads and the company is then paralyzed, and so what we did in that example is we basically stepped back and said, “The company needs to go forward, even if it’s on a bad path, but we try very, very hard to never get to the point where the company is paralyzed because of a board deadlock,” and that’s the default. It tends to be like an even number of board members is something that most of us try and avoid, although it’s more often than not in the governance structure less the number of board members that cause this paralysis and that is a very, very bad place to be.

Raza: I think the extreme [00:20:00] examples of such patterns would be the FTX or even Theranos board where it’s really, really founder controlled and many other extreme examples, some positive as well as many more negatives. Michael, what are the principles that you come in while viewing your role on the board coming in with an entrepreneur?

Michael: We do truly believe at least the way our firm operates is that we’re the invited guests and that it’s an honor to be there. It’s a highly competitive industry to provide capital. The capital we provide does have strings attached to it, like we want to be on your board, and so for us to be selected, we take that very, very seriously. We compete very hard to be selected the way we’ve architected our investor base. Half the capital come from a few dozen major strategic incumbents, household names, and so we think we bring more than just capital, but it’s a privilege place to be in.

What I say to my [00:21:00] partners is we want to be the first call, and when the CEO is struggling with something, we want to absolutely be the first call. Now, there are going to be issues that the CEO does not want to expose to his investor directors first, and so that’s therefore the power of the independent director, talk to a brethren of yours who’s been through that issue, and so I’m happy to be the second call. The first call should be to the independent director, not to another investor director. We work very hard to be the first call, at least for the independent directors on the board.

Joe: Thanks. There’s a great quote in your bio on the Flare website that I’m going to read and ask you to talk about it, “Arguably, the golden age of healthcare is upon us as the sector embraces novel and impactful solutions to improve outcomes and lower the cost of care.” To start, what in your view makes this the time in which we’re living the golden age of healthcare?

Michael: There’s been a confluence [00:22:00] of, and I’ll try and be really brief, what look to be unrelated conditions. One is the advances in high performance computing. Data liquidity has enabled novel new healthcare models, particularly around the ability to take risk on populations, the way you can activate, engage, populations, you can triage, you can predict outcomes for population. There’s a high performance compute that we all know, but it is now very present in healthcare. The ability to do drug discovery on unprecedented advances.

We also have a regulatory framework that I think is becoming more accommodating and is encouraging new entities to come in and manage populations in a different way, so there’s a transition from fee for service to value-based care models. i’m so excited about the next 20 years and I hope i’m investing through the next 20 years, notwithstanding, Joe, it is a very challenging ’23 and ’24 the years we’re sitting in now. [00:23:00]

COVID was a massive accelerant for technology, so you’ve seen rapid purchase and incorporation of technologies. Those capabilities now will start to reveal themselves as the healthcare system has been pushed really over the last two or three years to become intelligent, predictive, always on virtual, empathetic, all these attributes.

I’ll make an analogy, and I’m sure the two of you can punch holes in it. The US advertising industry 20, 25 years ago was re-architected with the advent of the internet. It’s a $375 billion industry, it’s massive, and I think today, as an investor, we can look and see 10-plus trillion dollars of venture capital backed companies that are now public, so enormous wealth creation; Twitter, Facebook, Google, a whole litany of great companies.

Healthcare spend is arguably 14 times larger, so you have this massive industry that’s being re-architected. There are new risks. There are new revenues and the executives who run the healthcare industry [00:24:00] simply do not have the tools to make that transition, much like other financial services; advertising, commerce, and so it’s that impetus that I think will create. I think we’re on the threshold, as I said in that quote, of building predictably multibillion dollar venture-backed companies in healthcare.

Now, these are hard companies to build. I don’t want to sound so naive. They’re not going to be straight up and to the right, but directionally, we’re clearly on the golden age of how you or I or our children will purchase, engage, be active with the healthcare system, and ultimately, the tools that facilitate that are being built by startups.

Raza: Michael, this sounds so promising and exciting, but at the same time, I’m reminded of this thing called the reverse of Moore’s law, which is Eroom’s law, which says that the cost of getting an FDA drug approved every 18 month doubles, and [00:25:00] healthcare is like one-sixth of US GDP or some really big number like that. A former from a consumer and just a citizen perspective, do we also see all of that resulting in lower healthcare costs?

Joe: Either now or in the foreseeable future.

Michael: Yeah, I don’t know if we’ll see lower costs in the foreseeable future. I think what we’ll see is better and longer quality of life. I don’t know if we’ll see that right in the next couple of years, which is why I’m couching it in 20 years. But if I reflect on the COVID vaccine phenomenon, typically vaccines take 10 to 20 to 30 years to develop, and we did it in eight months, whatever it was. You’re starting to see, I think, real evidence that these technologies that proliferates into the system will have tremendous and obvious benefits.

Some of the boards that I’ve been on, figuring out some of these tech-enabled services, the ability to triage, curate, identify subpopulations and then treat them [00:26:00] differently, we’re seeing dramatic improvement in medical loss ratios, which is sort of the inverse of cost of goods sold, where you’re picking up 20 to 30 points of margin improvement. So, I can also convince myself that some of these models actually create a lot of economic value, and ultimately, that should inure to the system.

But I think in the short to medium term, I don’t think you’ll see healthcare as a percent of GDP go from 18 to 14 percent. It’ll be sticky on the way down, but I think there’ll be other measures that will be really embraced, like quality of life, longevity of life I think will see dramatic improvements.

Now, the power of healthcare technology, it is the great democratizing force for healthcare. If you can get into MGH with a phone call, a lot of what we’re doing isn’t relevant to you, but if you live in neighborhoods that have no access to high-quality care, so there is going to be a rising tide benefit to a lot of [00:27:00] disenfranchised populations through a lot of this virtual care.

Joe: One of the areas that I’ve seen it, I still serve on the board of St. Jude Children’s Research. A lot of the work that we’re doing is really focused on each individual patient, because with the incredible advances and looking at genome and really being able to run that data so quickly, we can look at a kid and decide exactly what it is that he or she needs to be treated with other than saying, “Oh, it’s a five-year-old with X,” which is going to give them the basic thing. That is not the case anymore. It will increasingly be less and less the case and not in the far future, it’s now and in the near future.

Michael: Yeah, you’ve done terrific work, Joe. I know you’ve been involved with that for a few decades, I believe, so if you roll the tape back 20 or 30 years ago, those cases 20 or 30 years ago, now, it’s dramatic improvement. So, I couched this over a couple of decades. [00:28:00] We still have a lot to do, but you can see early evidence of the impact.

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

Michael: My pleasure, Joe. It’s always great to see you. Raza, great to see you again, but thank you for including me.

Joe: And thank you all for listening to On Boards with our guest, Michael Greeley.

Raza: Please visit our website at OnBoardsPodcast.com. That’s OnBoardsPodcast.com. We’d love to hear your comments, suggestions and feedback. And if you’re not already a subscriber, please be sure to subscribe at Apple Podcasts, Spotify, or wherever you get your podcasts, and remember to leave us a five-star review.

Joe: Please stay safe and take care of yourselves, your families, and your communities as best you can. We hope you’ll tune in for the next episode of On Boards.