Author: 1547869

10. Ian Sheridan on the importance of the board in the very earliest stage of a company

Ian Sheridan has been innovating in the financial world, in a variety of roles, for many years.  He has brought that innovative mindset to the venture fund where he is a managing partner, Vestigo Ventures.  In this episode of On Boards we discuss the fascinating approach in the use of data they employ in making investment decisions and to how they work with the entrepreneurs that lead the companies in which they invest, and their boards.

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Links

https://www.vestigoventures.com/

https://www.linkedin.com/in/iansheridan1/

Ian Sheridan Bio

Ian Sheridan Biography

Quotes

“The boards are small, they’re, intimate – business conversations dealing with every aspect of business.”

“The best entrepreneurs are driving the company and their teams … the board is there in this early stage to be a coach, to help them navigate, maybe it could be networking within the industry, whether that’s growing the business on the distribution side or working with the regulatory compliance side of things – whatever it takes.”

“We use data to source, underwrite and empower our portfolio companies.”

“What’s different about this crisis?  Well, I think the first piece is working from our home. Right? So, how do you stay connected?  How do you keep that relationship at the right level and make sure you’re really understanding where is that person today and what are they facing and how can I move through that issue?  ……I would say as challenging as these times are, and the real pain that’s happening across the planet and our country, I do see an unbelievable spirit of innovation and drive from these entrepreneurs that hasn’t been shaken through this process.”

 

Ideas/Comments

FinTech is about two things: reducing costs and providing an delightful experience to the customer. This is what all the innovation and improvements in FinTech revolves around. Now we live in a world very if you can think it, we can probably create it and that is what investing now means.

The opportunity that Cogo Labs affords us is the ability through big data to predict with a tremendous amount of accuracy which is the next IP address in North America that has the potential to go viral.  What are the big ideas that consumers are thinking about? And then we train our machines to go through that data and say, Vestigo, these are the companies you should look at, these are financial services or FinTech companies to consider and do it very early in the day.  If you know what the early adopters are doing on one side, and then you can see what everyone else is doing, you can run some really cool math to understand and predict the next thing.

When Vestigo invests in a company and becomes part of the board the company gets the benefit of the collective expertise of all partners at Vestigo regardless of who actually is on the board. All partners at Vestigo have been operators, serial entrepreneurs and that is really an excellent value-add for the company.

Boards at this early stage are very intimate and although there are various committees and other governance practices and there are a lot of hats to wear and as a board member one is thinking across the business model. The role as a fiduciary does not change but there is a lot more of a bigger white board to work with.

The CEO or the founders of these companies, these are passionate people who are going to run their companies. and, and the best know how to, how to use their board for counsel and advice, and, and potentially, networking.  So, whether as an investor a board member or a board observer, we’re here for the people we’ve invested in and that’s kind of a 24/7, whenever they need us, we’re there for them.

Transcript

[00:00:00] Joe: [00:00:00] Hello, and welcome to On Boards: a Deep Look at Driving Business Success. Hi, I’m Joe Ayoub and I’m here with my co-host Raza Shaikh.

Raza, how are you doing today?

Raza: [00:00:11] I’m doing well, Joe. Good to see you, virtually that is.

Joe: [00:00:15] Good to be with you virtually. I’m looking forward to seeing you in person someday.

First to our listeners. For those of you listening during the time that COVID-19 is casting a shadow over much of what we do in the United States, we hope you’re all taking precautions and staying safe.

On Boards Podcast is about boards of directors and advisors and all aspects of board governance. Twice a month this is the place to learn about one of the most critically important aspects of any company or organization – it’s board of directors or advisors.

Raza: [00:00:51] Joe and I speak with guests about a wide range of topics about boards, what makes them successful or unsuccessful and how to [00:01:00] make your board one of the most valuable assets of your company.

Joe: [00:01:05] Today’s episode is focused on the boards, governance and operation of venture backed companies, the earliest stage of governance in the private industry world, with a close look at a FinTech venture fund, headquartered in Cambridge, Massachusetts.

Our guest today is the co-founder and managing director of Vestigo Ventures, an early stage venture capital firm that invests in technology companies focused on financial services. He previously served as CEO and Chairman of National Trust Company and as Chief Marketing Officer and Chief Strategist for two Fortune 100 companies, and is widely considered a thought leader and catalyst for innovation in the retirement and wealth management industry.

Raza: [00:01:55] He currently serves on the boards of four privately held companies and several [00:02:00] advisory boards. He focuses on finding innovation and disruptive technologies where consumer behavior, technology and asset management intersect.

Joe: [00:02:11] We’re very excited to have Ian Sheridan is our guest today. Welcome Ian, thanks so much for being with us today as a guest on Onboards.

Ian: [00:02:20] Joe, Raza, it’s a pleasure to be with you both today and I thank you for that wonderful introduction.

Joe: [00:02:26] So Ian, before we discuss your fund, and the companies in which you’ve invested and their boards, I have to ask you about an item I saw in your bio which kind of caught my eye, that you invented the retirement industry’s first mobile enrollment technology.

I knew you were a man of many talents, but I did not know this. So just tell us a little bit about it.

Ian: [00:02:49] Well, thank you for asking. This was at a time before the Apple iPhone and the App Store existed. It was at a time where, financial services was beginning to [00:03:00] understand the impacts of behavioral science.

There was the theory and then there was a disconnect between the technologies and the execution of that.  Being a curious person looking at the business problem back in the day, which was how do you engage employees and bring them into a 401k plan, it was done by expensive booklets and enrollment meetings.

People would fly all over the country with pounds of boxes that were sent in advance and deliver this message. Employees would go home with a booklet to speak to their spouse and about 1% or less would actually enroll in the plan during those meetings. It became this terrible cycle of following up and trying to engage people.

Simply taking concepts from behavioral science at the time, the best available technology and since you asked, this is a dinosaur, this is the pocket PC platform at the time Mass Mutual has since evolved that product  that is now an application, a simple application but even then we went to the, iOS [00:04:00] system when it became available.

But back in the day, the idea was that you, instead of doing a standup presentation with a PowerPoint and booklets in front of employees, simply to go through that presentation integrated and linked across the classroom through these devices, and as human decisions were being made real time, aggregate those decisions, use that information, not only to empower the instructor, but the people in the room.

Instead of using traditional paper enrollment books, we used. customer pathways that were designed to encourage smart decisions.  As you make good decisions, we used the concept of people like me and we presented that information of  X percent in the room just made a really good decision to enroll or save at this amount and present facts along the way of what was working and what wasn’t.

It actually changed the, the enrollment process dramatically at the time before we had pre-enrollment, automatic enrollment and 401k. We went from less than 1% signup in booklets to a 98% and change, [00:05:00] success rate in the classroom by simply integrating technology. But that was at a time when we were just beginning to understand that each of us was ultimately going to use this brick.

That’s I shouldn’t say that, but, but this wonderful device, which is a good segue into why venture today.  Is that in financial services two biggest issues that we face is that we have a cost issue always. We’re always trying to reduce the cost of services. And then the other side is how do we delight customers and improve the outcome?

And that has been the forever challenge that I’ve had as an operator for 35 years in financial services. The invention of the, what we called the E4 at the time, was just an example of using technology, using behavioral economics and bringing that together to improve an outcome.

Today we’re in a much different place. Technology is fluid. We live at a time now, if you think it, we can create it. In my early career, we could think about a lot of stuff, but some of [00:06:00] my earlier challenges, 30 years ago, it wasn’t going to get my new fund listed in the Wall Street Journal so that people can see it. Today it’s I can, I can develop an app, I can put it in your hand. I can delight you as a customer and I can improve your outcome in amazing ways.

Joe: [00:06:15] So in your primary role now, as the Managing Director of Vestigo you must be in a great place because everything you’ve been doing, what you just described, leading you to where you are now, you must be just feeling great about being in this space right now.

Ian: [00:06:34] It’s absolutely wonderful. My founders and I all have a common DNA, we’ve been operators. Some have been serial entrepreneurs, very successful, but we have this common DNA of curiosity and to embrace technology and the mission of improving the outcome as it relates to our financial systems and personal wealth.

Joe: [00:06:53] Before we go any further, let folks know what’s the core focus of the fund.

Ian: [00:06:59] Vestigo [00:07:00] Ventures is a North American, venture capital firm focused on financial services or FinTech. We focus specifically on the early stage ecosystem across North America looking for entrepreneurs, who are re-thinking the way financial services is being delivered.

The most important thing behind the name of Vestigo is, is its Latin origin and definition, which is to seek the truth and as founders, we really thought that was important is to be curious to search, explore and find the truth.

Raza: [00:07:29] Ian, one factor that makes Vestigo different from other funds I learned is its relationship with Cogo Labs. I found fascinating. What is Cogo Labs and what does it do for Vestigo?

Ian: [00:07:41] Yeah, so that’s at its core starts at this relationship of its partners, but, we like to call Dave Blunden who owns Cogo Labs the “cool one” cause not only Cogo Labs but he is also on the X-Prize committee.

David had a vision years ago as an entrepreneur that data essentially was the new oil is the most important thing that was going to happen and building [00:08:00] businesses that could effectively make the changes that people needed. Cogo was founded on the belief that by bringing in consumer data, they could run an ad tech business, very successful, and grow that data asset. As an example, when we started Vestigo Cogo had six petabytes of data, about six years ago, which is incredible today it’s over 15 and growing.

Joe: [00:08:24] Talk about what 15 petabytes of data means so it doesn’t get lost in this conversation?

Ian: [00:08:31] What is 15 petabytes of data? I’ve heard so many different examples. Alice Fraser, who’s our data scientists has, has compared it to, I don’t. I forget how many different novels of War and Peace. From here to the moon, but it’s really multiple times the size of the library of Congress. Dave understood big data was going to matter in the creation formation and delivery of services in a meaningful way.

If you’re going to design and delight systems for consumers, that ultimately data is the [00:09:00] pathway. And so Cogo has enjoyed, for a number of years, the ability to use this data, create a very meaningful business in its advertising and an incubator that has successfully created commercial internet companies.

The last IPO that came out of Cogo, as an example, is EverQuote on the NASDAQ and that was developed before Vestigo’s time period. But my two General Partners, Mark Cassidy who’s really well known in financial services as a successful business leader, President, Chairman of LPL and David go back 25 plus years and working together on the human capital side of business. It was really Mark’s vision that Vestigo be formed in Boston as an early stage venture capital firm.

To come back to the Cogo opportunity is they have the ability through that big data to predict with tremendous amount of accuracy, which is the next IP address in North America that [00:10:00] has the potential to go viral. What are the big ideas that consumers are thinking about. And they’ve been successful with that and through the relationship we ultimately came in with the idea of, could we build a FinTech analytic stack on top of all that information and create a unique, distinct advantage not only to identify early stage FinTech companies, but to underwrite them in a very unique way.

Every VC has a quant and qualitative approach in which they get to know entrepreneurs, the business and the opportunity in the marketplace. We certainly bring that to the table, but with this extra capability that allows us to look not only at the data, that specific company, but how it interacts and relates within the marketplace. We use data to source underwrite and empower our portfolio company

Raza: [00:10:49] it that, that data informs deal flow or validates deal flow that comes in, which one have you found it to be more important and useful [00:11:00] for?

Ian: [00:11:00] Really both for us, that’s a great question.

When we first started, we built our first algorithms on top of tech stack and analytic digital stack that Cogo had created with high performance and high accuracy. We had to train our machine learning language algorithms. We call XPLR. It’s really five mathematical models that we’ve trained against that data, so that the machines learn what is FinTech and what’s non FinTech and specifically to the Vestigo thesis how does that fit in?

It has evolved and as you think about artificial intelligence and machine learning language, I can tell you firsthand living with it these last four years, it is incredible how fast these machines are. They’re in some ways I think of them as indie cars . We run them on the track of data. We take them off track. We adjust the humans, come in and my team will look very closely at that output to make decisions of, is this a company we should reach out to? Is it truly FinTech? Does it fit into our [00:12:00] thesis? To give you an example of the evolution the data at Cogo, I mentioned 6 petabytes to 15 petabytes of consumer, essentially clickstream data, you would think our algos would only pick up consumer FinTech companies, but what has happened is as the humans, the Vestigo team interacts with that output, we retrain that algo every time to go back and say “This is FinTech”. What was early consumer FinTech? High, high, signal rate on that.

We’re now picking up the broad spectrum that reflects our operations backgrounds.

Raza: [00:12:35] That’s an incredible story. It’s a data flywheel that gets better over time and provides you with such a edge and a competitive advantage for identifying and underwriting companies

Joe: [00:12:47] Let me ask a follow up on that because I’ve seen the power of this database demonstrated and there were a couple of things that really struck me.

One was the number of [00:13:00] consumers for whom you have very detailed information and I forget what the number is, and I forget how much information, but just, can you tell us a little about that? Because it blew me away to see the demonstration. And it’s one of the only things about a podcast is it’s hard to see that since we’re only listening, but maybe you could just expand a little bit on that.

Ian: [00:13:22] Okay. That’s  great.

How do you take 15 petabytes of data and turn it into something that’s useful is a really good question to think about. What Cogo has created is, through a permission based approach, has reached out to early adopters across North America, we call this a competitive database and essentially through permission-based approaches, they’ve invited 2 million plus people into two big panels.

One is an email panel that allows us to observe the commercial email sends and reactions that people have with those emails, not personally email, but think of  the, advertising email that comes into your [00:14:00] inbox. These folks have said, Hey, through the offer of Cogo, we’re willing to give you a line of sight on how we interact that, that and Cogo maintains its data scientists maintain that panel to be the true early adopters across North America.

They also do the same approach with web browsing. That’s 2 million people across North America who said, with permission, you can see how I travel through the internet and you can see how I interact with commercial email. That becomes really interesting, but let’s put that off to the side. Through ad tech, Cogo places it’s pixels on 15 to 20 million websites on any given period of time.

As all of us travel the internet, we pick up these pixels.  It used to be cookies and you can block cookies and you can block pixels too, but there takes a little more effort. These pixels ultimately build the profile of who we are, the heuristics, et cetera, that allow companies like Google and others to present to you the next thing you’re [00:15:00] really interested in. We all benefit from that experience. Following privacy regulations, GDPR, California compliance, et cetera, they’re able to build the next profile of everyone else to the tune of over 860 million digital profiles.

Now there aren’t that many people right between us and Canada, but what that is, is a reflection of: well, as I sit here in my office I have the PC, I’m talking to a laptop and another screen that’s connected to the internet, my watch, and another device. I’m kicking off a lot of signal as I talk to you.

As I use those devices, how do you figure out this is Ian at Vestigo? Or is this Ian at Gmail or is this Ian at outlook? Or is this Ian on his Mac or PC or his device? Cogo has figured a way to do that and to take that 860 and bring it down to really who are the working North Americans engaged in the internet. Now you have this, Joe , to the heart of the question: What’s really interesting with this data?

Well, if you know what the early adopters are doing on one side, [00:16:00] and then you can see what everyone else is doing, you can run some really cool math to understand and predict the next thing. As an example, Cogo looked at a white paper from Harvard on Harvard epidemiology and the study of flu and looked at how flu spreads across essentially the extroverted students and the introverted students.

Let’s call the extroverts our early adopters and the introverted students, everyone else. With a high degree of accuracy you can predict how flu will spread across those notes. Cogo with its own special sauce on top of that white paper was able to run its own math and predict the propensity of an IP address going viral.

They’ve been very successful, that helps them in their ad business has helped to think about what are the new ideas that people in North America are considering. What’s the next commercial internet company that Cogo could launch? We came in, saw that and said, okay, that’s great. But just seeing viral websites across North [00:17:00] America, doesn’t really allow you to pick. “Well, is that FinTech?” I mean, think of the names of companies, without mentioning specific names, you wouldn’t know, just on the surface, is that FinTech or is it consumer something ?

Raza: [00:17:11] Lemonade?

Ian: [00:17:12] Yeah, exactly lemonade or floor polish?

That’s where our team came in at Vestigo and developed very unique algorithms, five basic, machine learning models. That are trained to look at the best of the outputs. We’re already looking at the best companies in North America that are showing the signal to go viral. And then we train our machines to go through that data and say, Vestigo these are the companies you should look at that are financial services or FinTech companies and early in the day, very commercial orientated type signals today it’s across our thesis. Because the operators work with the machines and train them.

Raza: [00:17:52] And so would that approach, how many companies did the first fund ended up investing in? [00:18:00]

Ian: [00:18:00] We are currently at 19 investments, we are on a target of 20. When we first set this meeting up last week, we were in the process of making investment number 19.  The wheels of innovation and entrepreneurs do not stop because of a pandemic and , we’re seeing just amazing people continue to innovate.

That is probably the best part of this job is I get to work with data. I understand what true North is and I get to work with some of the smartest people who are thinking through really big problems using technology.

Joe: [00:18:32] So does Vestigo take a seat on the boards of the companies in which it invests?

Ian: [00:18:38] We think it’s really important to come in as an investor with capital is  one thing and there’s plenty of capital out there, but we like to invest with entrepreneurs who see the strategic value of our operations experience and our data. And for that, we ask for general information rights, it’s a line of sight into how the company is doing. We ask for a board seat. [00:19:00] And sometimes in the early stage of where we are investing, it’s a board observer seat because of where the company is and its life cycle.

Joe: [00:19:09] Right.  The boards for these companies in which you’ve invested, just give us an idea of who sits on them, how many board members and to what extent are they different from typical VC-backed company boards?

Ian: [00:19:24] Certainly very intimate and I don’t miss the board books that I had to read prior. It’s usually a more concise set of information as you move into these meetings, but the configuration is usually the founders who start and as they bring in either advisors who have invested with them, maybe in the early stages, angels, and or venture capital firms like Vestigo, we’ll have a seat at that table. We’ll have a seat, at that board. they’re small they’re, intimate business conversations dealing with every aspect of business.

While boards have committees and we have compensation committees, even at [00:20:00] that early stage, generally, you’re wearing a lot of hats. and as a board member, you’re thinking across the business model with an entrepreneur And your role there as a fiduciary doesn’t change because of the size of the company in fact, it’s just, you have a bigger whiteboard in which you’re working with

Raza: [00:20:19] Ian, just as you mentioned, I think that’s also my impression that at that early stage, the board is a lot about problem-solving or hands on about the business and much less procedural.  Has that been your experience as well?

Ian: [00:20:33] It is, but it is also about preparing them for those procedures down the road. As operators and corporate executives we like belts and suspenders. We’d like to have compliance and regulatory things thought out, but companies have to evolve to that process.

Even in the early stage of thinking about data security and compliance and beginning to build towards that, and as operators we have this unique advantage having worked with [00:21:00] regulators, our entire career, in some cases, very intimately, we try to convey to the early entrepreneur through that board seat, your regulators are your partners and your friends. These are people that you can engage with early on, learn from and build your business to be sustainable, in the markets that you’re going to serve. Because one day you’re going to be a really big company or you’re going to be partnered with really big companies and they’re going to expect that that compliance is in good order.

Joe: [00:21:27] On the boards do you, at the early stage, usually include a so-called independent that is a non-investor in that group. Or does that come later?

Ian: [00:21:38] It comes later, Joe, generally, I haven’t seen it yet that there’s an independent. There may be an early stage angel investor, advisor, but not independent.

Raza: [00:21:48] Along the same lines as you invest in these companies that are pretty early, do you also experience or expect that as the company raises more funds, grows that the [00:22:00] board actually changes as well?

Ian: [00:22:02] Absolutely. These are dynamic companies. They’re very fluid. They’re going to pivot whatever the starting idea is, we know as investors and even the entrepreneur understands that they’re going to evolve to the marketplace. Multiple pivots will occur and different expertise is going to be needed along that journey. Boards have to be dynamic and investors change. We’re an early stage. What we’d call a seed, A round investor. Other investors will come in later stage and may take a board seat and we may step down though we’ll keep our information rights going. Whatever is to the best advantage to that set of founders, the entrepreneur and their team to have the best expertise around them to help them build the market share, that allows them to win.

Raza: [00:22:48] What have you seen in terms of the direction of the dynamics of board? Is the board driving the company or is the company hopefully taking [00:23:00] the best use and best advantage of their board. Where is the pull or have you seen it more as a push?

Ian: [00:23:07] The best entrepreneurs are driving the company and their teams without question and the board is there in this early stage to be a coach to help them navigate, maybe it could be networking within the industry, whether that’s  growing the business on the distribution side or working with, the regulatory compliance side of things. And so the board there is really to act in that fiduciary manner to introduce the company to all the right things, that and experiences that ican to help them grow. The CEO or the founders of these companies, these are passionate people who are going to run their companies and the best know how to, how to use their board for counsel and advice, and, and potentially, networking.

Joe: [00:23:51] So in addition to the board, just to get folks to a bigger picture, you have a small fiduciary board, but you also, as I understand it, [00:24:00] have a larger board of advisors that serve a slightly different function. Let us know a little bit about that.

Ian: [00:24:06] You could very much have that type of model where the founders have brought in advisors around them, who are named, in the company, and may receive some type of advisory shares, in the cap table, they may have invested, they may not have, they may simply be given, you know, part of the, the options based on time service and how they help and then as the company matures and brings in investors like a venture capital firm, you’re gonna expect board seats.

Now I will say, as I’ve talked to entrepreneurs, Venture Capital is sometimes looked at as a double edged sword on the board. There are those venture firms that are there just to simply focus “how do I get the most out of my investment?” which basically as an investor, we’re all interested in that, but then there are, I think firms like Vestigo that are a little bit different. Certainly we are seeking the best return for our limited partners and investors in the fund. But we’re also there to help these [00:25:00] entrepreneurs because we’ve been there.

Each of us have 30, 40 years of experience of, of trial and error in small, medium and large companies. And so we come at it with a spirit of. we’re going to ask the tough questions, we’re going to create some challenging conversations, but it’s always in the spirit of how do we help you as an entrepreneur win your fair share in the market.

There can be the dynamics in these boards as they start to mature, and you have maybe two venture capital firms or three, and the dynamic of those firms, everybody’s interested in the success of the company, but how they push or pull may vary, based on their own kind of, backgrounds and the way they’ve created their fonts.

I think Vestigo as I think about our portfolio and the entrepreneurs that we’ve been engaged with now for several years, and those that go through the process with us most recently, it’s a dance that we both go through a due diligence process where we’re building a relationship with that [00:26:00] entrepreneur. They’re getting to know us. We’re getting to know them. you know, the quality of the way we think about asking questions, the quality of information we’re able to provide to them is ultimately what set you apart when you’re competing for to be part of these great companies. The best are not easy to walk into and they don’t just take money. You gotta earn your right to be at that table.

Joe: [00:26:25] Sure., now I think one of the things I’m getting are at least in prior conversations, I understood that your relationship with the founder slash CEO extends well beyond board meetings. I mean, often there are calls, there is interaction on a regular basis. And in addition, a number of your CEOs have non-board coaches, is that right?

Ian: [00:26:51] Yeah, so two, different things. So one as an investor and as a board member or a board observer, we’re here for the people we’ve invested in [00:27:00] and that’s kind of a 24/7, opportunity. so there are conversations on the weekend.

These folks are challenged all the time with the external forces of the world. Throw in a pandemic, we’ve had some really engaging conversations, both individually with our founders that we’ve invested in, but collectively as a group to bring people together so best practices can be shared even across the portfolio.

So, yeah, this is, you know, when I was a corporate person, I had the opportunity to have disciplined departments in each area. So whether it was a Sarbanes Oxley issue or an SEC issue or a FINRA issue, there were armies of people to address that.

When you’re the CEO, it can be a very lonely position and so to be able to have people you can call it seven, eight, nine o’clock at night. I tried not to do it too late, but I’ll take a call from entrepreneur that I’ve invested in many time. And so to be able to engage in that, and it’s not just the Vestigo it’s partnership. So, while one person sits on the [00:28:00] board any information that comes into us as shared as a team and we’ve collectively bring our best experiences, whether it’s through the entrepreneurial lens or through the corporate lens or through the analytic lens, we want to bring that back. So that person gets the best of our firm every time.

Raza: [00:28:16] That’s a great value, Ian, to be able to get  a three for one deal and bring it to the whole experience.

Ian: [00:28:23] And it’s fun, right? I mean, we have fun as a team. We are a diverse group in our thinking in our experiences, and there’s always a set of contentions as it relates to how we think about the world, but you bring that together, you mash it together and then you deliver it, to the companies that you’ve invested in and then we think we’re giving them something very special

Joe: [00:28:43] Ian talk about why it is sometimes beneficial for the CEOs to have their own coaches separate and distinct from the board. Cause I think that’s a good thing for folks to think about.

Ian: [00:28:54] Yeah, so this is personal for me. I’ve had coaches my entire life, whether it was in sports [00:29:00] or in business, 25 years ago, it was Tony Robbins. I think I walked on coals, along the way, you know, just amazing executive coaches who have been, you know, you need a sound, you need a sounding board, all of us do, right. so coaching is really important. And in many cases, entrepreneurs aren’t aware that that avenue exists.

Right? So having gone through corporate training, I’ve gone through training with the blue angels group, Navy seals. You can bring that kind of where they bring their military experience into the business environment and you would share that with people and then you expose them to executive coaching.

it’s great, many are in YPO, many of them are in speakers groups, but when you realize you can get to that level where you can get an individual coach, it becomes very powerful. And we do have entrepreneurs who are doing that today.

Raza: [00:29:51] And I think sometimes it helps that, the conversation that you may not be able to have with your board member, because they have fiduciary responsibilities [00:30:00] and you need a separate non board coach that, you could probably share everything.

Ian: [00:30:05] Absolutely, we all benefit from the outside perspective, right. Sometimes we can get so caught up in the myopic of the issue and we miss the, you know, the opportunities around us. So, I think we bring that as a firm, but, anytime you can add that to the formula, it’s, it’s a good thing.

Joe: [00:30:25] So you referred to the pandemic. It’s hard not to talk about that these days. How has that impacted your companies? Are they thriving? Are they hanging in or are they sometimes challenged? What does the mix look like in the, I know it’s really early, but 19 companies. How are they doing in this particularly challenging time?

Ian: [00:30:46] Yeah. So this has been a massive dislocation right across the planet and so we’re 10, almost 11 weeks, working distributed, as a team. And so you start with, you know, the, [00:31:00] your families, right. And the mindset of the people, the, the entrepreneurs that we invest in. Now we engage with and really understanding – are they okay?

And what I’ve learned through this really 10 week cycle is you need to meet people where they are, and people are in all different stages. And so it’s really important to try to, to get to that relationship level, to really understand how they’re thinking. but you get through the family. Heart health and then the network and then the business.

And so we’ve watched people move through that cycle. and as a firm, this is not our first, crisis. Each of us have got through from, you know, I was on the floor of the stock exchange in 1987 as a kid working my way through college and saw that was running a bank through the last financial crisis, actually acquired it before the crisis.

And then. my boss said, guess what? You’re now the chairman and CEO of a bank trust company, that little $5 billion company that overnight lost half its assets. so that’s when teams come together. we successfully [00:32:00] navigated that, but so not our first crisis for any one of us on the Vestigo team.

And in many cases, the entrepreneurs we’re investing in some are seasoned and have been through what we’ve been through. So again, they, they, they work through this and a pandemic is new for all of us. And so how you think through that, is real time learning and sharing of information. And for others they’re really new at this.

This is their first company they’re building. And so they’ve had all kinds of little crises. We wouldn’t think about that. They’re navigating like how to make payroll this week, you know, or, or how to, how to acquire the next big client. Hopefully when we invest them, they’re not worried about Pharaoh. but you know what I mean, they’re dealing with, with crisis is on a whole different level.

And so through this cycle, what we’ve learned is communication is, is really important. Doing what we’re doing today on a daily basis matters. and we’ve engaged with our, CEOs and founders intimately this way, individually, but also brought them together collectively to talk through what the big issues are and let [00:33:00] them share experiences across, their lens.

Joe: [00:33:04] So it’s great that they have experienced folks who have been through crises before, but I’m curious how this crisis has been different. What has it brought to the table for these companies that maybe you haven’t quite seen before?

Ian: [00:33:20] Well, I think the first piece is working from our home.

Right. So how do you stay connected? How do you keep that relationship? at the right level and, and making sure you’re getting really understanding where is that person today and what are they facing and how can I move through that issue? and then there’s also all of these models, right? It’s, it’s growing the business, acquiring customers, interacting and networking with other firms that, and that become clients.

And so where are all of those opportunities within their cycle, of, of the changes that are occurring and helping them navigate that? so it’s, it’s really different in that regard. I mean, after nine 11, none of us were [00:34:00] flying, but we had plans in place. I mean, I was fortunate. I was part of ADP at the time and, and one of the best disaster recovery programs I’ve ever been involved in, we were able to like clockwork.

Make things run. When I talked to our institutional investors, they are well prepared for this. And they’ve learned, I mean, you’re probably seeing this as well, you know, there’s a 30, 40% of the workforce. It’s been proven can work from home and be productive. in the startup world, the advantage was they were already distributed in many cases, right.

So they were, they’re using the best technology. They’ve been communicating through online, through the process, but the sales process changes now. Right. So how do you talk to, a bulge bank of wall street firm? When you’re a small company, they don’t know you. And so that is where we’ve been able to lean in with our network and with our data to begin to create new insights on what’s working and what’s [00:35:00] not working and empower those, those entrepreneurs, with that information and with that network.

And so, if anything, I would say as challenging as these times are. And the real pain that’s happening across the planet and our country, I do see an unbelievable spirit of innovation and drive from these entrepreneurs that hasn’t been shaken through this process.

Joe: [00:35:26] That is fantastic. That is really great to hear. I’m sure folks are going to love hearing that. I do want to just ask one follow up, which is so what kind of impediment has it been that you can’t actually get face to face with folks? Cause there are some things you can do, you know, on these, on these virtual platforms that works fine.

At least that’s what I found, but there gotta be some things where people think, you know, I’m not making the connection that I normally would. This isn’t what I’m used to. And I’m curious how [00:36:00] that may have impacted. Some of the things you’re doing, particular sales are trying to bring in new folks.

Ian: [00:36:06] Yeah, so we made an investment last week. we have a pipeline of companies where we’ve gotten to know them through the cycle. We’ve been working on a new investment right now where we did not meet this team in person. we are getting to know them through this avenue. We are getting to know them through our analytics.

We are through our data. We’re getting to know them through our, qualitative approaches, talking to the marketplace and leaders in the space within a particular area. and while I don’t want to get ahead of my skis, we’re about to make a recommendation as early as next week to invest in a company that has come through this whole cycle.

And so how do you do it? You know, Joe, Raza, you know, this, you are masters of personal relationships. And so you have to figure out a way to make that work through the screen now and through the technology. And I’ve always called it crucial conversations. If you can’t get to the crucial [00:37:00] conversation through the process then maybe you shouldn’t do business. If you can’t get that line of sight of understanding how someone is really good to react to situations. And I would tell you on this particular investment and, and the conversations we’ve had with entrepreneurs, you really get to see the grit that we all talk about in venture investing.

You’re looking for entrepreneurs that have the grit to make it through the ups and downs of building a company. Well, if this pandemic doesn’t make a great shine, then I don’t know what else could. And so I’m seeing that coming through the screen.

Raza: [00:37:39] Ian, one thing I want to go back to the role of boards, with these companies is to get your perspective of, within your portfolio. As companies vary, what various and in the board role, have you seen with one company versus the other, just to get a flavor or is there a flavor?

[00:38:00] Ian: [00:37:59] Just think of it as the, the maturing of a business, the evolution of a business and so you get to wear all the hats. I mean it’s across the disciplines of sales, marketing, operations, regulatory, compliance, treasury, all of those elements are, and they’re all at different cycles of it. Right? And so some companies don’t even know they have to do these, these, you know, a SOC1 or a SOC2 compliance and get ready for that.

And so there’s a whole spectrum of where they are and. Again, you meet, you meet these companies where they are and you bring the experience that helps get them to the next level. and it’s really important that we modulate where they are with their, and their needs, with what we can bring to the table.

Right. We don’t want to distract entrepreneurs from the vision we’re so excited about investing. If you want to help them on that journey and not burden them with, with stuff that you know, can wait.

Joe: [00:38:58] Yup. Makes [00:39:00] sense. It’s a great perspective, Ian.

I wanted to just say, it’s been great speaking with you.

Thanks for joining us today. I hope you and your family will continue to be well and stay safe.

And for all listeners, thank you all for listening today to On Boards with our special guest Ian Sheridan. Please stay safe. Take care of yourself, your families, and your communities as best you can.

Raza, you too – please take care. I hope you and your family continue to be well and stay safe.

Raza: [00:39:32] We’re all staying safe. Thank you.

Ian: [00:39:34] Thanks. Well said, thanks.

Joe: [00:39:37] Take care, guys.

9. Larry Stybel on the importance of an informed and effective board

Larry Stybel talks what a board need to do to really do its job properly and the critical role of the Nomination/Governance Committee in that process.  Do we have the right talent on this board?  Are the board members sufficiently educated to handle their fiduciary responsibilities? And does the board understand that it has primary responsibility for defining the corporate culture?

Check out Larry Stybel’s article about Who’s the Board’s Chief Learning Officer which touches upon several issues we discuss in this episode.

Thanks for listening!

We love our listeners!  Drop us a line or give us guest suggestions here.

Links

https://www.boardoptions.com/

https://www.stybelpeabody.com/

https://www.issgovernance.com/

Larry Stybel Bio

Larry Stybel is Vice President of Boardoptions.com.  Nominating & Governance Committees of Boards of Directors retain Boardoptions.com for a talented board and an educated board.  Core services include Board Self Evaluation, Board Retained Search, and Board Education.

He also is co-founder of Stybel Peabody Associates, Inc.  Founded in 1979, its mission is Leadership and Career Success for senior executives: retained search, leadership coaching, and executive outplacement.

Larry is Executive in Residence at Lexington Growth Funds.

He is listed in Marquis WHO’S WHO IN BUSINESS AND FINANCE and Marquis WHO’S WHO IN AMERICA.  In 2019, Marquis Publishing presented Larry with the “Marquis Lifetime Achievement Award” for Larry’s “enduring contributions to leadership.”

He has been on the Board of a venture backed tech company in the HRTech space and a member of the Board of Directors of the New England Chapter of the National Association of Corporate Directors.

Larry received his doctorate in psychology from Harvard University and is a licensed psychologist in the Commonwealth of Massachusetts.  Each month PSYCHOLOGY TODAY publishes Stybel Peabody’s perspectives on leadership.  To date there have been over 350,000 downloads.

Quotes

“If you really don’t understand the industry that you’re in, who is your chief learning officer for the board of directors, and in many cases, by default, the chief learning officer of the board of directors is the CEO  and if the board also has the responsibility of evaluating the CEO’s performance, is there something wrong with this picture?

Board evaluation is that time when the board shines a spotlight on itself and says, “what are we doing positive and negative to advance shareholder value?”

“Every company that I have ever worked with says we are innovative, and the question is: who’s the role model for innovation? If it’s not the board, then where?”

“I think the board has primary responsibility for defining the corporate culture, and then the CEO has the responsibility for executing the corporate culture.”

“The board is usually putting the spotlight on the CEO and senior management. So, in that way, I can understand why putting the spotlight on themselves is not something they actually want to do.

Right it goes like this: “I think performance evaluation is great for you, Joe, but not for me.”

“There is a song by Leonard Cohen, and I think you know it, Raza, “Everybody Knows.”  And that song applies to boards. Everybody knows who’s making a major contribution and everybody knows who isn’t. They just don’t want to talk about it.”

“There’s a kind of cliché that I that I see among young, inexperienced founders it’s called “the problem solved problem.” And that is: we had a problem, you know, 70% of our revenue is coming from one company and that one company is threatening to go to a competitor.

I flew to California and I talked with the CEO and I got him not only to stay with us, but to increase our business. And I go back to my friends and family board and I say, we had a problem, its solved – and they say, great, what’s for dinner?”

“I think podcasts like these are, are an excellent way for board people to learn while they’re driving or learning while they’re exercising.” (Thanks Larry!)

Ideas/Comments

If a board wants to keep what is often a superficial sense of collegiality, they don’t want to do board of directors self-evaluation because you’re going to get to issues that one or more board members are going to be uncomfortable with.

When board self-evaluation is defined as an event, it usually is a onetime event.

If a board is really serious, they’re going to do board of directors self-evaluation.

People think of diversity in many ways. Gender diversity is one of them, racial and ethics diversity are others but the way, somebody does problem solving is another important dimension to add to the matrix of what you need on a board to make it truly diverse.

I have encouraged CEOs to do on boards is to send something to the board even once a month or a one pager. It could be a snapshot of financials. It could be three or four sentences about what’s going a brief, but helpful, update so that when you’re walking into the board room, or even when you’re getting the materials for the next board meeting, you have been updated all along. No surprises. The board should not be surprised. You should not walk into the board room and find out something’s been going on,

What happened with Equifax (theft of the credit records of 143 million people) should be part of every board education course., First, they did not immediately inform people that their data had been stolen. They delayed it for six weeks, which gave the hackers a chance to really use the information they had stolen.  And the second thing, maybe even more egregious, members of the senior management team actually sold shares of stock during the time before the public knew that the breach had occurred so they would not take a hit on their stock shares. And this gets back to corporate culture. So, what was going on at Equifax that made senior executives think that what they did was okay to do?

 

Transcript

Joe: [00:00:00] Hello and welcome to On Boards – a Deep Look at Driving Business Success. Hi, I’m Joe Ayoub and I’m here with my co-host Raza Shaikh. Hey Raza.

Raza: [00:00:12] Hi, Joe happy to be here with you co-hosting.

Joe: [00:00:15] Good to be with you too.

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: [00:00:33] Joe and I speak with a wide range of guests and we talk about what makes a great board 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.

Larry: [00:00:47] Our guest today is a longtime leader in career coaching for senior executives, in leadership coaching and retained searches for boards of directors, CEOs and other members of senior [00:01:00] management and has been deeply involved in board education.

Raza: [00:01:03] He is the founder of boardoptions.com and co-founder of Stybel Peabody Associates. His articles are published regularly in Psychology Today and have been downloaded by hundreds of thousands of readers.

Joe: [00:01:20] We’re very excited to have Larry Stybel as our guest today. Welcome, Larry.

Larry: [00:01:25] Great to be here.

Joe: [00:01:26] Good to have you here with us on On Boards.

Larry, you do a broad range of work with boards and board members, one of which is working directly with nomination governance committees to help them do their job better.

Why in your view, are nom/gov committees so vitally important to the board and to the company which they serve?

Larry: [00:01:47] Well, if you’re looking at for profit companies, typically there are three core committees: nominating/governance, compensation and audit, and all of the committees are very [00:02:00] important.

What makes nominating governance unique is that it’s really looking at two issues that are critical for corporate governance. Issue number one is do we have the right talent on this board? And the second issue is: are the board members educated to handle their fiduciary responsibilities?

Joe: [00:02:21] So in your view nom/gov should serve at least two purposes, which is evaluating the board andalso making sure the board is educated as to what their duties are?

Larry: [00:02:33] Yeah. I assume that the readers here are interested in both for profit and nonprofit boards. Is that right?

Joe: [00:02:40] I think our listeners are interested in a wide variety of things. Yeah, I think that’s right.

Larry: [00:02:45] So, when we’re looking at a lot of boards, but particularly in the nonprofit area, people are on boards of directors of industries that they have no idea about what’s going on.

 The [00:03:00] biggest example I can think of is hospitals. You know, many of the people that are our hospitals are business leaders who really don’t really understand that much about healthcare. And so, if you really don’t understand the industry that you’re in, who is your chief learning officer for the board of directors, and in many cases, by default, the chief learning officer of the board of directors is the CEO and if the board also has the responsibility of evaluating the CEO’s performance, is there something wrong with this picture?

Joe: [00:03:32] Right. What about for profit though? Should norm/gov committees still be making sure that their board members are educated about their industry, their sector, their business generally,

Larry: [00:03:43] Typically a board of a for profit company might meet four times a year. If, that, and so they’re always behind the curve in terms of understanding what’s going on in a rapidly changing industry. Who has the responsibility of making sure that the board [00:04:00] members are up to date with information? That’s the nominating governance committee.

Joe: [00:04:04] So in your view, really, in addition to maybe educational segments during a board meeting, things should be done between board meetings to keep board members updated.

Larry: [00:04:14] Sure, absolutely.

Yeah. so one of the things, that nom/gov does is board evaluation. It’s critically important that, a board remains strong and well-matched for the business of the company that they’re supposed to serve.

Why is this so important?

There is an old Turkish saying, when a fish Ross had rots from the head. Right. And many of the thought that was a…

Joe: [00:04:42] I thought there was a Lebanese saying, actually,

Larry: [00:04:45] I think you’re, I think you’re right. Turkish. Lebanese. It’s in middle East. Okay. Every company that I have ever worked with says we are innovative, and the question is: who’s the role model [00:05:00] for innovation? If it’s not the board, then where? I mean, one of the fascinating things I’ve found in my career is I look at the dynamics of the board. And then I start talking to people in middle management, most of whom have never been in the boardroom and don’t know who the board members are and I find the communication dysfunction of the board is filtered down to management.

Joe: [00:05:24] Explain that, I’m not sure I understand that completely.

Larry: [00:05:26] For example, if you have a board culture where everybody gets along and says nice things to each other. In front of them, but then behind the back, you know, I find the same culture at the middle management levels.

Joe: [00:05:42] Is that so, interesting.

Larry: [00:05:43] It’s like, again, who’s the role model for the corporate culture? If it’s not the board, where’s it going to be.

Joe: [00:05:50] Well, how would middle management know what the board culture is?

Larry: [00:05:53] That’s the fascinating thing is somehow it, it gets transmitted from the boards to the CEO, from the CEO [00:06:00] on down.

Don’t forget for many for profit companies, when you look at CEO tenure, it’s getting shorter and the CEO often is actually not the one who sets the corporate culture. He’s the one that’s hired by the board to make the corporate culture.

Joe: [00:06:17] So in your view, the board really has primary responsibility for corporate culture.

Larry: [00:06:23] I think they have the prime responsibility for defining the corporate culture, and then the CEO has the responsibility for executing the corporate culture.

Joe: [00:06:33] Fair enough. That makes perfect sense. Given how important evaluation is why isn’t it done well in so many for profit companies?

Larry: [00:06:42] Well, first of all, board evaluation is that time when the board shines a spotlight on itself and says “what are we doing positive and negative to advance shareholder value?” The rest of the time the spotlight is on the CEO and the CEO’s [00:07:00] team about what are they doing to, to advance shareholder value.

So that’s what board evaluation is all about. To answer your question, Joe, there’s, there’s two issues involved here. One having to do with the board members themselves and one having to do with the consultants who sell boards of directors self-evaluation.

The first is the board members themselves. I don’t know how many times you’ve been involved with a board and they say, we’re collegial. We cooperate. We’re very honest with each other. Well, often, when you really strike below the surface, what it means is we’re superficially friendly with each other. And we don’t really hurt each other and we don’t create a lot of controversy with each other.

And so if a board wants to keep that superficiality, they don’t want to do board of directors self-evaluation cause you, you’re going to get to issues that one or more board members are going to be [00:08:00] uncomfortable with.

Joe: [00:08:00] Well to go back to what you’ve said though, the board is usually putting the spotlight on the CEO and senior management. So in that way, I can understand why it’s probably that putting the spotlight on themselves is not something they actually want to do.

Larry: [00:08:16] I think performance evaluation is great for you, Joe, but not me.

Joe: [00:08:23] Yeah, exactly right, exactly right.

Raza: [00:08:25] So Larry, when you do work with companies for a board evaluation, what process do you follow.

Larry: [00:08:32] Yeah, well that gets to the say I said the first part is the board members themselves. They often don’t want to be evaluated, which I don’t blame them.

Then the second is those who sell board evaluation  A. lot of times it’s sold as an event. It’s a big process. There’s an organization called the National Association of Corporate Directors, and they have a big deal about this. It’s a very [00:09:00] complex thing. It’s expensive, it’s very time consuming and what happens if you’re a board member, you put that much time into something, you’re expecting an epiphany, you’re expecting a major change and then if it turns out it’s not that major, people then say that was a lot of work, that was a lot of money for very little results. We’re not going to do this again. And so when board self-evaluation is defined as an event, it usually is a one-time event.

Joe: [00:09:31] So maybe it’s just a matter of setting expectations that are more realistic.

Larry: [00:09:35] Absolutely, what would we think is really important is small, baby steps. If we can help the board incrementally improve itself 1% every year, then in five years we’ve improved it 5%, which is going to be pretty good. We try to make every intervention every year, no more than 20 minutes. No more than 20 [00:10:00] minutes of the board member’s time, but every year we’re going to spend that 20 minutes.

Joe: [00:10:05] At some point, the board members themselves have to be evaluated.

Larry: [00:10:08] That’s right.

Joe: [00:10:08] When you do that, how do you go about doing it?

Larry: [00:10:11] Well, first of all, again, we’re looking at boards self evaluation. There is the evaluation of the board as the totality. That’s one module. Then there’s the of the different, the three committees and how they relate to the board. That’s another module. Now we’re getting to what you’re saying, Joe, which is the evaluation of the board members themselves.

Joe: [00:10:32] Okay.

Larry: [00:10:33] There is a song by Leonard Cohen, and I think you know it, Raza, “Everybody knows.”

Raza: [00:10:41] Yeah

Larry: [00:10:42] And that song applies to boards. Everybody knows who’s making a major contribution and everybody knows who isn’t. They just don’t want to talk about it.

Raza: [00:10:55] So Larry, does that turn into an effective exercise [00:11:00] that effectuates offboarding for an ineffective board members?

Larry: [00:11:03] Exactly. What happens is the only thing that I’ve ever done in my professional life where I accomplish the mission before I start. And that is once a board is willing to make the tough decision and say, we’re going to do board of directors, self-evaluation, which includes individual board members, we will evaluate each other and then you will know how you stand with your peers.

And if we can create a time lag between that commitment and the execution of the program, usually we do six months time lag. What we find is those board members that are the least productive announce that they are retiring and the board can organize a party for them, thank them for the service and by the time we actually start the program, we’ve accomplished the results, without any bloodshed, without any bad [00:12:00] feelings. Everybody leaves. Cause everybody knew. Everybody knows. Nobody wants to talk about it.

Joe: [00:12:06] Boy, that’s a good job if you can get it!

So is it really even possible for a board to evaluate itself without outside help? I mean, it that viable?

Raza: [00:12:20] Is self-evaluation a misnomer, and it’s really the overall process. Like is it even possible as Joe was saying.

Larry: [00:12:27] I think to start with it helps to have an outside kick it off and, and what the, and get the process going.

I think over time, once the corporate culture is set it can be done as an ongoing internal process through the nominating governance committee. Yes. I think it’s really important. There’s another issue here too, and that is a lot of board members that are, let’s say, World War II boomers.

Their attitude about being on boards is, [00:13:00] maybe I make a couple of bucks and maybe it’s good for my resume and maybe it’s good for networking and, you know, if it’s a nonprofit, okay, I promise I write a check every year and I swear to God, I’m not gonna fall asleep at the board meetings and that is usually good enough for the boomer.

Joe: [00:13:18] That’s horrible. That is terrible. But I’m sorry. It is, I don’t care.

Larry: [00:13:24] It’s true. You know it’s true.

Joe: [00:13:26] I’m not saying it’s not true, but it’s not a good thing.

Larry: [00:13:29] Oh, that’s right. That’s okay.

But now you’re looking at, at the next generation, they say people in their forties and 50s and maybe even 30s. And they’re saying, I don’t have a lot of time to waste and I’m not, I’m not going to waste my time on a board that is not serious and how do I determine if a board is really serious or basically in the pocket of the CEO. Board of Directors self-evaluation. If they’re really serious, they’re going to do board of directors [00:14:00] self-evaluation.

Joe: [00:14:00] I want to go back to something and defend my boomer generation because there are very few things that drive me crazier than sitting in a boardroom and wasting my time.

Maybe other boomers have time to waste, but I think that is an unfair observation. I really do. There are a lot of people on boards for profit and nonprofit who have said to me, boy, “I wish we could get more done.” “I wish we’re using our time better.” “I wish we were doing strategic stuff instead of talking about the color of the balloons at the next party. “I think that cuts across. – anyone that takes their job seriously. I really do.

Larry: [00:14:41] I wish you were right.

Raza: [00:14:45] You’re in the minority of, but…

Larry: [00:14:48] I do see a generational difference, and I do think the younger people are just, they just don’t want to waste their time.

Joe: [00:14:57] Well, if that’s true, then that’s great.  If it’s [00:15:00] trending in the direction of people board members wanting to use their time more effectively, that’s a great thing.

Let me ask you this though,  going back to what you said about announcing that there’s going to be an evaluation of board members,giving it six months before it happens and kind of letting  nature take it’s course.  Does that happen on for profit boards as well as non for profit boards?

Larry: [00:15:24] Yes, both for profit and nonprofit. If you’re looking at New York Stock Exchange companies, they are mandated to do board of directors self evaluation, that is a requirement. No one’s telling them how to do it, but companies that take it seriously will see this happen.

Nonprofit, we do a lot of work with nonprofits, particularly larger nonprofits where people come in and they’re going to write a check and they’re going to say, my reputation hangs on the reputation of this nonprofit.  And so if it’s going to get [00:16:00] a negative story in the Wall Street Journal it’s going to affect me so I’m not going to let that happen. So they insist on it.

Joe: [00:16:07] That’s good. That’s a good thing.

Raza: [00:16:09] Going back to the earlier point of the generational change of how boards operate in effectiveness, I see that, as we’ve talked with other guests, that it also may relate to whether a company is investor-backed and the investor-backed board is going to insist on performance and it is going to insist on solving the problems that the business has and developing a strategy because otherwise the business doesn’t exist.  So it might as well also be true that it depends on the kind of the board it is that these, you know, cultural, things happen.

Larry: [00:16:45] Raza, I totally agree with you and I think there’s certain dynamics of private equity dominated boards because they’re really focusing on short term, grow this business, grow the top line so we can sell this thing [00:17:00] in three to five years. So, everything is focused around that. I often found they don’t do board of directors self-evaluation cause they’re all focused on that goal.

Joe: [00:17:10] Right. Well it would seem like bringing that kind of focus to all boards wouldn’t be a bad thing. 

Larry: [00:17:17] You know, when I started my career, we’re speaking not far from Harvard Business School, and when I started my career, there was a book by two Harvard Business School professors, and it was about boards of directors and it was called “Pawns or Potentates.” Remember that book? And unfortunately, I’m not sure much has changed.  And what they were saying in that book was, it sounds very impressive that you’re on a board.

Is it? And it was saying, for a lot of board members, they’re really pawns of the CEO or, I’ve seen [00:18:00] it with, private equity firms, the so-called outside board members who are taken from a list of friends of the partners of the private equity firms. They’re pawns. They’re really not outsiders.

I’ve seen this in family businesses where we’re going to have outside directors of our family business. So I’m going to bring in my college roommate and I’m going to bring in the lawyer that depends on  my business as, and I’m going to call them the outside directors cause they’re non-family.

Joe: [00:18:30] Yeah. Well, my reaction to that is in those instances the board is not serving, is not providing the value to that company that it could provide.

Larry: [00:18:40] Totally!

Joe: [00:18:40] And that is really unfortunate.

Larry: [00:18:43] But the dynamics that they were talking about in that book, I think it was like in the 70s, still exist.

Raza: [00:18:50] Well, what we’re saying is there probably is a curve, with many boards that are simply not as effective, in governing or providing [00:19:00] strategy to the company as there should be, but we also know that, in the value creation process, there do exist effective boards as well and those are the things we want to talk to our audience and what makes a board effective.

Joe: [00:19:14] Well, one thing that makes a board effective is, at least in my view, if a board is doing its job, then it should be asking questions of management.

And it should be holding management accountable, in a respectful way, for achieving its strategic goals. A question I have for you is if a board’s not doing that, or when a board doesn’t do that, sometimes it can go really off the rails. How does that happen? What’s the dynamic that occurs where things are going on at the company and the board really is asleep at the switch, so to speak. And they don’t, they don’t make thcall, they don’t ask the questions, they don’t say anything at a board meeting. And then things can get [00:20:00] bad enough that you know, the next thing you know, you’re on the front page of the Wall Street Journal.

Larry: [00:20:04] Well, I think this conversation is just gone full circle.

Now we get back to the nominating and governance committee. Yeah. So the two core roles of the nominating governance committee, first of all, is an informed board. And I was saying earlier, if there is no chief learning officer for the board of directors, then by default the CEO is the chief learning officer and the CEO and the CEO will tell the board what it needs to know and what’s wrong with that picture.

And so often what happens is the board is given information by the CEO and then they make the decisions based on that information. That can really be harmful to a company. The second is, do we have the right talent on the board? And again, it’s the nominating governance committee that us supposed to write the job descriptions.

Supposed to hire theisearch firms or [00:21:00] decide how are we going to find the right talent. And, and often, you know what I have found is we want a collegial board. Now, a collegial board is defined as often people with similar backgrounds to us who look at the world in very similar ways. So we have collegial meetings.

And on the meetings go really smoothly, where you know, you really want to mix it up. I don’t just mean mix it up in terms of having people from different sexes and races, but also different perspectives, coming in. So I think that’s important. That’s a nominating and governance issue.

Joe: [00:21:42] Yeah. Very important committee.

So let me switch a little bit here. we talked about this earlier and one of your articles.

Larry: [00:21:49] Yup.

Joe: [00:21:50] I’d love to start a guy, by the way. You wrote “15 years from now, the Equifax case will be taught to aspiring business leaders as a good example of what [00:22:00] not to do in a crisis.” And I noted in the article. I won’t go through everything, but two of the things that happened after the breach of this critical data became known is one, the board decided to not release that information for six weeks, which allowed the hackers to have the information and use it for a long time before anything could be done.

Larry: [00:22:24] Let’s step back. Some of your listeners may not be familiar with the Equifax case. Okay. Why don’t you give us, it was a big deal in I think, 2013 when this happened. So let me go back over this.

Joe: [00:22:38] So let me ask you the question. Tell us  a little bit about the Equifax case.

Larry: [00:22:42] Equifax is an Atlanta-based public company with a market cap of $14 billion andemploys 9,500 people. so it’s, it’s a big company.

What happened is in September, 2017, Equifax revealed that there was a [00:23:00] cybersecurity theft of 143 million records of people, you and me and people listening to this podcast.

Raza: [00:23:10] I was included.

Larry: [00:23:11] You were, you were part of it. And their social security numbers, their names, their birth dates, their addresses, their licensed number, the driver’s license numbers.

They secured 209,000 credit card numbers.

Joe: [00:23:25] Whoa!

Raza: [00:23:27] So, once you get that information, you can sell thato on the black market, the dark web. And so, over the years, people with armed with this information were able to open bank accounts in your name, established lines of credit in your name, obtain new credit cards in your name and steal your tax refund. That’s, that’s what the Equifax case was all about.

Joe: [00:23:51] Okay, so now let’s talk about what the board did, that should be part of every board education, you know, course. [00:24:00] Two things that I remember from the article, and there are other things. One, they did not immediately inform people that their data had been stolen.

They delayed it for six weeks, which obviously gave people the hackers a chance to really use it. And the second thing, and I actually find this even more egregious, that members of the senior management team actually sold shares of stock during the time before the public knew that the breach had occurred so they would not take a hit on their stock shares.

Larry: [00:24:34] And this gets back to corporate culture. So what was going on at Equifax that made senior executives think that was okay too to do.

Joe: [00:24:46] That’s my question! What made them think they could do that?

Larry: [00:24:51] And, and you know, again, you can point your finger at the CEO and said, that was the CEO’s fault.

We’ll fire the CEO, we’ll get another CEO and problem [00:25:00] solved. And I would say, no. Was the board of directors. It’s the board of directors that defines the culture. Somehow there was something in the corporate culture where the senior managers sayimg, I can do this and I’m not gonna, I’m not going to get penalized for it.

Joe: [00:25:15] It just absolutely boggles my mind that a group of people sitting on a board could think that either of the things I just described was okay.

Raza: [00:25:27] And Larry in the checks and balance paradigm, then if you’re saying that it’s the board’s job and not the CEOs, how does the CEO then make sure that the board is doing its job?

Larry: [00:25:40] I think that’s where board of directors, self evaluation comes in. It’s also part of the governance of public companies, that the board members are going to be elected by the shareholders.  Also, there’s, are you familiar with the ISS ratings?

Raza: [00:25:55] I know, please tell our listeners.

Larry: [00:25:57] ISS stands for Institutional Shareholder [00:26:00] Services.

It is a for profit company that evaluates board governance, and you as an individual can look at the ISS rankings of a public company. And the way you can do that, you can go to Yahoo Finance, and then you type in the name of a public company. And one of the information will be the ISS rankings, and it’s ranked from one to seven and the higher the ranking, the worse it is.

And, usually when you see something that’s a six or seven as the ranking, there is something wrong and ISS service is to help institutions decide whether or not to cast their votes in favor of the current board or against the current board.

Joe: [00:26:53] Does a bad ISS rating, have an impact on stock price?

Larry: [00:26:57] It should, I haven’t seen [00:27:00] any  evidence  on that yet.

Joe: [00:27:02] So let’s go back to nom/gov committees. And one of the things you said earlier, it was that they’re responsible to make sure that the skills and expertise and attributes of the board as a whole are well matched to the company and to the strategic goals of the company.

Larry: [00:27:19] Right.

Joe: [00:27:20] So when a nom/gov committee is looking at that, talk about how it should create the matrix or however it’s going to go about looking at its board and thinking about what the board should look like in the future to support those strategic initiatives.

Larry: [00:27:38] Okay. We’re going to focus on for profit companies for this. And that means usually they have somewhere between five and seven people on a board, and they’re usually on two committees and of the three and, and any time. And then they get rotated and move around. [00:28:00] I’m going to tell you how I see things as they are, and then I’m going to make an offer for your listeners.

Joe: [00:28:05] Okay? It’s not going to be anything free, so don’t anyone get any, don’t get too excited.

Larry: [00:28:10] No, it’ll be free, it’ll be free. You can be excited.

What I do find is that when nominating governmencd people are thinking about what do we need. In terms of skillsets, they talk in terms of industry expertise or maybe some experience and maybe doing, finding, private equity funding or some experience with doing an IPO or that’s all important.

But, what I would like to see, and what I can share it with your readers, is we have a matrix that we have developed looking at problem-solving approaches as a function of corporate strategy and freedom of action.

So, for example, if you have a credit union, you have a very [00:29:00] defined corporate strategy and very limited freedom of movement because it’s highly regulated.

Joe: [00:29:05] Right.

Larry: [00:29:06] On the other hand, if you’ve got a, a FinTech company that’s just starting out, you’ve got a lot of freedom of movement and a lot of strategic maneuverability and a lot of freedom. So that’s different. So we look at the two variables, what’s the strategy and what’s the freedom of action? And then we have a matrix of different problem-solving styles.

And the idea is you want to have a board that consists of people with a portfolio of problems solving, so the board will look at things from different perspectives. So, for example, if you have a credit union and everybody is very conservative and risk avoidance, that’s probably somewhat okay.

But the problem is everybody’s going to feel very collegial with each other cause they’re all thinking the same way. And you can have men, you [00:30:00] can have women, you can have minorities. It’ll, be great. But the problem is you don’t have anybody whose thinking outside the box,

Joe: [00:30:06] Right.

Larry: [00:30:07] And you want to have one or two people who think outside the box.

Raza: [00:30:11] So Larry you’re saying that people think of diversity in many ways. Gender diversity is one of them. Others may have race. but you, you were saying the way somebody does problem solving is another important dimension to add to the matrix of what you need on a board in a diverse manner.

Larry: [00:30:32] And, it also is affected by the strategy of the company and the freedom of action.

Joe: [00:30:38] Now that’s interesting. You know, when I’ve been involved in looking at a board, the kind of matrix that I’m used to is looking at the skillsets and and experience that we all consider critical to driving the kind of strategic initiatives the [00:31:00] company has. So maybe it’s strategic background or maybe it’s financial, or maybe it’s regulatory, maybe it’s cybersecurity, whatever the things are that matter to the company.

But you’ve added an interesting dimension, which is how do they solve problems? How do you determine that?  

Larry: [00:31:18] Often that’s through being clear in the job description about what you’re looking for. In doing interviews, it often, we often add, we’ll ask the question, tell me about some things you’ve done that you’re proud of, and then we ask him for maybe three or four stories and we usually get some sort of consistency. The the stories may be different, but the, the way they approached the problem was very similar.

Joe: [00:31:44] So it’s really an interview process that you use to determine their problem solving approach.

Larry: [00:31:51] Yeah. You’re not going to get it on a resume cause, it won’t really talk about that.

Joe: [00:31:54] But I was thinking maybe there’s some kind of a, I dunno, a test you can give my or something. [00:32:00] .

Larry: [00:32:00] Yes. there’s no Myers-Briggs for board members, but there is something called the big five personality factors. And you know, there’s a lot of research on personality. And most of the common psychology tests are versions of what’s called the big five personality factors. So for example, one personality factor is openness to new ideas.

Joe: [00:32:24] Right.

Larry: [00:32:24] Well,  I would argue on a credit union board, you want to have one person that is high on that that is high on that dimension. But if you had a board of five people and you had three people that are high on that dimension, you couldn’t get anything done because it’s a highly regulated environment.

It’s, it’s kind of cut and dry, you know? As long as you stay between the lines, you’re going to be okay. On the other hand, if we’ve got an early stage FinTech company, I want more than one. I want maybe two or three people [00:33:00] who are really open to new ideas and really out there in terms of exploration.

Joe: [00:33:05] So it really goes back to nom/gov or whomever. But nom/gov in most situations, giving really deep thought to what the makeup of the board should look like, and then taking action to make sure that that’s what it looks like.

Larry: [00:33:20] Right.

Raza: [00:33:21] So Larry, switching to more tactical, I think we talked the, or touched upon it a little bit earlier. When the board is meeting only three or four times in a year, they have a packed agenda. They can often get behind as to what’s going on. What should boards expect management to do to address that?

Larry: [00:33:40] Well, this is gets to the other role of the nominating governance committee, which is about board education.  How is the board going to be educated between meetings? And I find that in, at least in the for profit side, and I think in the nonprofit side too, you’re really talking about incredibly busy people and they don’t have a lot [00:34:00] of time. And so I think podcasts like these are, are an excellent way for board people to learn while they’re driving or learning while they’re exercising.

Joe: [00:34:12] I just want to say something – I couldn’t agree more!

Raza: [00:34:17] Where we’re talking about both aspects of education. One aspect of education is generally learning effectiveness of a board, and I’m sure our podcast is going to be very helpful for that in small ways.

We were also talking about education, about what’s going on in the company, and the idea that you meet three or four times, but management is not necessarily giving you the full information or as frequent information. Should there be more touch points or more interaction in between, the three or four times the board meets, what do you think?

Larry: [00:34:54] It would be nice if that were possible. Logistically, it’s a [00:35:00] problem. I think politically it’s a problem when the board member is going into the company asking employees questions and the CEO is getting, starting to get paranoid.

Joe: [00:35:11] So one of the things that I have encouraged CEOs to do on boards is to send something to the board even once a month or a one pager. Here’s what’s, it could be a snapshot of financials. It could be three or four sentences about what’s going a brief, but helpful, update so that when you’re walking into the board room, or even when you’re getting the materials for the next board meeting, you have been updated all along.

I think that’s a good practice and I don’t know why it can’t., I realize it takes time on the part of the CEO, but if care and nurturing of your board is important, that seems like something that, you know, you should make time for.

Larry: [00:35:51] Well, Joe, you’re preaching to the choir, right? And, I tell my CEOs that I’m working with that 20% of your time should be [00:36:00] on board work, you know, communicating on board.

I even go further than you, Joe. I say you should be on the phone and talking to the most powerful board members and talking with them about what’s going on. There should be no surprises. And many CEOs resent that, particularly when I say 20% of your time.

But I think that’s appropriate. I think, you know, my experience is when the CEO is fired, they’re not fired because they were incompetent. They wouldn’t have gotten the job if they were incompetent. They’re fired because the board didn’t trust them anymore. And that’s about, that’s about board communication.

Joe: [00:36:40] 20% is high. But I respect the fact that that’s what you’re telling the people that you’re working with. I would pick up at the one thing, and I think the key thing. No surprises. The board should not be surprised. You should not walk into the board room and find out something’s been going on…

Raza: [00:36:57] we’re running out of money.

Joe: [00:36:58] Yeah. [00:37:00] Whatever it may be, that should not happen.

Larry: [00:37:02] I’m going to start sounding like a consultant. I’m going to say it depends. Cause one of the, one of the things that we find, we’re sometimes hired by private equity firms. I’m, I’m talking about really good private equity firms. And they say, you know, we’re, we’re funding this founder to be CEO and we have a responsibility to evaluate the CEO’s performance, and at some point we’re probably going to fire him.  He knows that, but I can’t be his coach and his judge at the same time. So we’re going to outsource the coaching work to you.

And here’s what I find. When a founder starts a company, the board, if there is one, consists of my friends, my family, the people who really believe in me.

And they’re there because I asked them to, and they actually appreciate not [00:38:00] being too involved because they’re my friends and my family. Of course, that whole situation totally changes once it’s a private equity dominated board, now they want to know and they don’t want any surprises. And, and often what I find is the CEO slash founder doesn’t fully appreciate that he’s got to change your behavior.

And what worked, you know, there’s an old saying in coaching, what got you here won’t get you there. What got you here to the point where the private equity have faith in you to give you the money, won’t get you there in terms of the trust.

Joe: [00:38:38] Yeah. So I get that. I would, I would submit that the no surprise kind of guideline is not a bad one to have, no matter who the company is and no matter who is sitting on your board.

Larry: [00:38:50] In theory I totally agree with you, Joe, but there’s a kind of cliche that I that I see among young, [00:39:00] inexperienced founders its called “the problem solve problem.” And that is we had a problem, you know, 70% of our revenue is coming from one company and that one company is threatening to go to a competitor.

I flew to California and I talked with the CEO and I got him not only to stay with us, but to increase our business. And I go back to my friends and family board and I say, we had a problem, its solved – and they say, great, what’s for dinner ?

Joe: [00:39:37] I   want to ask you about something else. You’re involved in many activities. One of the things you do that Raza and I both enjoy a great deal is the Seat at the Table.

Larry: [00:39:46] Yep.

Where people in your network come together once a month and sit as a board and have conversations about key issues in corporate governance. How did you develop this concept and how has it evolved over the years? [00:40:00]

 The word evolve is really the right thing. We started at stable Peabody started as an executive level outplacement firm. And we had these monthly meetings for people who were out of work and it was sort of job search related, but we were working with so many CEOs and they were out of work because they didn’t manage the board. They wanted to talk about board issues. So we started talking about board issues.

Joe: [00:40:34] Interesting.

Larry: [00:40:35] I called it, our  job candidate meetings, and then somebody once said, no, this is like seat at the table for, for board people and I said Oh, okay. And so we started doing that.

Then for a number of years we were doing, people would come and give lectures, or make presentations, but we were finding we were getting, you know, pretty smart, savvy, highly [00:41:00] opinionated board members coming. And so we decided to do cases instead and they, they loved the cases.

Joe: [00:41:08] Yeah. I think the conversations that take place at the seat of the table are really terrific.

Larry, it’s the great having you here today. Thanks so much for joining us.

Larry: [00:41:17] Thank you.

Joe: [00:41:17] And thank you all for listening to onboards with our guest, Larry Stybel

Take care Raza

Raza: [00:41:24] You too, Joe.

8. A Panel Discussion: The Role of Boards in the Current Crisis – and how it’s changing

Planning for a crisis is not a luxury and boards must be a very good at crisis management – we’re seeing just how important that is right now.  For this topic, we’ve assembled an incredibly experienced panel – our first panel episode – to delve into the role that boards are playing, and must play, during a crisis. 

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Jay Lorsch Bio

Jay Lorsch is the Louis E. Kirstein Professor of Human Relations at Harvard Business School. For the past 35 years he has specialized on the functioning and operations of corporate boards and is widely recognized as Recognized as a leading expert on the subject. His full bio here: https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6502

Ellen Richstone Bio

Ellen Richstone is a former Fortune 500 CFO and former CEO of a private company. She has been sitting on public company boards for over 15 years- on micro caps up to Fortune 500 in size.  She is currently sitting on the board of three public companies in : Technology; Industrial and Clean Tech. Her prior board experience includes companies in: Consumer Products, Bio Tech, Financial Services and Pharma. She also sits on the Board of NACD New England and is both an NACD Board Leadership Fellow and also received the first Distinguished Director Award from the Association of Corporate Directors.

Rick Williams Bio

Rick Williams is Managing Director of Williams Advisory Partners, LLC. He has a breadth of experience as an executive and board director for technology companies including medical technology, software, and financial services. Rick is a nationally published thought leader. His soon to be published book entitle “Create the Future – for your company and yourself” is a is a “how to field guide” for leaders who want to think creatively about where to take their organization. Williams Advisory Partners provides CEO and board advisory services for middle market technology companies. He was Chairman of the Board of Point Care Technologies and formerly was Chairman of a quasi-public bank/VC firm. Rick is on the board of an ocular drug delivery company and a leading company in gene therapy. Rick is past President of the Harvard Business School Association of Boston. He was a management consultant with the global consulting firm Arthur D. Little, Inc. He is a physics graduate of the University of Pennsylvania.   www.WilliamsAdvisoryPartners.com

Quotes

“Clearly, number one is the focus on employee health and employee safety. The takeaway I would give on this area is the need to balance empathy, safety and yet execute where execution is still critically needed.”

“There is a demand for increased communications with all parties promptly, clearly with increased transparency, and this is all stakeholders – employees, customers, supply chain, and of course shareholders.”

“How does all of this change our long-term strategy – or not? What pivots should we be making within our strategy for the long term?”

“I think it’s very, very important to have board leadership and to recognize that one of the board’s primary duties is to make sure that leadership is in place and functioning effectively, not only with the board but with management.”

“I think  the “trick” of being a lead director or a chairman is to figure out how to build a relationship with management through the CEO and how to maintain cohesion within the board so that the two groups, that is management and the board, can work in a collaborative way for the good of the shareholder, for the good of the company.”

Ideas/Comments

We’re going to rethink the reliance that companies have on their supply chains and critical resources: are they exposed to getting cut off in the kind of crisis that might happen over time?

In today’s world, boards have to be ready to move in and deal with a crisis – whether the crisis is externally generated like this one is or whether it’s a CEO who suddenly has a heart attack or decides he wants to quit, the board has to be very good at crisis management, and that really goes back to the leadership of the board.

Succession planning is being done very differently than the way we traditionally have done it at the board level, given that you need to really dive down into many levels, which the board doesn’t usually do.  The reason we must do that is because, as people get sick, you need to make sure that the critical areas are covered.  We’re learning lot about management at levels below the very top.

Has there ever been a time when honest, authentic communication has been more important for a company?

Messaging must be realism about the challenges facing the company, a message of brutal honesty as to what is going on and what the threats are – and at the same time, a message of hope.

Transcript

[00:00:00]Joe: [00:00:03] Hello and welcome to On Boards: a Deep Look at Driving Business Success. Hi, I’m Joe Ayoub  and I’m here with my co-host Raza Shaikh. How are you doing today Raza?

Raza: [00:00:16] I’m doing well. Good to be with you Joe.

Joe: [00:00:18] Good to be with you Raza. Virtually.

First to our listeners, for those of you listening during the COVID-19 crisis, and many of us in the United States are restricted in what we can do and where we can go, and we’re all trying to understand how to best conduct ourselves, we hope you’re all taking precautions to stay safe.

On Boards podcast is about boards of directors of advisors and all aspects of board 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 [00:01:00] advisors.

Raza: [00:01:00] Joe and I speak with guests about a wide range of topics relating to boards. What makes them successful or unsuccessful, and how to make your board one of the most valuable assets of your company.

Joe: [00:01:14] Today’s episode is focused on the role that boards are playing during the coronavirus crisis and how that role is changing, and we have a slightly different format today.

We’ve invited three guests, instead of one, to help give a broad perspective on the changing role of boards during this crisis.

On our panel today, are Jay Lorsch, a distinguished professor at Harvard Business School.  For the past 25 years he has specialized on the functioning and operations of corporate boards and is widely recognized as a leading expert on the subject.  Jay, it’s good to have you with us. how are you?

[00:02:00] Jay: [00:02:00] Thank you very much.

Raza: [00:02:01] We have Rick Williams as our guest today, who is the Managing Director of  Williams Advisory Partners.  He has a breadth of experience as an executive and board director for technology companies, including medical technology, software, and financial services. Rick’s soon to be published book entitled “Create the Future for Your Company and Yourself” is a how-to field guide for leaders who want to think creatively about where to take their organization. Welcome Rick.

Rick: [00:02:37] Thanks, Raza. Glad to be here.

Joe: [00:02:41] And, Ellen Richstone. She is a former Fortune 500 CFO and a former private company’s CEO. She has sat on public company boards for over 15 years and is currently sitting on the boards of three public companies. One in the technology [00:03:00] sector, industrial sector and clean tech.  She also sits on the board of the NACD of New England, is an NACD Board Leadership Fellow and  received the first Distinguished Director Award from the Association of Corporate Directors. Ellen, welcome to On Boards.

Ellen: [00:03:21] Oh, it’s great to be here. Thank you for having me.

 Joe: [00:03:24] So Ellen, let me start with you. You’re sitting on the boards of three public companies. Each in very different sectors. What conversations are you currently having at the board level?

Ellen: [00:03:37] Thank you, Joe. The conversations really fall into three buckets: the immediate, the medium term and the long term, but they really divide into four different areas.

The first is employees, the second communication, the third financial and the fourth business. Let me go [00:04:00] back to each one of them.

The first – employees and people.  Clearly, number one is the focus on employee health and employee safety. The takeaway I would give on this area is the need to balance empathy, safety and yet execute where execution is still critically needed. The third item within people and employees is succession planning. It’s being done very differently than the way we traditionally have done it at the board level. Given that you need to really dive down into many levels, which the board doesn’t usually do and the reason we have to do that is because, as people get sick, you need to make sure that the critical areas are covered.

The second area [00:05:00] is communications. There is a demand for increased communications with all parties promptly, clearly with increased transparency, and this is all stakeholders – employees, customers, supply chain, and of course shareholders.

The third area we focus on is financial. Number one is “Cash is King.” So the focus on liquidity is absolutely paramount. The second is a scenario planning, which also was part of the business, but in the scenario planning, within financial, it’s the, I’ll call it pare and protect or to ride out the storm.

The third is don’t forget about your internal controls because as we all come out of this, we don’t want to create a different set of problems as we come out.

The [00:06:00] four, is the business area. And this I divide into four different areas. One, which is of course, supply chain. Are there any broken links? What can be done today and how is this impacted as we go forward?

Two: customers. All of my companies are having increased, communication, interface, actions, with the customers.

Three: are there short or long term opportunities? My three companies are in very different areas. One is in an area that’s being decimated, one which is in an area which is having opportunities because of this crisis. And the third is one which has been declared a national, they’re not allowed to shut down because of their, their status supplying the military.

So, very different scenarios, [00:07:00] and in some cases there are  opportunities that are coming out of this, new paradigm shifting business situation, which takes us into the last category, which we can’t forget, which is strategy. How does all of this change our longterm strategy or not? What pivots should we be making within our strategy for the long term?

And with that, I would turn it back to you, Joe.

Joe: [00:07:28] Thank you, Ellen. Rick, would you like to a follow up on that?

Rick: [00:07:34] Well, first of all, Ellen has just kind of a really superb overview of what the boards need to be doing at this point. And I actually, we just got to add and build on a little bit what Ellen said.  Ellen emphasized communication as an important element.

One of the things I think the board can contribute to in these situations is a very important conversation about what should the [00:08:00] board and the company be communicating?  So, Ellen mentioned that she is on the board of companies in three different sectors. One that’s been severely impacted, one that’s  a critical industry and another that’s has may have opportunities coming out of this.

So what is the message that the company should be communicating to its employees, to, its customers and to shareholders. And it’s not the same in each.  And I think part of that messaging has to be realism about what’s the challenge facing the company, a message of brutal honesty in a real crisis as to what actually is going on and what the threats are. And also a message of hope. And I would say bounded hope about within the bounds of reality. So what, what is the vision for how we’re going to get through this is part of the message, I think has to come out of this.

Joe: [00:08:54] Raza, has there ever been a time when honest, authentic [00:09:00] communication has been more important for a company?

Raza: [00:09:02] I can’t imagine Joe and our recent guest, Joe Bearlein, also emphasized and provided playbooks on how what really matters is the authenticity and trust of the messages and messaging in this world.

Joe: [00:09:20] I’d like to bring Jay into the conversation if I can  with this question:   wouldn’t it be good practice for private company boards to follow the same structure as public company boards? That is that every board, public or private should have either an independent chair or an outside lead director?

Jay: [00:09:42] Yeah, I think that’s right. I would agree with you. And, I think the problem, however, is that, in private company boards, the term, really defines the difficulty, which is in a private company board, the people who are the shareholders are actually on the board and therefore [00:10:00] you get into this complicated situation about who’s really leading the company.

At the end of the day, in my experience, when you’ve got private shareholders, whether they’d be a set of venture capital firms or a family, they have immense, influence because in a sense it is their company. And that’s different from a public company where the shareholders are represented by the board and the board’s responsibility is to speak for the shareholders and to oversee management on behalf of the shareholders as well as any other constituents that you’ve got involved.

So I think it’s very, very important to have leadership and to recognize that one of the board’s primary duties is to make sure that leadership is in place and then its functioning effectively, not only with the board but as well, with management, I mean, I think that’s the trick of being a lead director or a chairman is to figure out how to build a relationship with management through the CEO and how to [00:11:00] maintain cohesion within the board so that the two groups, that is management and the board, can work in a collaborative way whether for the good of the shareholder, for the good of the company.

Joe: [00:11:11] Thanks Jay.

Rick, I wanted to go to you with a question that you raise actually for Ellen, which is: how does the relationship between the board and management change in a crisis and what’s different in this crisis?

Rick: [00:11:28] Okay Joe, boy, this is an interesting conversation, already, so I think it’s great and I’m learning myself.

 First of all, let’s just drop back to kind of what is the role of the board versus the role of management? I think it’s just worth restating that every so often because I think we lose track of that sometimes. So the management of the company is in charge of running the company, not the board of directors.

And as Jay just mentioned, that’s a difficult separation to keep often with private [00:12:00] companies, but that is the distinction that should be in place the boards role is as, as an advisor, a coach, a resource, a representative over overall management in terms of the supervision of the company, that’s the board’s role –  its not to run the company. So, if you look at what’s happening in a crisis like this, the management is the one who has to deal with the immediate crisis and the board has to provide its supervision, but stay out of the way of management as it’s running the company.

And, I think there are a number of differences between the normal  relationship between the board and the management, and the board’s role in a crisis. And among them being that frankly, a lot of leaders today of companies may never have been through a crisis of this magnitude.

And hopefully there are people on the board who have and can provide some guidance as to, okay, how do you make decisions? What are the issues you have to think about? [00:13:00] All the sorts of things that, Ellen mentioned before. So the board also the leadership, often is thinking about what are the issues I have to deal with today?

What do I have to do today? And I don’t have time to think about six months from now, a year from now, five years from now and usually those are domains are off to the board has more of a role in. But even in the cases where the management has to be thinking about the immediate, the future can be, what’s going to happen a month from now? What’s going to happen two months from now? And the board often will have the time to think about that a month from now and two months from now questions that the management may not have time to, in the same way.  We’re not thinking about five years from now, but are you really thinking about what’s going to happen two months from now?

Who are the suppliers going to be? Are you going to have cash? Are we going to be able to stay in operation? Or if, or this [00:14:00] immediate surge in demand that we have, is that going to be here two months from now or six months from now?

 I also think, that one of the things that the board needs to be think very carefully about is,  the relationship that they have between each other. and Jay talked about this a little bit. What happens if you don’t have a good relationship?

Well, whether you have a good relationship between management and the board is or not in a moment of crisis, both management and the board have to think consciously about maintaining that relationship, maintaining trust and maintaining open communications and its communication with, management and the board so the board knows what’s going on and also has enough information so we can get its work done and also that the board is not putting demands on management for communication that management doesn’t [00:15:00] really have time to provide. And it’s really not as central for the board at this moment.

Joe: [00:15:04] Let me ask you, Rick, a follow up question: as much as boards may want to help, don’t they have to be especially careful now not to grab the wheel, so to speak and veer into management?

Rick: [00:15:17] Oh, absolutely. There are certainly instances in which the board has to be in effect imposing or making a decision, but really the more, valuable usually, role of the board, is to help the management think about process. What is the process you have set up to deal with this crisis? How are you going to make decisions through this crisis?

Joe: [00:15:42] Ellen, did you want to follow up on that?

Ellen: [00:15:45] Yeah. I would just wanted to talk for a moment about how the board and the management communicate, because I think every board, led by the chair or the independent lead director and [00:16:00] management need to figure out, the frequency and the amount of communication that’s needed between them.

I did some thought processing and it came down to three points. with my boards right now, my public boards, it comes down to the CEOs give email updates about every other week. It includes information on company specific and it may touch on something that is just happened in the industry. So that’s bullet one. Obviously if there is a crisis or some huge change, it’s more frequent, but what the pattern is every other week, communication by email.

Second, that boards do calls regularly. Normally you don’t meet that often on a phone call virtually or in person, in between [00:17:00] standard board meetings but each of my boards have set up regular calls, one which is biweekly and two of my boards are on a monthly cycle, so that there can be live communication. Again, it increases if something immediate has happened, but otherwise we have a standard routine and  each board has to figure out what its routine is with email communications coming out from the CEO so that the board can maintain an appropriate distance.

Oversight. Yes. Appropriate noses in, fingers out. And make sure that they’re doing the right things, but not interfering or preventing or taking time away from what management needs to be spending their time doing.

Joe: [00:17:52] That’s great, Ellen. Thank you.

So, Jay, let me follow up something that Rick said [00:18:00] and ask you about situations, actually, you and I have talked about this previously, that in situations where the relationship between the board and the CEO, senior management has not been strong. For example, there’s been a lack of transparency or a lack of trust. What can a board do now in order to handle that challenge or manage that challenge?

Jay: [00:18:28] Well, it’s always a challenge when the board and the CEO don’t trust each other, or particularly the board as well as company is losing confidence in its leader and the leadership of the company. I think in a situation like we’re now in, most boards obviously would prefer to avoid that kind of a problem.

Yet, I think. If there’s a lack of trust between the manager at the senior manager, the CEO, and the board, and the board’s leadership. I think you’ve got to fix it. And I think even though you’re in the middle of a crisis,  it’s [00:19:00] probably even more urgent not to let it fester.

The board is really fundamentally got to worry about more than anything else, is the quality of the leadership of the company. If they’re loosing confidence  in that person , the CEO, I think, they’ve got to figure out how to fix it. There’s two ways to fix it. One is to have the kinds of conversations with the CEO, which might rebuild their mutual confidence to each other or to make the decision that as bad as that is and as dangerous, it’s difficult as it is at this moment if you don’t have the kind of leadership you want, you better fix the problem by buying elite. Either from within the organization or by looking outside and, I’m not suggesting that’s an easy thing to do, but I think trying to run a company where the board doesn’t have confidence in the management, particularly the top manager, the CEO.

In the kinds of crisis we have, right? It’s really fundamentally impossible. and it’s gonna. It’s gonna come down at some point soon trying to change the leadership. [00:20:00] And I think the sooner you get you address that problem is the safer the company is going to be.

Joe: [00:20:06] Jay, what about the idea of boards having board only executive sessions to at least talk among themselves and think about how they can address problems that they may be having with the CEO and how they can at least deal with that in the short term. The longer term may be a change in management, but that is, this is a, as you suggested, a not a good time for that.

How does the board get itself on the same page?

Jay: [00:20:40] Well, let me say, first of all, you know the analogy I would use is this like trying to change leadership when you’re leading the army through a street? You don’t want to try to do that, but the other point I want to make is that I guess I was assuming that the board regularly has these kinds of, what we call for [00:21:00] some strange reason, executive sessions meaning where there’s sessions with no executives in it.

I’ve never understood how we came to that, that terminology. But the point is, I think every board needs to have a, at least at the time of regular board meetings, a session with just the independent directors alone without the CEO and, trying to figure out where they are as a group. you know,

The reality is there are some things directors need to talk to each other about and they don’t want the CEO there. And you’ve got to have those sessions. And I’ve always believed that, you know. For the last decade. Most boards have had those sessions regularly at the time of each, you know, before or after, or maybe even before and after each of the regular board meetings. A board can’t be effective if the directors themselves don’t know how to talk to each other and can’t be honest with each other.

And I think that’s important to emphasize. There’s a lot of people who keep talking about the relationship [00:22:00] between the CEO and the board and the relationship between the board and other managers in the company. That’s certainly is important, but I think equally important is the relationship among the directors.

I didn’t mention this in the introduction, but I’ve been on about six public company boards, myself and a number of her private boards. And I would say. But if the boards that I was on were really in tune with each other, they didn’t understand each other. They didn’t trust each other. didn’t have common goals and work they couldn’t do a very good job. I mean, the only way you’d get that kind of commonality and shared objectives. Is by having these kinds of quote “executive sessions” so the directors know where they’re headed.

Joe: [00:22:41] Thank you. Ellen, would you like to follow that up?

Ellen: [00:22:45] Well, all I will say is, Jay, I agree with you 100%.  Executive sessions, even before this time were standard practice, with at least public company boards. And [00:23:00] all of mine have always done executive sessions, but I think this situation we’re all going through now just underscored the fact that if you hadn’t been doing executive sessions, and if your board had not been talking to each other on a regular basis without anyone else in the room, if you aren’t able to communicate between yourselves as, as board members, then frankly, it’s a lot more difficult in situations like this, a lot more difficult.

So I would just emphasize, if you aren’t already doing them, please do them. If you are doing them, leave plenty of time. And what the best practice that that that one of my boards usess  and the others have started is at the end of a session and when the board is all together and it could be virtually [00:24:00] altogether, the board chair or lead independent director, whosever running the board, will go around to each director, nobody’s left off the hook and ask them to question one: how did they feel about the conversations we had and to what are their biggest concerns? And he gets all of that input from each of the directors and then we have a discussion and it is over time, it builds the kind of rapport and discussion that you need to have between directors.

Joe: [00:24:41] Ellen and Jay. Great comments. Rick, would you like to follow up on that too?

Rick: [00:24:47] Well, am hesitant to follow up after Jay and Ellen, but, most of my experience has been with private boards. in fact, I would say all my experience been with private boards and I, I’ve been in so many [00:25:00] situations in which the board meeting really didn’t happen until the executive session started and it’s really so very important. And what Ellen said about allowing time as opposed to, Oh, let’s have a quick, you know, five minute, does anybody have anything to say? You’ve got to schedule the time. I was also gonna raise one other element to this building on Jay’s comment about, the directors getting to know each other and what their agendas are. That, let me just put on the table the case where you have members of the family are part of a board of directors. Or you might have a private equity representative on the board of venture capital representatives on the board.

You know board members are not homogeneous, just sort of everybody gets together and works. The reason they’re on the board will be quite different in most cases. And the interests they represent and their own motivations for their being on the board will be [00:26:00] quite different. And as a result of that, it’s often difficult to get the board members who may not personally know each other that well. It’s difficult to get them to work together as a cohesive group, advising management, reviewing management practices, all that sort of thing. So , what Jay said about, having the board members spend time getting to know each other, getting on the same page with each other, is extremely important to have the board be more than a just a functionary that’s sort of doing a role but not really making a contribution. And sometimes it doesn’t work perfectly. In fact, I would say it seldom works perfectly, but the importance of getting to know each other and finding common ground of the board can work with collaboratively is absolutely essential to board being an important contributor.

Joe: [00:26:55] I will say one thing, I thought all the comments are great. I too [00:27:00] have always wondered why a session with only board members is called the “executive session.” I’m glad you said that, Jay. I have no idea where that comes from.

Jay: [00:27:12] This may sound strange, but I think in many respects public company boards are easier to build and make effective than venture capital board or a family company.

The reason being that there are very strong emotional interests in those two situations. And, you know, I’ve been on both and I’ll tell you that it’s much easier to build an understanding and common purpose among public company directors than it is in a family where uncle Joe doesn’t agree with his brother , and in particularly in these venture capital boards, I think the boards that are dominated by venture capital representatives often are the most dysfunctional boards you can find because the idea for a board isto, represent the shareholders.

The problem is when the shareholders are on the board,  they get into [00:28:00] arguments with each other and it’s very, very hard for them to put the interests of the company ahead of their own, parochial interests. And so I think, in a crisis situation like this I’d rather be on a public company board than I would be on some of these family boards and particularly on a venture capital board.

Raza: [00:28:18] For the venture capital board I completely agree, Jay, when the preference stack and the capital waterfall, is so stark, even though as a board member, everybody’s beholden to the shareholders , it’s seldom  is. It does create a lot of tension between the series A board versus the series B board member.

Joe: [00:28:42] So Raza, let me follow up with you and then I’m going to ask everyone maybe to comment on this last question, which is: how has the role of boards changed in this crisis and what is it likely to mean for the future. To the extent we can really see that.

[00:29:00] Raza: [00:29:01] Joe, the first thing I’m observing, as everybody has pointed out that boards are changing towards more frequent communication in all ways.

The second thing I observe, is, it almost for every single board, it is an “all hands on deck” situation. The third thing I know that, there, there always was aligned between, you know, management and board guidance. But that, that line is certainly shifting more towards hands-on. They’re not touching the wheel, but they’re almost, or maybe in some cases they are,

There is a tremendous amount of realization also at board levels that this is not really a short term crisis. This is here, for the long term, and they got to adopt for that.

The one very important thing that I see that all boards are [00:30:00] now in a problem solving mode. Whether it’s how do we get cash in the bank or how to apply for the PPP, and if I need to change my charter documents to be able to do that. But basically, in all respects, boards are squarely in a problem solving mode. And I would say the last thing, probably the tactical, that a lot of boards have gotten now familiar or used to what is Zoom and what is WebEx and how to conduct, board meetings virtually.

Joe: [00:30:32] Ellen. Do you want to, follow up and, and if you would a few words on what it might mean for the future too.

Ellen: [00:30:41] Joe, thank you very much. That’s exactly where I was going to go. What is it likely to mean for the future and the role of the boards? And I think I do it in four bullets.

One:   boards need to understand the world has really changed.

Two: [00:31:00] planning for a crisis is not a luxury. And when I say planning for a crisis, I’m talking about everything from boards would always talk about doing enterprise risk management. Well, enterprise risk management, this just underscores the criticality of that whole effort and the need to be able to understand that that crises happen.

Three: crises will continue. I don’t care whether we talk about a climate change issue or tornado. I hate to think about  9/11 but it, it’s happened once, the pandemic forest fires look at California. Think about the cybersecurity issues that some companies, particularly in financial services and in retail, have gone through.

So crises will continue to come and they’re coming at a faster pace and,

Four: [00:32:00] build resiliency. Think it’s a core need, on a go forward basis at all levels of the corporation.  It starts with the board: how does a company build resiliency as they come and go through these variety of crises that will attach itself to many different industries on a go forward basis?

Joe: [00:32:27] Great stuff to think about, Ellen. Really, really thank you. Rick, do you want to add something to that as well, please?

Rick: [00:32:34] Yeah, just a  couple of comments. I mean, first of all, I think human nature is not going to change and we are not going to be able to predict what the next crisis is going to be.

So the next time there is a major crisis, we’re going to go through the same process of not really understanding what the nature of the crisis is, not understanding what we should really do and [00:33:00] having to go through a process of, make decisions, try, make mistakes, learn, adjust, and move on.

 In addition to what Ellen said, which I thought is very on target, I think that, we’re also going to rethink the, reliance that we have all, all companies have on our supply chains and critical resources, and are they exposed to getting cut off in the kind of crisis that might happen over time?

I think this whole notion of our economies are set up to find absolutely the lowest cost source of production, is being challenged. I mean, that is sort of  the international, business system that we’ve set up, which I think all of us would agree ideally is what we should be doing. But in recognizing the implications of that in a moment like this, where certain supplies are going to be [00:34:00] unreliable for whatever reason, I think that’s going to be a question that we’re all gonna face as we go forward in whatever business we’re in.

Joe: [00:34:08] Thanks, Rick. Jay, do you have some final comments?

Jay: [00:34:13] Well, I know what it will tell us about the future, but I assume the future will, continue to have crises. Hopefully not a, not as serious as the one we now currently faced.

But I think the point I would make here is that the boards  were never created to deal with crises that, that wasn’t the the idea, but the fact of the matter is, in today’s world, boards have to be ready to move in and deal with a crisis – whether a crisis is externally generated like this one is or whether it’s a CEO who suddenly has a heart attack or decides he wants to quit. you know, there’s all kinds of crises out there, and I think the board has to be  a part of your organization, which is really very, very good at crisis management. and I think that really goes back to the leadership of the board.

[00:35:00] The  boards that I’ve had experience with dealing with big crises, I’ve always had, first of all,  a small number of perhaps the leaders of the board, not a leader, but people who are high status members of the board who’ve been around a while who take the resolution of the crisis very, very seriously. That’s one thing you need.

The second thing you need is a leader, not the CEO. CEO has got plenty of problems to deal with. But you need  a leader of the board, whatever title you use for him, chairman or lead director who takes the resolution of the crisis  and the management of the board seriously, there’s no time in my experience where that kind of leadership becomes more important because of avoiding a crisis without that kind of leadership. And that kind of guidance can go off in too many different directions. And I, so I think that the importance of a leader of a board. Whatever title you give him or her, becomes fundamentally important in these crises.

And, we need to keep our eye, , [00:36:00] recognize the kind of effort these people have to put in to make the company successful and making the company successful obviously means the board is successful.

Joe: [00:36:11] Thank you.

Ellen, Jay and Rick, it’s been great speaking with you all. Thanks so much for joining us today. I hope you and your families will continue to be well and, of course, stay safe. I look forward to when we can be meeting in person again and to our listeners.

Thank you all for listening to Onboards with our special guests, Ellen Richstone, Jay Lorsch and Rick Williams. Please stay safe, take care of yourselves, your families, and your communities as best you can.

Raza, please take care. I hope you and your family continue to stay safe.

Raza: [00:36:51] Yes, Joe, we’re all staying safe and thank you and I hope you and your family stay safe as well.

Joe: [00:36:58] Thanks. [00:37:00]

7. George Davis on what boards need to do in a crisis: Listen aggressively – but fight the urge to grab the wheel

George Davis has been a trusted advisor to multinational, public sector and private equity backed organizations seeking guidance on critical boardroom issues for many years.  We discuss with him what boards of directors need to do in a crisis, how this crisis is different from those in the past and what it may mean in the future for companies and the boards that serve them.

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Links

https://davispartnersgroup.com/

Quotes

A good board member understands their role and how to be supportive from a governance perspective and to fight the inclination to become a part of the management team. 10:38

I try to counsel people to say, look – this is when the CEO needs more room to breathe, to be able to pivot, to react.  Don’t choke him or her with a hundred questions because you’re concerned about something you have not agreed to that the board thinks is a concern. 11:44

Some of the fundamentals that have always been true will, post crisis, be even more of a focus as it will be clear how important they were.  A truly diverse board, with many different perspectives and skillsets, is far more likely to be able to advise their CEO than a board that wasn’t as well constructed. 17.19

I have a strong belief that after this crisis board appraisals and board succession planning will become a hot topic.  Just like CEO succession planning became a hot topic after the 2008 crisis.  In each case the question will be: did we have the right people around the table? 19:36

How do you layer the competencies and the matrix skills of the board to match where the future of the company is going to be? And with this huge consumer disintermediation that’s going to happen post Covid-19.

Fight the urge to be false predictions of overconfidence. Be extremely clear in your communications, honesty right now is way more appreciated than anything.  So, if it’s uncertain, say it’s going to be uncertain. If it’s going to be hard, tell them it’s going to be hard. I think false positives destroy morale. 25.50

Ideas/Comments

Crisis management protocols and feedback loops and risk mitigation are pertinent to today’s crisis, but in the past, everybody felt that it was either an economic turn or there was a cycle and we’ll pop out of it. The magnitude of change in board rooms today is quite different. 

If you’ve developed a strong foundation of trust and transparency with your CEO and their team then it’s going to be a lot easier to say: 

“Go do what you got to do. We just need a briefing. We need a one hour. We don’t need a long board meeting, for example, because we know you’re going to do the right thing. We know you’re going to tell us what we need to know, and we know you’re going to tell us the truth about it. We trust you.”

The boards that don’t have that relationship are going to struggle ansd it’s going to highlight this fundamental thing that we talk about all the time about having that relationship with the leader of the company.

Transcript

[00:00:00] Joe: [00:00:05] Hello and welcome to On Boards: a Deep Look at Driving Business Success. Hi, I’m Joe Ayoub and I’m here with my co-host Raza Shaikh. How are you doing today, Raza? 

Raza: [00:00:18] I’m doing very well, Joe. Good to see you, virtually that is. 

Joe: [00:00:22] Good to be with you virtually. 

First to our listeners.

For those of you listening during the time that COVID-19 is still spreading, and many of us in the United States are restricted in what we can do and where we can go, and we’re all trying to understand how to best conduct ourselves, we hope you’re all taking precautions to stay safe. 

On Boards Podcast is about boards of directors and advisors and all aspects of board governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or [00:01:00] organization: its board of directors or advisors.

Raza: [00:01:04] Joe and I speak with guests about a wide range of topics about boards, what makes them successful or unsuccessful, and how to make your board one of the most valuable assets of your company. 

Joe: [00:01:18] Today’s episode is focused on how boards, board members and the company that they serve are responding to the Coronavirus crisis that we are facing, what action they may consider, and how they’re looking beyond the crisis to think about what the new normal might look like and what that means for your business.

Our guest today specializes in human capital, including board and CEO evaluation, succession planning, strategy implementation, and management effectiveness. In a world where the human capital value chain is becoming broken into many pieces and specialist [00:02:00] functions, he serves as an unbiased and transparent advisor looking for the best answer to leadership challenges.

Raza: [00:02:08] He was previously on the executive committee of the global management and consulting firm, Egon Zehnder, leading its operations and founded its Boston office over 20 years ago. As a former managing partner of Zehnder’s global CEO practice and leader of the firm’s global board practice, he has been a trusted advisor to multinational, public sector and private equity backed organizations seeking guidance on critical boardroom issues for many years. And he is a frequent contributor to the Wall Street Journal, Harvard Business Review and Forbes – among many other publications. 

Joe: [00:02:53] He is the founder and CEO of the Davis Partners Group. We’re very, very excited to have George Davis [00:03:00] as our guest today.

Welcome, George. Thanks so much for being with us today as a guest on Onboards. 

George: [00:03:07] Thanks, Joe. Thanks Raza. Great to be here virtually. 

Joe: [00:03:12] First, how are you doing, amidst the uncertainty that is so prevalent in our lives right now? 

George: [00:03:19] Well, Joe, thank you. Personally, I’m fortunate enough to say I’m safe. I’m sequestered, my family’s in good shape and professionally, I thought it’d be quiet, but it’s actually quite busy talking to a lot of the boards that I consult with. 

Joe: [00:03:35] Like you, I had a few days that it was dead silent. I think people were just trying to, this was when it was all coming to the point where we realized that it was a pandemic and a crisis, and then the conversation started again and now with zoom and other virtual platforms. I’m actually meeting with more people than I was last month. . It’s counterintuitive [00:04:00] to me. but you know, it’s good to be in contact with people virtually. 

George: [00:04:04] Well, it’s interesting. The meetings have increased, but actually the topics for me have changed. It’s gone from regular board governance consulting into crisis management and, I’ve either been old enough or fortunate enough to have been around for awhile. So, I have seen this a couple of times and I think a lot of the boards that haven’t gone through this or I’ve had new board members trying to understand how best to operate are seeking some advice.

Joe: [00:04:31] That make sense ,so what do you now seeing in the boards that you’re working with, that are different in the conversations that you’re having? 

George: [00:04:40] Well, what’s interesting now, the conversations are, all the boards are on deck. It’s all hands on deck – everybody’s on a group call. 

I used to have calls with either just a chairman or the nom/pro head or a committee leader, but now everything’s in crisis mode. [00:05:00] And when you shift from a normal pattern or routine and you go into crisis mode, communication patterns and frequencies really change.

Raza: [00:05:09] George, what would make a good board now in this new world? 

George: [00:05:15] What makes a good board now or what makes a good board member now   ?

I  think the real thing that I’m talking to a lot of companies and a lot of directors is:  know your role.  When you’re in a crisis management, really know what the board’s job is and don’t panic and communicate better.

Raza: [00:05:36] I’m going to switch it to a broader context. I know every country is having to deal with this crisis. What can we learn from how international boards have handled this crisis? 

George: [00:05:48] It’s interesting. There’s a lot more commonality than differences.

I think right now on the public company, US boards, there’s full engagement. There’s full duty of [00:06:00] care, rights and responsibilities. There’s full dialogues. 

When you talk about Asian boards, most of them are family run 75% of Asian boards are run by families and they’re not public. And usually there’s more of a patriarchal leader. And plays to kind of the role of the chairman, and they take a much longer view, and I think they are patient, so they understand that things are going to be radically different in the short term. and they’re really trying to understand the implications to their business, in the, in the longer term and in the short run. 

Joe: [00:06:34] So does that mean George, that in those Asian companies, the conversation is different in some way than the conversations you’re hearing in US boards?

George: [00:06:45] The the conversations of the companies that I’m consulting with now are more balanced. It’s impressive that, they go through their normal risk management of where is capital, where is liquidity? but they are able to understand that there may be [00:07:00] permanent change in their business and they’re okay with sacrificing the short term, if there is a longer term view.

Public company boards in the US are still doing the same things. I just think they’ve been, I think the international boards have had a longer term exposure. Covid started back in December in China. And so I think they’ve had a longer turn  at this date and time in April, commerce is slowly getting back to China where it’s rapidly shutting down more so in the US so I think that the pattern of conversations are different. I think the US public companies are still more crisis management. 

Joe: [00:07:37] What does that mean exactly? They’re in crisis management.  What does that mean about the conversations you’re hearing at the boardroom level? 

George: [00:07:45] Well, just, it’s a triage and a successful boards learn to triage of  where are we in terms of capital and liquidity? Where are we in terms of our employees and their risk? And then you get into the conversations of [00:08:00] revenue disruption. A lot of really interesting conversations are disruptions in the supply chain, where a lot of the boards may have known who their tier one suppliers are, but had no clue where tier two or tier three suppliers are. And so there are types of fact -finding, gathering information questions right now. 

Joe: [00:08:21] Interesting.You know, one thing I’ve heard, I’m curious if you’ve heard this, but, I’ve heard a few, board chairs actually say that they have counseled their CEOs to think about their company from a cash perspective rather than a profit perspective.

So instead of saying, how does this decision impact profits. Now think, how is it affecting cash? Because that’s the kind of decision you need to be making now. Have you heard that. What do you think about that? 

George: [00:08:54] I have heard variations of that and it’s very consistent into the, the theory of going from crisis [00:09:00] management, step one to risk management step two, to operating in a new paradigm, step three  You’re echoing kind of the step one let’s just figure out what we have for cash. How do we pay our employees? Where’s the revenue coming from? What do our receivables look like? So, you know everybody’s on deck   the 

Joe: [00:09:33] But I am not talking

decisions that not so much worrying about profit in the short term. Is that something that you’re hearing ?

George: [00:09:47] Yes, and it goes to survival.  You’re not worried about making the income, you’re trying to keep afloat. 

Exactly. 

Raza: [00:09:55] Earlier you talked a little bit about how the board should be operating now. [00:10:00] But, can you talk a little bit about what makes a good board member in this new world? 

George: [00:10:07] Yeah,  one of the things that I try to advise, and I guess just from past experiences, you know, again, through 2001, 2008 and now, I think a really good advice to directors to know your role, understand your duties of oversight, your duties of care.

Listen aggressively, but fight the tendency to grab the wheel. We have a lot of boards now with a lot of experienced people, and the tendency in a panic situation is to grab the wheel. Kind of like my daughter when she’s learning to drive, the worst thing I can do is lean across and try to help her.

 You want to trust your management team, and so a really good board member, understands their role and how to be supportive from a governance and to fight the inclination to become a part of the management team. 

Joe: [00:10:55] Who is it that needs to steady the board to [00:11:00] make sure that that balance between governance and management stays, in the right place? Is it the CEO? Is it the chair? Is it you sometimes? How’s that working? 

George: [00:11:11] It really has to come from the board itself. And I think, Joe, to your point, it’s,  the chair or the lead independent director, depending if the CEO and the chair of the same, because they need to keep the communication loops going and more frequent, both within the full board and within the management teams. And they can play – and behaviors are key, right? People will follow good behaviors and good culture. And if the board starts adopting weird behaviors or panic culture, that’s just going to disrupt everything. 

And if anything, I try to counsel people to say, look. this is when the CEO needs more room to breathe, to be able to pivot, to react and don’t choke him with a hundred questions cause you’re concerned about [00:12:00] something you have not agreed to that the board thinks is a concern. So the, the chair and the l ead director can play a pivotal, you know, a conductor of the orchestra role.

Joe: [00:12:10] Boy  I love that advice. Give your CEO room to breathe. Everyone wants to be helpful, but they have more on their plate now than probably ever before. 

Let me ask you a question. You’ve been, you and I have both been around longer than maybe some other board members – how does this crisis differ from those that we have faced in the past?

George: [00:12:35] The crisis management protocols and feedback loops and risk mitigation are all kind of pertinent to today’s, but everybody felt that it was either an economic turn or there was a cycle on the will pop out of it. And right now the disruptions at the magnitude across multiple continents are going to be astounding. 

[00:13:00] I mean, people, even this morning I was dealing with a industrial company that was worried about food supply and food labor and how do you get the cross-continental, shipment of goods and services? And that’s a six month question, but it’s, it’s disruptive and people didn’t have to think about that before and personal safety and not being able to do normal course of business activities. 

You know, people got on planes in 2008.  So its the magnitude of change  that I’ve seen in the board rooms today.

Joe: [00:13:37] Well, I would just throw out the uncertainty. In the past, there were certain things you could look to as potentially precedent. I mean, everything is, everything is different, but as precedent to what might likely happen in the future.  

In this situation, there is no precedent. There’s really nothing like this in any of our lives .  It’s hard to [00:14:00] know how to plan given the dramatic uncertainty about how long this is going to go on for.  And what things will look like after the crisis has passed. 

Raza: [00:14:11] Yeah, and I was going to ask George that if we think about it, that this is a time when the tide is going out and as they say,  when the tide goes out, you will find out who was swimming without their trunks. George, what do you think once this plays out for the medium term, what are we going to find out? What are we going to learn? Are companies going to find out what kind of board they actually had built and how their management team actually was, you know, doing when,  the going got tough?

What do you think we’ll find when the tide goes out? 

George: [00:14:51] It’s always a humbling moment when the tide does go out. And, Warren buffet was  clairvoyant when he, suggested that.  The interesting [00:15:00] piece is , and you really have to talk a medium term, right? It’s, I think people are going to get into survival mode, then get into recovery mode and then they’ll call them back and say, okay, how did we do?

And some of the areas. Where you can have the Monday morning quarterback is succession planning. You know, did you have the right management teams in when you were there? and , you know, sometimes the CEO and boards get very close to management teams during crisis. There’s many more communications and more feedbacks, there’s more updates. 

You’re gonna understand the board’s skill diversity, the diversity of skills. Sometimes boards. do not have enough regulatory experience, or they put off getting that cybersecurity person or they put off doing something. and, that’s another area. 

The two other areas are, risk management structures. You know, what were the risk manager? You know, some boards I’ve always debated, do I have a risk committee or not have a risk committee?  You’ll find out and it’ll [00:16:00] certainly be stress tested today, whether those are strong or not. 

And then I really think the board feedback loops . If the board was a slightly a little dysfunctional beforehand, and then you throw in the weight of a crisis, those things usually  show quickly.  And then you’ve got to learn, maybe it is important to do some board succession planning. Maybe it’s better to have board appraisals and that have effective ones versus, you know, regulatory compliance type of process. 

Joe: [00:16:31] So, in a way, some of the fundamentals that have always been true will, post crisis, it’ll be clear  how important they were. And I, I’ll talk about one thing in particular. 

We talk about diversity of boards. And I don’t mean just gender diversity. I mean diversity in all ways, diversity of skills, expertise and other attributes. Because the diversity in the boardroom means different perspectives. And [00:17:00] collectively that group of people then is usually stronger. 

That kind of fundamental seems to me like something that would really, really go a long way now for a board. A truly diverse board with a lot of different perspectives is more likely to be able to advise their CEO than maybe a board that wasn’t as well constructed as that.

Don’t you think? That’s probably right?

George: [00:17:26] Yeah. I couldn’t agree more, Joe. And one of the things that I  usually see is, not only the diversity of skills, but sometimes boards build, too technical aboard where they will get what I called, the OneNote piano, director who is very technical in one area. But then when you have to talk about strategy and diversity of, how the company operates in a crisis, and this person only knows to play one tune, that that will stand out for, very quickly to the rest of the group. 

And [00:18:00] we, you know, you really talk about, and, and the problem is that goes right back into board feedback loops with board appraisals.

If you’re not giving feedback to a director to be better. Or to have the honest conversation that perhaps after 15 years you may not be as relevant today when a company needs to pivot into a new area or have much to add when it is in an area.  I’m a strong believer that after this crisis that, board appraisals and board succession planning will become a hot topic. 

Just like CEO succession planning became a hot topic when, the 2008 crisis came. A board succession planning is going to be a topic of, geez, did we have the right people around the table? How long is too long, and what do we need to do about that? 

Joe: [00:18:49] Absolutely right, no question about that.

I think also that the sometimes difficult process of offboarding, which even the best [00:19:00] CEOs and board chairs sometimes find very difficult is going to be easier. Because looking at how the board responded in the crisis is going to give people a a a basis for conversation. The kind of conversation that people should be having with board members all the time, but because of this, maybe that conversation is just going to be easier to have.

George: [00:19:25] Right. I agree. I think it’s going to, it I, it’s funny, I didn’t think of it from that way when you started the question, but I get it. Meaning, yes. Now it’s like, Hey, we just came through this. We need more regulatory. We need more supply chain. ,We’re in a new industry now. You know, we’ve pivoted into something completely different. We need something. 

The other thing that it’s going to come up with. And I, and I worry that because the economics are changing and the economics, I don’t know what 2021 is going to look like economically, but I do worry that people are going to want to sit on boards as a part of their retirement income [00:20:00] and they’re going to, they’ve lost a lot in the marke their businesses are changed. And I saw this after 2008, and a couple of other mini crisises where board members like to stick around because they need that extra cash to supplement whatever they’re doing. And that’s a red flag behavior. When I talk to somebody or they want to be on a board, or someone calls, calls me and says, Hey, I want to get on a boardI want to have my retirement. I want to be on two or three and live on the Cape and do something, you know, and then you’re like, that’s not the reason to be on a board. And that’s a, that’s a huge red flag behavior. And I worry, I think boards should be attuned to that. And CEOs should be attuned to that as well.  

Joe: [00:20:36] Great point George. 

Raza: [00:20:38] George, as you mentioned, nobody’s building boards right now, but as you know that when this will be a little settled and over, we don’t know how long would it will take, but post COVID-19, people will be recomposing and, updating their boards. 

What do you think [00:21:00] would have changed at that time and when you are looking at board candidates, how would you look differently in that post COVID-19 world when now when you will be updating or composing boards?

George: [00:21:16] So it’s interesting. Boards will be different. I don’t know how yet, but they will. But the tenants, what will usually happen is what is the business that they are in and how do you layer the competencies and the matrix skills of the board to where the future of the company is going to be. And with this huge consumer disintermediation that’s going to happen post Covid 19, 

boards are going to have to be in different businesses. Are you in a service industry? Are you a, you know, consumers don’t want to go to store bricks and mortars anymore? Are you in a delivery business? What does that look like? You know, 

Raza: [00:21:56] Are you an e-commerce shop all of a [00:22:00] sudden everybody wants to deliver. 

George: [00:22:04] And if you’re a struggling garment manufacturer that was about to get disintermediated out of, foreign, land making PPE equipment right now, and you’ve retooled yourself, that may be, you know, a short-term, two to three year, survival mode for the company and made the company made pivot and look completely different.

And it’s not to be opportunistic. But it’s to be steely-eyed, sober as you look at business realities of what can you do and how does the consumer model change. Or the business to business model.

Joe: [00:22:40] So, you refer to the matrix of the board and I looked thinking about the kind of charts that I look at about the boards and what you’re looking for in the board. And  I think that’s a great visual for me at least to think about that chart is different. We don’t know how exactly it’s going to be different, but it’s not going to be the same [00:23:00] chart either within the company or just generally what you may be looking for to build a more effective board. I think that’s a great way of looking at it. 

I did want to ask you this.     Audi gap addressed 

It seems like you got to spend, I don’t know, some percentage, 10% of your time,  more for some companies, thinking about where are we going to be next year and what do I need to be doing now to get ready for what is going to be facing me. 

George: [00:23:46] You know what I enjoyed was your, definition of long term was next year.

See, that’s just, that is truthful though, but that [00:24:00] is longterm thinking right now for CEOs.  And I think one of the things that we chat about in the boardroom of the boards that I sit on, and then the boards I advise, which is right now, fight the urge to be false predictions of overconfidence. To be extremely clear in your communications -honesty right now is way more appreciated than anything else from a, and again, it’s that tone and balance. 

So if it’s uncertain, say it’s going to be uncertain. If it’s going to be hard, tell them it’s going to be hard. But I think the worst thing either directors can do, or even CEOs, to their board or to their employees is to be false positives. I think false positives, destroy morale. 

Joe: [00:24:52] Well, I, there’s no question, clear, honest, authentic communication is the gold standard. [00:25:00] No question about that.  

Raza: [00:25:02] I think in the clear communication, George, you were saying, if we’re not going to be open by Easter, then say that we’re not going to be open by Easter.

George: [00:25:12] Exactly.  Especially for new board members, cause there’s a lot of, of new board members that have come on, which is don’t overpredict and don’t get over excited, but don’t panic. But just keep, you know, steely-eyed cold, sober view.

And if you don’t know, tell them they don’t know, cause then everybody feels that you’re in the same boat with them. 

Joe: [00:25:31] Right. Makes sense. 

 Raza: [00:25:33] Going back to the topic of off-boarding, George, that’s something that was, relatively important, but relatively hard to do even pre COVID-19 world. What have you seen in terms of effective ways for boards to be, ou know, up to date and refreshed with the skills, experience, and expertise that they’d need?

George: [00:25:56] I think the conversation is going to be difficult, [00:26:00]  to say goodbye to somebody, especially if you’ve gone through a crisis. If you’ve been in a foxhole with somebody for the last year and a half, the need, there’s, you know, the, the boards.

It’s interesting when I’ve worked with boards on this topic, they’ll say, gosh, I have five or six screaming needs we want on the board. But we want to keep the board the same size or smaller cause they’re more effective. And then I kinda just pause and I’m like, well how does the math work that?

And no one reflects, like everybody wants to go to heaven, but no one wants to go right now. 

And it’s a hard, it’s a hard conversation. But I think as long as you keep the pillars and the guideposts are: what are the competencies and skills that you need, and then you’ll have an honest, self evaluation board evaluation process once a year to say, are we meeting what we say we need?

And if the board gets into a cadence of that discussion, it’ll happen. Just like it did a CEO succession, that used to be a taboo subject and quiet back room [00:27:00] conversations. And now it’s a right up, you know, as soon as the, the CEO joins, we talk about succession planning right after, he’s on board or she’s on board.

And I think. boards have to start doing that themselves on an annual basis and get into a cadence of dialogue as uncomfortable as it might be, but there’s some great boards that do it right now. I think it’s usually the weaker boards that are afraid to have that conversation. 

Joe: [00:27:23] I was going to say exactly, the fundamentals are important and this will highlight how important some of those things are.

And one of those fundamentals is – we always talk about how important it is for the CEO and the board to have trust and transparency, and if you are a board that has had that with your senior management team, your CEO and the his team or his or her team, now it’s really paying dividends because you can really, you know, you said earlier, give your CEO room because he or she needs [00:28:00] it.

If you’ve developed a strong foundation of trust and transparency with your CEO and their team then it’s going to be a lot easier to say, go do what you got to do. We just need a briefing. We need a one hour. We don’t need a long board meeting, for example, because we know you’re going to do the right thing. We know you’re going to tell us what we need to know and we know you’re going to tell us the truth about it. We trust you. The boards that don’t have that relationship, I think are going to struggle, and again, it’s going to highlight this fundamental thing that we talk about all the time: having that relationship with the leader of the company.

George: [00:28:41] Cultures and behaviors matter. Joe, it’s just, you’re just dead on. 

What’s interesting is people, and I’ve worked with some boards and we’re doing assessments for them, or trying to structure how the do the assessments and they’ll do the perfunctory compliance things of the committee structures and stuff.

But no one, and I think, you [00:29:00] know, as a, as we reflect on this conversation, how agile are boards, I mean this whole, the whole thing’s about what’s your board’s culture – are you an agile board. Are you a reflective board? Do you panic? And I can say, all right now, 50% of the boards have no clue what they are. 

As a, as a, if you described every board, how, how, what’s, what’s your culture like, the word you’ll hear is collaborative. But I think people have to start measuring , what’s your board and your thing. So when the next storm comes, you know, you’re better prepared to, to batten down the hatches 

Joe: [00:29:35] And there will be a next storm. 

Raza: [00:29:37] Yeah. And as they say, who you are is what you do. I mean, that’s where, where everything emanates from. How boards operate, interact and guide the company is what it becomes. 

George: [00:29:52] You know, there was a study done by a consulting firm that said, how good are your board appraisal process? And over [00:30:00] 70% said, not good or perfunctory.  And I know doing the board appraisals, you can talk about the general people, and you’ve talked about the strength or weakness of Phil, Mary or Jane, but are you an agile board?

 What are, what are those competencies you want to measure? They don’t have that vocabulary and that’s where I’m like, you know, 50% of the boards don’t have that vocabulary. 

Joe: [00:30:24] That makes sense. 

Raza: [00:30:26] I heard that 80% of drivers believe that they’re above average. 

George: [00:30:31] Yes. Those Sweedish truck drivers and they said, how good are you? 80% they’re in the top 5%!  

Raza: [00:30:50] What should they be thinking, developing or working on, for their skills and expertise? 

George: [00:30:57] You know what, that’s a great question.  I talk to [00:31:00] groups about this often. I think – get educated on the roles and the responsibilities of a director. Don’t view it as a retirement plan. Don’t view it as a resume builder.

But if you really understand the duties of oversight, the duties of care, and your personal risk, brand and legal, and then what you owe the shareholders, the employees, then you’re going to come in eyes wide open on your, it automatically wants you to learn more and it forces you to learn more. And then be open to conversations.

I think, the newer directors are going to be the ones that are going to change this board appraisal conversation. I think they’re the ones going to say, sure. I’m usually closer to management. I’ve probably done it before versus somebody in their early seventies facing retirement age and I know what I’m doing. I don’t need to be told I am what I am. 

Raza: [00:31:54] I was going to ask this like a, kind of off topic question [00:32:00] George, do you think that’s the market size of boards is expanding or shrinking? I, I’ll put this in context. I, from the, since the 2000, the number of public companies is almost half of what it was in 2000.  So it’s just there less number of public companies and hence less number of public boards, private debt. 

The private, enterprise however, has been, you know, expanding and increasing in numbers as capital formation and, you know, venture formation has happened or the past many years. Now with this crisis we do expect that many of the companies won’t survive, unfortunately, but generally, where do you see the trend of, boards in general and board, market for board members going? 

George: [00:32:52] Raza, it’s a great question. And, I was just talking with my partners about this, a couple of days ago. 

What will [00:33:00] we’ll be sure is, you know, the, the IPO markets and things like that, who knows what that’s gonna look like in a year. But one thing will be certain, the board turnover, the velocity of change will be, has always been very high post crisis. Because people realize who they’ve had or what they need to get.

 I also think that private equity once liquidity comes back into the market. They’ve been sitting on billions of dollars of dry powder, but the valuations have been too high. I think the private equity peers are going to be voracious in terms of their appetite to put capital to use, because they also get Kerry. And once they put the money to use, then they’re going to be making money that they lost in the market. 

And, that means board change. And I think we’ve done a lot of conversations on and consulting to private equity shops of how to best optimize boards. And again, different,  characters on competencies are needed on private equity [00:34:00] boards then on say, a US public, large cap board, very different individuals. And the velocity of change will be very high, I think in 2021, 22. 

Joe: [00:34:11] Great. Thanks. That’s great answer. 

George, it’s been great speaking with you. Thanks so much for joining us today. I hope you and your family will continue to be well and stay safe. 

George: [00:34:24] Thanks Joe, and thanks Raza and please everybody stay safe as well. But thank you for the privilege of being on your show. 

Joe: [00:34:31] Thank you all for listening today to On Boards with our special guest, George Davis.

Please stay safe, take care of yourselves, your families, and your communities as best you can. 

Raza, please take care. I hope you and your family continues to be well and stay safe. 

Raza: [00:34:50] Yes, Joe, and we are all safe. Thank you. And I hope you and your families as well. 

6. Joe Baerlein on crisis communication: clear, concise, honest communication and, especially now, a strong dose of authentic empathy

Joe Baerlein, a nationally known strategic communication advisor for some of the country’s largest companies, trade associations, large non-for-profits, talks about what matters: always consider the long-term impact on the company’s brand and reputation – and never be afraid of providing truthful information or being proactive about providing it.

Thanks for listening!

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Links

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Joe Baerlein’s Bio

An example of authentic, clear and factual communication from Arne Sorensen, President and CEO of Marriott International with stakeholders:

Quotes

If you are a CEO of an organization, you need to say we’re doing everything we possibly can.  We’re observing everything that the CDC, the various state departments of public health are telling you.  But we want you to know that we care about you. We are one community…this will eventually recede if we do everything. 

If the CEO of a particular company can’t deliver that message and come across as authentic after two tries, then I would say that’s not the messenger.  And you’d have to think about who might be the best messenger.  It could be the senior vice president of health and safety who may live this in his or her bones every single day. It could be the chair of the board – because people will smell in a second if you’re not authentic.  13:08

I think this [Covid-19] changes everything. Why? Because it’s unknown and I think smart CEOs are going to look at their board and say, what do you think? 7:46

[Information you provide to the press] must be 100% accurate because you do not get the proverbial second opportunity to make the first impression. 15.10

Ideas/Comments

Companies have to have a communications vehicle that can speak to all of their publics, broadly defined, meaning who’s important to them: their employees, their customers, their vendors, the community where they do business. And they have to be able to talk in real time.

During the coronavirus crisis the separation of management and governance for boards will shift – it’s all “hands on deck.”  Companies need the expertise of their C-suite, of their outside experts and their board now more than ever because they need to figure this out, together.

When there is a crisis, the company’s brand and its reputation is a responsibility of the board.

When an unknown hits, you should at least have to have some operating principles on how you would react.  What are our highest risks? What could happen in this company from A to Z?  How would we manage those risks? What level of resources would we need?   What are the five worst things that could go wrong? What are the first five things you do?  It depends on what the business is, but it allows you to have a game plan, that you will alter depending on circumstances, when and if something bad happens.  But at least you have a game plan on how to respond when a crisis strikes.

Transcript

Joe Ayoub: [00:00:00] Hello and welcome to On Boards: a Deep Look at Driving Business Success. Hi, my name is Joe Ayoub and I’m here with my co-host Raza Shaikh.

Hey Raza, how are you doing today?

Raza Shaikh: [00:00:21] Very good Joe and I’m very happy to be here with you co-hosting.

Joe Ayoub: [00:00:25] Good to be with you too.

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 – it’s board of directors or advisors.

Raza Shaikh: [00:00:44] 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 more importantly, how to make your board one of the most valuable assets for your company.

Joe Ayoub: [00:01:01] Our guest today is a nationally known strategic communication advisor for some of the nation’s largest companies, trade associations, large non-for-profits, and specializing in reputation and advocacy matters.

Raza Shaikh: [00:01:16] Working with boards, law firms and businesses all over the country, he has managed over a hundred crisis and reputation assignments on a variety of topics, including Department of Justice, US attorney and State Attorney General investigations, sex abuse at private schools, airplane crashes, data breaches, and media investigations into high profile individuals.

Joe Ayoub: [00:01:43] We’re very excited to have as our guest today, Joe Baerlein.  Joe, welcome. It’s good to have you here on On Boards.

Joe Baerlein: [00:01:49] Great. Thank you.

Joe Ayoub: [00:01:51] First to our listeners. For those of you listening during the time that the novel coronavirus is still spreading, and we’re all trying to understand how to best conduct ourselves, we hope you’re all taking precautions to stay safe.

Joe, as we record this show today, COVID-19 is the number one topic for everyone. I think most people would agree, last week was unlike anything almost any of us in this country have ever experienced. It is an uncertain and unsettling time.

You’re the person that’s called when there’s a crisis, and certainly this qualifies as a crisis. So I’m sure you’re getting calls about messaging and addressing internal issues and many, many issues that are facing companies today, which they may have never before faced.

Can you tell us a little about what kind of calls you’re getting and what kind of questions are coming into you.

Joe Baerlein: [00:02:51] Well, I think what’s been going on, you’d have to divide it into this week, last week and the week before because, each of those weeks was different. I would say three weeks ago it was: “Tell me what you think about this. You think this is something we have to be concerned about?”

Last week when the stock market crashed and you saw governors of various states and finally the federal government acknowledging that this was indeed a serious pandemic, I think there was widespread “what do we do?” And I think the first thing you saw companies doing was how do we get our employees to work from home and with the CEOs that I’ve spoken to in the last week or so, I would say that was the major effort. How can we clear out all the people that we can to work at home?

This week now, have companies thinking in a variety of different ways. One: this may be longer than we thought, therefore, how do we think about planning for the near term and the longterm?

(Two) What is my responsibility to my employees, my vendors, and my customers over these next let’s say 60 to 90 days to be charitable here.

And then number three, what sort of preparation and response do they need to be thinking about.  And I would say that last one is really just occurred since, I would say the end of last week, up until 96 hours ago, we were in a different phase.

So as an example, my team, my team is a group of a specialists in security and preparedness, in video content, digital marketing, digital technology, microsites, which are websites for a specific target. I have an international government relations specialist. I have a survey research person.  Our team was hired by a major national retailer officially on Saturday. Their issues are how do we deploy people in their company all across the country?  How do they bring customers into their store and then get them to exit their store? And then, how do they communicate to their employees

And what was interesting, their sales force need to have information that they don’t usually get from the company headquarters. So we’re building this microsite, which will be geared towards specific information for their sales force  So, if you envision your traditional website that you’re all familiar with, this will be something specifically on the coronavirus, and it’ll be particular to this business’s operations, and it will include, you know, a Q & A, what should say a store manager know if asked by a customer on a daily basis, and that’ll change probably every 12 hours or less. There’ll be a statement from the CEO about what the company is doing nationally to protect their employees, their customers, their vendors. And then there’ll be information on how either employees, sales force or customers get additional information.

Joe Ayoub: [00:06:34] That sounds interesting.

One question that we talked about a little bit before was to what extent are boards of directors meeting now to discuss how their companies should be messaging?

 Every board I know is meeting virtually, none of them are meeting personally right now.  What should boards who are thinking about the well-being of their companies or thinking about potential liability or thinking about how to act responsibly during this very difficult time, what kind of conversation should they be having?

Joe Baerlein: [00:07:11] As both of you know, traditionally the bright line that separates board from the C-suite is, the C-suite and the CEO are responsible for day to day management, and the boards are tasked with looking at the long-term issues that face the company as well as the operational issues the financial reporting.

I think this changes everything. Why? Because it’s unknown and I think smart CEOs are going to look at their board and say, what do you think? What do you think? If you have a former CEO on your board. I think that’s going to be one of the first people that you as the CEO call. So I think we’re in a different ballgame.

Joe Ayoub: [00:07:56] Yeah. the, the separation of management and governance is really going to be a little blurred –  it’s all hands on deck. We need the expertise of our C-suite, of our outside experts and our board now more than ever because we need to figure this out together.

Raza Shaikh: [00:08:12] So Joe, now, when you’re getting calls from your clients, what are you advising them?

Joe Baerlein: [00:08:18] Well, first of all, they have to have a communications vehicle that can talk to all of their publics, broadly defined, meaning who’s important to them: their employees, their customers, their vendors, the community where they do business in. They have to be able to talk in real time.

I can’t tell you how many perfunctory emails I’ve gotten in the last 48 hours from businesses and organizations. We want to let you know what we’re doing on the coronavirus. I don’t even read them anymore because they’re old information and they don’t say anything .

I think the first step is to say, how do you figure out how you’re going to talk and communicate to those important constituencies that matter to your business.

Joe Ayoub: [00:09:06] So what should a company do in its communication to make sure that people like you and me don’t see the email and go, Oh, this is perfunctory, this is old news, this is, this isn’t going to tell me anything.

What do they need to be doing so people are actually going to read it and what they want to communicate is going to get to them?

Joe Baerlein: [00:09:28] If you think about it, we all have choices in what we decide to open, what we decide to read, what we decide to view. So one is the information has to be new, it has to be credible and it has to be, if not medical or science based, it has to reference that information. So if you want to stay on top of this today, you’re probably reading three or four major newspapers a day.

 So if I was a company, I would be looking to say, what can I tell people who don’t read The Washington Post every day or the New York Times or the Wall Street Journal? What can I tell them? You know, the aggregation of news, for example, is really important here.

Joe Ayoub: [00:10:13] So going beyond just giving them good information and going back to this, national retailer you mentioned, you’re setting up a microsite, you said, why kind of messaging. Not what are they going to say, but what generally, other than informational, should they be providing to their various audiences?

Joe Baerlein: [00:10:34] I think I would divide this into two parts. One is factual information so that people know if you’re XYZ company, you’re going to continue to be open for business, you’re going to change your hours, you’re gonna alter the way that customers visit your operation. You’re going to have more things online than you did before. You need to give them that.

But then I think what is missing in a large way across the board today is any degree of empathy about what people are going through.

I strain to see that in public officials, in business leaders, right? Which is, this is very uncertain. This has a degree of fright that we haven’t seen. Take 9/11 it’s comparable to that in my, in my mind. And I had an assignment for a company five days after 9/11, so I think you need to reassure, if you are a CEO of an organization, you need to say we’re doing everything possible we can.  We’re observing everything that the CDC, the various state departments of public health are telling you. But we want you to know that we care about you. We are one community. We are, in this case, one Commonwealth. I mean, I could almost write the words to say, this will eventually recede if we do everything right.

Joe Ayoub: [00:12:07] How do you deliver that message and make it sound like you really mean it as opposed to our people told us to say this, we really care about you. I mean, how do you make it so that someone actually gets this message and think – they’ve given this some thought? They actually might care about what is happening.

Joe Baerlein: [00:12:27] I look at that and say, if the CEO of a particular company can’t deliver that message and come across as authentic after two tries, then I would say that’s not the messenger.  Right, and we’d have to think about who might be the messenger, the best messenger. It could be the senior vice president of health and safety who may live this in his or her bones every single day. It could be the chair of the board because people will smell in a second if you’re not authentic.

Joe Ayoub: [00:13:08] Talk a little bit about the microsite that you’re setting up for one of your clients. What would be its purpose and how will it help that company. deliver its message and deliver the information at once to its audience.

Joe Baerlein: [00:13:23] The way to explain this, I think to your listeners, is: company websites are like giant ocean liners. They’re really hard to turn around. Microsites are like speedboats, right? They have very functional software tools on them that enable you to adapt very quickly to a changing environment.

So for example, if you wanted your customers or employees to communicate the position to an elected official, , you can build a box into these microsites that allows you to write your congressional delegation, so that a citizen or an employee could send a note to any one or all of the nine congressional districts quickly.

I think the second thing is the ability to fresh up information really fast. In some of these cases where we’ve had crisis situations, we’re changing information, altering it every three to six hours. 

And then the third thing is for a company who wants to reach, say, a sales force, you can make this password protected. So if I’m the store manager in Tulsa, Oklahoma, and the headquarters is in New York City, and I’m wondering what, what’s going on, I can go in several times a day and see updates. I can see the video from the CEO, I can see the Q & A, which gets altered. I can see any and all information in the store, hours of operation. That’s the value.

Raza Shaikh: [00:14:59] So in doing all of that, Joe for these communications, what factors should we consider when sending out those communications?

Joe Baerlein: [00:15:10] One, it must be 100% accurate because you do not get the proverbial second opportunity to make the first impression. Right? So you must be that.

You must be concise in the information that you are going to distribute, about whatever the situation is. And I would say the third thing is you have to let people know whether it’s employees, if it’s environmental issue, people in our community, you have to let them know you actually care about this and what you’re doing to alleviate this in great detail.  That’s an absolute necessity. If you put out anything less than that, people will then dismiss it. It’ll look like all those emails we’re all getting about what they’re doing

Joe Ayoub: [00:15:58] Makes a lot of sense.

So Joe, you’ve been providing advice about communications and crisis management for a long time. I believe your first experience advising a board was a number of years ago when you were still working with the Choate Group, which was the public strategy subsidiary of Choate, Hall & Stewart – you started that group in 1987, is that right?

Joe Baerlein: [00:16:19] Yes.

Joe Ayoub: [00:16:20] Tell me about that first situation you had that involved giving advice to a board and how that played out?

Joe Baerlein: [00:16:27] So this was one of the major national credit reporting companies, and they had an issue at that time where the vendor that they used did not understand this, municipal lien process in the state of Massachusetts.

And so what happened was that the first headline in the newspaper was that over a hundred thousand people had their credit affected by this erroneous interpretation of this municipal lien statute. This went on for three days, so on day four one of my partners decided to call me in on this.

The first meeting was with the general counsel of the company, the senior vice president of government affairs and I listened. So I, this was three o’clock in the afternoon and there was an hour long session about this and, finally, I said they’re going to go file their copy at five o’clock because it’s a business story on Page One.

What are you doing?  What do you have to give me? And they looked at me like I had two heads and I said, look, you know, if you’re telling me that this is not 100,000 people at risk, it’s less than a thousand – their research had shown that – then your goal has to be to get this off Page One and back into the business page.

Joe Ayoub: [00:18:03] Because at a thousand it’s not a Page One story anymore.

Joe Baerlein: [00:18:07] Right.  It’s a, it’s a story. It may be on page one of the business story, but it’s not a Page One, and it’s certainly not a Page One four days in a row. So we got to this hemming and hawing back and forth, and now it’s a quarter to five and I said, what do you got to give me?

And my partner said, well, we have a detailed letter that’s gone to the Attorney General, but that’s privileged.  And I said, well, let me see it, and I read the letter and it basically laid out all the ways that this was, this mistake, which they acknowledged was a mistake, really affected less than a thousand people, not 100,000.

So I said, give me the letter. Well, it’s privileged. And I said, look, here’s your choice: Page One or inside the business page.

And so at that point, a member of the board, who was a lawyer, joined the call and, he came in in the bottom of the eighth inning here, so to speak. And I did a summary of this and I said, look, here’s what we have to do in my opinion. The ground rules would be to the reporter: look, I’ll give you this on an exclusive basis, but only if it goes back into the business page. And then I said, and if, we are wrong, you can go back to putting this back on Page One, but I believe we’re right. And if we’re right, you’re looking really bad if you keep printing 100,000, cause it’s going to come out eventually that it’s less than 1,000.

So, the board member, said, go for this, and the general counsel, agreed, it was interesting the general counsel and the, and the board member of the company said, yeah, go for that.

 So I called the reporter and I said, look, I got something for you. Here’s the trade. It’s not 100,000, it’s less than a thousand, I have a letter to the Attorney General that lays out why.  I’ll give it to you and you only, but it’s got to go back on the business page. . He took the trade, I sent him the letter, the next day it was back in the business page.

Joe Ayoub: [00:20:12] So two things I take from this as a board member or someone that advises boards. Don’t be afraid of giving truthful information. Why would you hold that in your back pocket? And absolutely don’t be afraid of being proactive about doing it because holding it back, I would think minimizes or devalues its importance.

Joe Baerlein: [00:20:35] Well, and I think again, sometimes, lawyers might look at something very narrowly and say, well, gee, that’s a privilege document. And I’d say, as a nonpracticing lawyer, so what? If this means protecting the company’s brand and reputation, and in that case, this turned out to be the right solution.

Joe Ayoub: [00:20:56] The last thing you just said is, to me, why a board’s involvement in this is so important because the board’s responsibility is the company. So the company’s brand and its reputation is a responsibility of the board, and in this situation it is incumbent upon them to look at this very broadly.

Great, to have lawyers in the room – we have two in this room right now of the three of us – but from a board perspective you have to look way beyond, you know what’s privileged, what’s not privileged. Obviously keeping a mind, you know, you can’t violate the privilege if it’s something really critical that can’t go out, but you have to think about what is in the best interest of the brand of this company.

Joe Baerlein: [00:21:40] And many times, the first thing I say when I get hired, working with a lawyer I have not yet worked with, is I’ll say I was Of Counsel at Choate, Hall & Stewart, and I understand our first responsibility here is to protect the legal strategy and the legal rights. So 9 times out of 10, we’ll be on the same page, but there’s going to be an occasion in this assignment, likely when we’re going to be having a discussion about the legal rights and legal strategy versus the brand and reputation. And I said, we’ll talk that through. And you can see their shoulders just drop in comfort like, okay, this guy is not someone who throws the proverbial spaghetti up against the wall and wants to get the client in the newspaper or on television every day.

Joe Ayoub: [00:22:26] Right.

Raza Shaikh: [00:22:28] Joe, several years later, you were brought into an internal company situation by a member of the board regarding serious allegations that the CEO had a relationship with a woman working in the company. Tell us about that and, what happened and how you advised your client?

Joe Baerlein: [00:22:45] So this was several years ago, just to put it in context.

It was certainly pre Harvey Weinstein. It was pre the “me too” movement, but it was certainly at a time when most companies had policies in their handbooks about what defines inappropriate conduct or contac  between male and female employees.

What was interesting, this company was a fairly big company, but it was silent on  people in a senior role having a consensual relationship with a subordinate.

Joe Ayoub: [00:23:26] Just want to interject. It’s not just male and female interaction. It’s any kind of sexual relationship, whether it be male, female, or otherwise.

Joe Baerlein: [00:23:36] Right. And at this time I was just saying, this happened to be male female, the CEO of the company, a woman who was not a direct report, but she was an officer of the company. They were both single, right? That was  the situation.

Joe Ayoub: [00:23:51] So on its face, if you think about it, two unattached people, not reporting to one another, doesn’t on his face seem like a  bad thing, but there’s no company policy that addresses it.

Joe Baerlein: [00:24:08] Right? Correct. And I think you saw recently there was an issue, with the McDonald’s CEO who was dating a subordinate, but they did have a policy in place that said that was a violation of the policy in a he, I think he was allowed to resign. so that was very clear on its face. This was silent. and this was at a time, I think it was like 2011 or 2012 where there was certainly a heightened interest on these issues, between what was appropriate and what was not appropriate in office situations.

So I got brought into this by a board member who I knew.  And, it was interesting, the first meeting of the board, there were nine people on the board, it was eight to one to say no issue with this. And the one person, who was the person who brought me in, who said, well, we have to look at this because there’s no policy as to whether or not we would get hurt.

Joe Ayoub: [00:25:14] Question: was there gender diversity on the board?

Joe Baerlein: [00:25:19] Yes, but it wasn’t, it wasn’t a, I think there might’ve been two women and seven men, right? It was two, maybe three, but it was certainly not five, four, or four or five.

Raza Shaikh: [00:25:31] And Joe, is this when the board begin to realize that they have to manage aggressively some headline risk?

Joe Baerlein: [00:25:40] Yeah, I mean, I had several meetings with the board.

First there was a subcommittee, there were three people, the gentleman who brought me in and two others, and I just started talking about risk. And this woman had been promoted to her position within the last year to 18 months.  By him. But she did not report directly to him. I think she reported into the COO or the CFO.

 So there’s not a direct reporting, but he technically had to agree with the promotion.  So as you dug deeper into this, you saw there were degrees of complication as to how they might handle it.

Joe Ayoub: [00:26:23] So what did you advise them?

Joe Baerlein: [00:26:25] This CEO had done a wonderful job in the running of the company in terms of everything – profitability, you know, meeting all their financial goals. And there was a strong sense, well, there’s no reason to have to force him to leave. So I said look, let me paint a scenario for you, which is, you allow him to stay and someone out of those 10 senior vice presidents that, are in the same line as this woman is, decides to drop this to the press and say CEO “X” is having a relationship with Senior VP “Y” and, she just got promoted and that’s all they have to say.  And, you know, in some outlets, that’s enough. If you go the gauntlet from TMZ to sort of others, that’s a story, right. And then I said, the question becomes how big a story is this?

How long does this story go for?

Would there be others that come out and say, yeah, I agree she shouldn’t have been promoted to that job. Said, anonymous, you know, XYZ company Senior VP, and then all of a sudden you’re dealing with multiple day story. 

And the rule is if you can’t clean it up by the third story, then you’re in for a long haul.

And so when I said that I got some of the board to pause.  I think what got people to accept what I suggested is I said, look, by all accounts, this is a very ethical person who’s running this company. He has done nothing wrong in his past, and he read the same handbook that everyone else did. It said, I don’t have to disclose anything.

Joe Ayoub: [00:28:28] Completely silent.

Joe Baerlein: [00:28:29] Completely silent.  And I said so think about this. If this CEO gets beat up on the way out the door, and by the way, if you get to a fourth, fifth, and sixth story on this, there’ll be pressure on you to ask him to resign.

So if you really respect and admire this person, I would say allow him to resign and allow him to put his own reasons on why he is resigning, because if he’s that good, as you say, he’ll get picked up by another company in the next 6 to 12 months, and you can figure out what a generous severance is.

And then the question became on whether the woman should leave also. And I said, look, you could decide to do that if you want, but a Senior VP is not at the same level as the CEO.

And so what happened is they brought him in and he understood this and he said, yeah, I don’t want to get beat up on this, I don’t think I did anything wrong . So he resigned, there was some attention, but not a lot of attention. It wasn’t really, no, it was minimal attention.  And six months later, he was the CEO of another company.

Joe Ayoub: [00:29:47] So, actually the result was excellent. It does kind of underscore the importance of having that kind of policy really clearly laid out. Today, it’s kinda hard to imagine any company of any size would not address that. But the result the board came to was the result that would have come about had there been something in the book because it would have prohibited the relationship that they were involved in.

Joe Baerlein: [00:30:16] Yes. but, you know, when that one, as I said, it was a eight to one when I started. And then by the time I think we had six, seven meetings, it became the majority. And actually everyone unanimously thought, and then they brought in the CEO. I was not part of that meeting, but the executive committee met with him and he understood this

Joe Ayoub: [00:30:35] Right.

Raza Shaikh: [00:30:36] So with this fast track of, news on the internet, Joe, when do boards realize that the importance of aggressively managing headline risk is paramount for the company and for the boards?

Joe Baerlein: [00:30:50] Well, in most cases I have seen, there’s not a practical understanding on how that works. . So…

Joe Ayoub: [00:31:00] You’re saying not a practical understanding on the part of boards?

Joe Baerlein: [00:31:04] Yes. 

Joe Ayoub: [00:31:05] So what are, what are they missing?

Joe Baerlein: [00:31:06] Meaning, if you look at a board and you say: I got a former CEO on the board, I have my outside counsel, I have someone who is a partner in an accounting firm, down the line. There’s usually nobody like me,  and again, these are all very smart people in their field, but this is new to them .

So sometimes when I go into an assignment, I say this is how you need to think about proactively protecting the brand without stepping on day to day governance issues of the CEO.  But understand today with the internet, a reputation can be blown up in, in a day. It was before online, you know, going back to like 2000 you would say, okay. The 24 hour news cycle.

Just think about what a joke that is now, right? The information moves so quickly.

Raza Shaikh: [00:32:01] Oh, it’s a two hour news cycle.

Joe Baerlein: [00:32:03] And, I think the other thing that I say to them is  because traditional media has shrunk, many times the online world is the new assignment desk, meaning here’s a story. And you get calls from a respected entity that you have to run down something or ultimately turns out not to be truthful.

So I think what I say to boards is, one, it’s moving really, really fast. Two, you have people online who are not the same respected journalists that you see at the Boston Globe and the New York Times, Wall Street Journal, the Washington Post, where you can actually have a conversation with someone and say, look, let me make my case on whyI think this is wrong.

Joe Ayoub: [00:32:48] Now, you can’t do that anymore with a lot of people. It just doesn’t exist.

Joe Baerlein: [00:32:51] So in the online world, you get the story and then you’re playing the prevent defense.  It’s a bad place to start off.

Joe Ayoub: [00:32:59] Yeah. You know, it’s funny you talked about the kind of people that might be on boards, and I would say. It would be extraordinarily rare to have someone who’s used to dealing with headlines, crisis headlines, on a board.  So it probably applies to almost every board, no matter how well put together they are, no matter how well they were constructed for the strategic plan of the company, they’re not likely to have dealt with the kind of headline risk that you’re talking about.

How do they prepare for it so they’re not calling you? You know, as you said to me once , I always get the call when there’s a four alarm fire, so what can the board do in advance? So they’re not waiting until, you know, the horse is out of the barn or whatever metaphor you want to use.

Joe Baerlein: [00:33:46] Well, again, if you think about it, I think about an example I had on anthrax back in 2001. So I got hired by the largest direct mail company in the world, happened to be located in the United States. Basically your everyday junk mail that we all get, right. That’s what they move through the system.

And when the first case of anthrax was discovered in the US Capitol in 2001, I got a call from their outside investigative firm.  So I was brought in and they were nowhere near a headline, and they were a very decentralized company, but they had no one in that company all the way up to the CEO would ever had any experience with this.

So we spent eight weeks. Fortunately we had eight weeks, of going through all of the various contingencies. Of what could happen and what their response can and should be.

Joe Ayoub: [00:34:49] So you had a luxury in that case that you had eight weeks

Joe Baerlein: [00:34:52] Very often doesn’t happen.

Joe Ayoub: [00:34:53] Oh my goodness. I mean, today Raza just talked about a two hour cycle. I’m not even sure it’s sometimes not even, it’s less than two hours. Today with news moving or information moving so quickly – what should a board do to be prepared to take action as quickly as possible in the event of a headline crisis?

Joe Baerlein: [00:35:17] Think they need to look at the business that they are in and say, what are our highest risks? And then go through and role play. Ed Davis, the former police commissioner, who’s one of my agency partners, we’ll actually do that. We’ll, we’ll go through a roleplay and say, what could happen in this company from A to Z? What would be those risks? And then we’d say, how would we manage those risks? What level of resources would they need outside resources to go into the company?

Joe Ayoub: [00:35:48] So do a prep with the board for potential headline risk scenarios so that when it happens, they’ve already at least given some thought to it.

Joe Baerlein: [00:35:59] It’s actually a plan you get them, you’d give them a document that says, all right, you’re in the energy business. Here are the five worst things that could go wrong, right?  How do you deploy people. What are the responses? What internal resources might you need. So, you know, it depends on what the business is, but it allows you to have a game plan that you will alter, by the way, when, when and if that happens. But at least you have a template on how to respond.

Raza Shaikh: [00:36:29] And so, Joe, you’re saying that, for the known unknowns, you will have a plan for things that you know, can happen.  But that, does that cover unknown unknowns as well? Do you have a general plan about, okay, well how do we get together when a crisis happened that we never thought about or, or, never worked through before?

Joe Baerlein: [00:36:49] Coronavirus is a pretty good example, right? I mean, I don’t think, I think we were all sort of numbed by swine flu, Ebola, SARS, and said, okay, it’ll be handled. It won’t reach us.  When an unknown hits, I think you at least have to have some operating principles on how you would react.

Again, if you’re in a retail business, how do you deploy your employees and how do your customers access your premises if it’s a brick and mortar, right?  How do you get information if you’re a national company out to your workers? So it would vary, but I do think you could at least go through that exercise of planning what happens, what are the first five things you do?

Raza Shaikh: [00:37:37] Yeah.

Joe Ayoub: [00:37:38] Joe, it’s been great speaking with you. Thanks for coming in today and thanks for joining us here on Onboards.

Thank you all for listening today to Onboards with our special guest, Joe Baerlein. Please stay safe and take care of yourselves, your families and your communities as best you can.

And you, Raza, you take care too.

Raza Shaikh: [00:37:59] You too, Joe.

Joe Baerlein: [00:38:00] Right. Thank you both.

5. John Hession on investor-backed company boards: discipline, tough love and results

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.  

Thanks for listening!

We love our listeners! Drop us a line or give us guest suggestions here.

Links

https://www.morse.law/attorneys/hession_john

https://seraf-investor.com/compass/article/key-angel-investing-tax-issues-infographic

Quotes

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

Big Ideas 

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.

Transcript

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. 

4. Board Diversity, private company boards & the impact of social media: a conversation with Beth Boland

Beth Boland is a force to be reckoned with.  Named one of Massachusetts “most influential lawyers,” Beth was first initiated into the world of shareholder defense working as a clerk for a district judge on the Mike Milken and Ivan Boesky cases. Now chair of Securities Enforcement & Litigation Practice at Foley & Lardner LLP, she also serves as President of the New England chapter of the National Association of Corporate Directors (NACD). 

An expert on how boards operate, she champions the expansion of diversity on boards and has worked tirelessly to bring gender diversity to the boardroom.

Thanks for listening!
We love our listeners! Drop us a line or give us guest suggestions here

Quotes

“I think folks [in private companies] are really growing away from the idea of thinking of their board as a potential nuisance that they have to deal with, and [thinking of it] as one that is really a strategic asset.” [12:10]

“I guarantee you that there are some rock star women and aspiring directors of color who will knock your socks off.” [19:05]

“Take care of your people, who will take care of your product, which will take care of your shareholders.” [27:40]

Big Ideas 

The increasing interest of private companies to run their boards more similarly to their publicly held counterparts. [09:50]

Board diversity. [14:53]

Shareholders are insisting that companies recognize and address a much broader range of stakeholders to benefit their shareholder’s long-term interests. (22.16]

The growing trend, and recent Delaware court decisions, to hold boards accountable for the interests of stakeholders beyond only shareholders. [22:38]

Links

Beth Boland’s Website

Beth Boland on LinkedIn

B Corps

Business Roundtable

NACD New England

Transcript

Joe: [00:00:00] Hello and welcome to On Boards: A Deep Look at Driving Business Success. Hi, my name is Joe Ayoub and I’m here with my cohost Raza Shaikh. Hey Raza. 

Raza: [00:00:11] Hi Joe, happy to be here with you co-hosting. 

Joe: [00:00:13] 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: [00:00:33] Joe and I speak with a wide range of guests and we talk about what makes a board great, what makes a board unsuccessful, how to be a good board member, and more importantly, how to make your board one of the most valuable assets for your company.

Joe: [00:00:51] Our guest today is a highly regarded securities attorney who represents clients in shareholder suits, SEC and Attorney General investigations and consumer class actions. 

Raza: [00:01:03] She serves as the securities enforcement and litigation practice chair at the law firm of Foley and Lardner, and also serves as the President of New England chapter of NACD, the National Association of Corporate Directors.

Joe: [00:01:20] We’re very excited to have Beth Boland as our guest today. Welcome, Beth. 

Beth: [00:01:25] It’s great to be here. 

Joe: [00:01:26] It’s great to have you as our guest On Boards. 

So your background as an attorney is really interesting. Can you tell us a little bit about  what you did that led you to focus on shareholder defense work?

Beth: [00:01:40] Sure, sure. I, after coming out of law school, I was so fortunate to get the best clerkship in the world, which was clerking for a very famous judge for the Southern District of New York in Manhattan. And, the docket that he had on some of the key cases were the Michael Milken and Ivan Boesky insider trading cases, I was clerk on those and got started there, really got hooked.

Coincidentally, I just got off the phone right before I came over here to the studios with a New York Times reporter who called me up to comment on a certain board situation and it turned out that he wrote the book that I read when I was a clerk. called Den of Thieves on Michael Milken and Ivan Boesky and so it was such a small, you know, small world sort of thing. 

We also sat by designation on the court of appeals for the DC circuit, and Ruth Bader Ginsburg was one of the judges who was on that panel for that week. So I was able to work with her very closely on developing, drafting opinions that she then issued and what a great experience. I thought she was awesome then I continued to think so.

Joe: [00:02:54] She is awesome. What a great start to a legal career. How do you top that? 

Raza: [00:02:59] Beth, how did, your work as an attorney then lead you to become involved with the NACD?

Beth: [00:03:05] Well, you know, after representing boards of directors and advising them and defending them for however many decades, it was a natural evolution to be asked to go on the NACD board. And from there, I got very interested in the work that NACD was doing. And at one point when the prior president was stepping down, I got the phone call to say, Beth, we have thought about it and have nominated you to be our next president, so I stepped right up. 

Joe: [00:03:35] How long had you been at the board when that happened? 

Beth: [00:03:37] Oh, about eight years or so. 

Joe: [00:03:39] . And it was Bob Popeo who proceeded you, is that right? 

Beth: [00:03:41] He did. 

Joe: [00:03:42] How long did he serve as president? 

Beth: [00:03:44] I think it was four years and this is now my fourth year, going into my fourth year as president, I will be handing over the reigns to Cathy Minehan, the former president of the Boston Fed, in a couple of months.

Joe: [00:03:57] What a fabulous succession. Did you do succession planning in advance or did this work out? 

Beth: [00:04:03] Absolutely. I did succession planning.

About a year ago, I sat down with Cathy and said, what do you think? And then we planned it out. 

Joe: [00:04:10] Yeah. Good for you. I mean, it’s the best practice. It’s good to hear that it’s going on at the NACD. 

Beth: [00:04:15] Right? We try to practice what we preach. 

Joe: [00:04:17] How big is the board? 

Beth: [00:04:19] The board is about 20 to 25 people, depending on any given point in time. 

Joe: [00:04:24] Do you have term limits on the board? 

Beth: [00:04:26] We do. We do. Again, we practice what we preach. 

Joe: [00:04:28] Excellent. 

Beth: [00:04:29] We do three, three year term limits, so up to nine years on the board. 

Joe: [00:04:35] Great. you know, following Bob Popeo is, you know, big shoes to fill. When you took over, what issues or initiatives did you want to focus on?

Beth: [00:04:44] Well, Bob had really led the organization into a transformational change and really upped our game tremendously. And so what I saw my mission to do was to fill in the infrastructure so that we could continue that in a sustainable way, both in terms of drawing more on all of our board resources for the tremendous programming that we have, as well as establishing the committees to really think longterm about our programming, about our finances, about our marketing and so on.

So really building it out as kind of a business. 

Joe: [00:05:21] Does New England chapter kind of act on its own? Is it following the lead from other, other regions? How does that work? 

Beth: [00:05:28] Yeah. the National Association of Corporate Directors has 22 chapters around the country.

Each chapter is really quite independent in terms of their programming, their structure, their board, and so on. We are all independent 501 (c) 3s)   and we do look to our sister chapters as to, you know, the type of programming that they do. But we really have full freedom to do our own and kind of forge our own path.

Joe: [00:05:55] So what are the things that have happened since you’ve been President that you’re the most excited about? Most proud of? 

Beth: [00:06:00] Oh, a couple of things. First of all, our Director of the Year dinner rocks! Okay. May 4th, 2020 Westin Waterfront Hotel – be there.  

Joe: [00:06:12] I want to say this, it’s on my calendar.

Beth: [00:06:14] Fantastic. Fantastic. We have a tremendous roster of honorees that are really truly the, director visionaries, sittiing on multiple boards and who really have led transformational change on their boards and done so with grace and dignity. So,  we expect a very full crowd. We typically have the governor, the attorney general, the speaker, the mayor, coming out to it.

And, we’ll expect to have a similar roster this year. 

Joe: [00:06:43] My first one was last year. I thought it was fantastic. How did it come about? 

Beth: [00:06:47] Well, I’ll tell you, approximately 12 years ago, maybe we’re in our 13th year,  a former president by the name of Ed Pendergast had the wonderful idea to institute this dinner and to really honor some of the key people, you know, directors who’ve really shown extraordinary leadership.

And from there it just grew. It just. Kind of rocketed, especially as Bob Popeo took over. And then, now in the last four years, what I’m most proud of is how we have diversified, not only our board, but also our honorees. So you see really a diverse slate of folks and, we continue to sell out.

Joe: [00:07:26] Yeah. No, it was a full house last year. I do remember.  What are the other things that you are really happy about? 

Beth: [00:07:31] Also our programming is, I mean, you guys have been to some of the programs and, the level of speakers that we have, whether it is, you know, the CEO of GE when they came into town, or folks like Cathy Minehan, or Eric Rosengren, we had a great program where Cathy and, Eric led that on current economic forecast, we are planning to have Admiral Jim Stavridis, who used to be the allied commander of NATO, who is going to talk with us right around the November elections. and that’s going to be incredible. 

Raza: [00:08:08] And Beth, I can personally testify, a few years ago, I went through the aspiring directors bootcamp at NACD and I thought, it was a compact, morning till night,  dense and a wonderful program. 

Beth: [00:08:20] Right, right. We  pack your brain from eight o’clock in the morning till five o’clock at night, and then I think, y’all might’ve been at our, program kickoff our  fall program kickoff last year.

We had four  really, articulate and thoughtful CEOs on the stage. the head of John Hancock, the head of State Street Bank, head  (of) Boston Scientific and the CEO of IDG as well. I couldn’t be prouder of our programming. 

Joe: [00:08:48] Yeah, no, it’s been fantastic. And it’s really been, it seems like it has more momentum than ever.

Beth: [00:08:53] Yes, it does. 

Joe: [00:08:54] So one of the things I’ve been really interested about is that in the past the NACD, really focused on public companies, and there’s been an increasing focus on private companies, which I think is really great. How did that begin to happen? 

Beth: [00:09:07] Well, I’ll tell you,  we were actually approached by, there is another organization that deals really almost exclusively with private company boards and they were trying to kind of lift off in New England and they approached us and said, can we join forces?

And we said, sure. You know, this is really an important issue for our members. As you know, more and more public companies are now going private. And second of all, those that are private are becoming increasingly focused on adopting good governance practices. So we saw the opportunity there and, then,  when they came to us,  the light bulb immediately went off and hence that series was born.

It’s been very successful. 

Joe: [00:09:49] . But I have observed that private companies are increasingly viewing their boards, in a professional way   and doing the things that public companies do to make sure they have the right mix of skills and  expertise and attributes.

Why is that happening? 

Beth: [00:10:07] Well, you see it in a couple of different ways. Number one is the corporate governance law and liability issues are equally applicable to private companies as they are to public companies. A lot of people don’t realize that, and so private company boards are ones that are recognizing that they too can have liability if they don’t do the right thing.

So there’s kind of the risk side, but also, especially as those private company boards are either planning to go public or want to position themselves to attract more board talent, they are upping their game as well. So it’s not just purely a defensive issue. It is also to move the organization, the,  company forward.

Joe: [00:10:56] Yeah. So, I mean, are private companies recognizing how valuable a board can be?

Beth: [00:11:02] I think that’s true. I think that is definitely true.

 It used to be, in many respects, especially on the private company side,  venture capitalists and so on would populate it, but now we’re really moving to more a model that you have a number of independent board members that are joining those boards and providing that strategic value to the company and to the CEO.

 Raza: [00:11:26] I think for the private companies, one of the reasons also might be that companies are choosing to stay private longer. There has been a little bit of a drought in the IPO market, for example, in recent years that only recently unfroze a little bit. 

Also, it does seem that the capital formation and venture formation starts as private companies so there are a lot more of those  and I think that’s what I’ve observed as well, that even at the startup board level, which is private company boards,  there has been a lot more, recognition of the importance of a good board, and further as they grow to professionalize that board.

Beth: [00:12:09] Right. . I think folks are really growing away from the idea of thinking of their board as a potential nuisance that they have to deal with as one that really is a strategic asset. 

Joe: [00:12:20] Yeah. I’m seeing it though in the family owned businesses. Not just the venture and private equity funded companies.  Family businesses in the past, I think often did look at boards as a nuisance or maybe were concerned that they would somehow lose control, even though that’s not true and really failed to see how valuable it can be.

I mean, you know, for doing well, why do we need outsiders here?  There’s a great article by Cindi Bigelow, who’s the chairman of the board of Bigelow tea.

She wrote an article about, going to her parents and saying, I’m thinking of having a board for our company and their reaction, like a lot of family owned businesses was “why do we need that?” And she wrote a great article about 10 years later, she looked back and thought, this is the best thing I’ve done for my company.

So , if people like that, or obviously people like you, people that have been talking about governance and the importance of governance has maybe, I don’t know, seeped into the private sector. Is that, is that possible? 

Beth: [00:13:23] Well, I think so.  What you see is as more and more of these stories of board liability and boards that have been asleep get into the news, there’s a lot more recognition about, Oh, they’re, but for the grace of God could go, we.

And I do want to recognize A.D. Makepeace who is our private company honoree for the director of the year awards. Their story is really an extraordinary one. Going back to the idea of family owned businesses, they have been family owned. They’re now on fourth, maybe fifth generation cranberry growers originally  on the Cape, and they brought in about 20 years or so ago an independent CEO, a non-family CEO, and now he has just stepped down and they’re on their second non-family CEO and have been just a true success story of making that transition from wholly family owned and controlled to that mixture of family versus independent. management. 

Joe: [00:14:30] Yeah. You know, I think you’re right. Stories like that. I, I know that story. I’ve heard that. but stories like that are probably in part, responsible for families looking at their companies and realizing outside expertise can be helpful. 

Beth: [00:14:45] Right .

Raza: [00:14:45] It seems like that the board of directors for private companies is the growing market for boards. 

Beth: [00:14:51] It is, it is. It definitely is. There’s two real growth stories in terms of board expansion or  that market for directors.

Number one is the private company boards, because there are far fewer public company boards nowadays, whether it’s through a public boards that have gone private or private companies that are, you know, professionalizing their board and really looking to those outside directors.

But also in the wake of California adopting the board diversity requirement, you see a lot more boards that are even expanding by a seat or so in order to meet those diversity requirements. 

Raza: [00:15:36] Beth, actually, that’s what we wanted to touch a more on. So, NACD and many other wonderful organizations have been doing work for gender and other diversity on boards.

Can you talk about  the progress that has been made and what has been accomplished? 

Beth: [00:15:52] Well, I would like to say that we’ve made a lot more progress. We meaning, you know, writ large around the country that we would have made more progress than we have now,  which is why you see statutes like in California, that used to be, “we would like you to be more diverse” to “thou shalt be more diverse” and other states around the country following suit and saying the pace of progress is not fast enough and we need to now mandate, or at least threaten mandating that sort of diversification. And you see that kind of dovetail as well with the “me too” movement, much more emphasis, especially now when you have “me too” issues within a corporation.

And if you don’t have some diversity around the board, then number one, is that board going to have enough independence to be able to address those issues? And second of all, what are the symbols? What are the takeaways that people who look at the board, either from outside or within the company, say that they’re really taking this seriously. 

Joe: [00:17:03] It’s always been true that diversity on a board makes it a better board. So it’s discouraging that it’s taken this much to get only where we are. 

As far as I know, I think we talked about this before, California is still the only state that’s actually adopted a statute that that addresses gender diversity.

Beth: [00:17:20] That’s correct. But there are a number of other States, including Massachusetts, that are considering it. 

Raza: [00:17:25] And Beth I saw the  article in the Boston Globe last month, that the state’s largest companies, have finally added  women on their boards. So, the so called zero zero list.   Talk about that and how, further initiatives are being taken by NACD and other organizations, to continue to make progress on that.

Beth: [00:17:45] Well, great credit needs to be given to the Boston Club for measuring that progress or lack thereof  Every year they come out with a very, time-intensive study on the 100 largest companies by revenue. And what is their diversity on their board, or at least gender diversity on their board and in their senior management.

And as you mentioned, Raza, they have a term for those that have zero women in senior management and zero women on their board called the zero zeros.  Yes, there was quite a bit of, fanfare about the very last company in Massachusetts that was a zero zero.  Shirley Leung and the Boston globe highlighted that and then they most recently added a woman to their board. 

Joe: [00:18:34] , Zero zero does not sound like a list that anyone wants to be on!

Beth: [00:18:37] It’s not a list that anybody wants to be on. 

Joe: [00:18:40] You have to call attention to it to put pressure on those who are making the decision to actually take action.

Beth: [00:18:48] Yeah. And what we’re seeing, I’ll tell you, I mean. People talk about it, but I will tell you it is true.  When you hear, whether it’s senior management or the board chair say, well, we’ve looked, but we just haven’t found that pipeline. It means they haven’t looked hard enough because I guarantee you that there are some rock star women and aspiring directors of color who will knock your socks off.

But they just weren’t in the circles that they were looking at either them, you know, the board directly or their search firm. But there are a number of different groups, that I’ve been involved with above and beyond the Boston Club that are working very, very hard to bridge that gap.  I think in the past year we’ve been far more successful, but the, the resumes that come across our desks are just like incredible.

Joe: [00:19:41] So, you know, it’s really a matter of making it a priority. I was just involved in building a new board for a bank. The board is larger than a lot of other bank boards. It’s 11 people, and we have four women on the board.  I mean, you look at this board and it is such a strong board  because the CEO of the bank really wanted to make it diverse. That was a goal from the start. 

So when people say, “Oh, we can’t find women candidates who will fit in on our board”- I agree with you, I think a lot of times it just because they’re not looking.

Beth: [00:20:18] Right, right. And now we’re seeing, that there are some boards that instruct their search firm to say, come back only with a diverse slate, whether gender diverse or ethnically diverse.

And only if we don’t find the candidates that we really need for this board, then we will move beyond that. 

Raza: [00:20:41] Beth, you call it the “last mile” problem as in, bringing it to the last mile. What are the steps for organizations from NACD to the Boston Club  to help with that last mile?

Beth: [00:20:52] The Last Mile – that is the moniker that, some of us have chosen. 

There is a small group of, women who have come together, many of us, Boston Club members, and so on. Who have said, we need to shake things up a little bit differently.  We’ve been at the static rate far too long, look at the Boston Club numbers and what is it? What’s that missing link. Okay. 

And we call it the last mile because as a reference or illusion to the telecom industry and, , hooking up or the utility industry hooking up that very last mile is the most expensive and time intensive. And so what we have done is basically take the Boston club’s list and go through and say, okay, who knows the  CEO of this organization of this company, or the chair of the board, or the head of the nom gov committee, or whatever it may be.

And we sit down with them and say,  what are the obstacles that you were finding? And if it’s a question of candidates, we can help you with that. And people that we personally vet and know and know your board and know this candidate so that we can say that this candidate will fit, 

Joe: [00:22:00] You know, it’s classic grassroots campaign organization.

That’s what it is. So it’s an informal group?

Beth: [00:22:06] Yes,  we really just kind of come together and, you know, said, what can we do to change this? We’re all frustrated and need to do something.

Joe: [00:22:16] That is fantastic. 

So . I’d like to talk a little bit about the changing landscape of board responsibility.

You said in a recent article that “shareholders are insisting that companies recognize and address a much broader range of stakeholders to benefit their shareholder’s longterm interests.”  

Can you talk a little bit about what’s going on with that?

Beth: [00:22:37] Sure you see two different but related trends that are coalescing now.

On the one hand, you have the Delaware courts, whether it’s a publicly traded company or a privately traded company, saying very clearly in their decisions: you as a board member can no longer just sit back and passively accept, whatever the landscape is for your company and whatever management may tell you about that.

You need to affirmatively be asking the right questions. Nobody ever votes to say. “Oh, we’re going to have a sexually hostile work environment” or we are going to evade emission standards or impose new bank accounts on our customers who don’t want them. 

Nobody ever votes for that  but what directors have a duty to do is to ensure that the compliance infrastructure there meets the risks that that particular company  faces and that there are metrics that they’re asking the right questions. 

In the past, in the “bad old days”  it used to be that the courts would say, you know, unless basically you’re moribund, then , there’s no liability. But that’s all changing. 

In the last six months, there been two decisions that came out from the Delaware courts that said we will no longer just allow you to be passive as you were in the past. And you know, not have liability. You need to be active. You need to know what the risks are and ask management the right questions. Are we addressing those risks? So on the one hand that’s going on with the courts, 

On the other hand, what you see are like the business round table talking about we need to look at a lot more constituencies  then just our shareholders. Shareholders, of course, are the owners of our company, but they’re not the sole stakeholder that we need to pay attention to as we make those decisions. 

So you see both of those, trends coming together, and that makes boards take a look around and say: we need to up our game.

Joe: [00:24:53] So who are the other stakeholders that companies are really starting to focus on? 

Beth: [00:24:57] You look at the Business Roundtable in a statement, and they identify its vendors, its employees. It’s the community in which they’re located or when in which they operate their business. So, there are, there’s supply chain  folks, you know, third party vendors down the chain. 

So there is a whole host of tentacles that a business, a company’s business operations touches and that they need to think about because otherwise it’s not sustainable. 

Joe: [00:25:27] Putting aside what the law is saying, why is it just really good business for boards to do that?

Beth: [00:25:35] Yeah. Well, the boards need to, it’s good business because otherwise they’ll have some supply chain issues. You know, they’re using the lowest cost vendor out of Bangladesh to do their manufacturing, but unless they’re paying attention to them. You know, those vendors could be exploiting their workforce.

And then it does two things. They can’t keep their employees and they get a lot of bad press.  Reputational risk is an issue that boards are becoming far more sensitized to. 

Joe: [00:26:10] Do you think social media has raised the stakes , on reputational risk? 

Beth: [00:26:14] Oh, like astronomically astronomically.

The court of public opinion is a far more jealous court and a demanding court then, the, judicial decisions that you might get six months or 12 months down the line. 

Joe: [00:26:31] So I, what I got from your article a, one of the things I got from your article was that the court is actually kind of catching up to the trend rather than leading the trend.

Beth: [00:26:40] I would say that that’s true. . One thing that, that if you look around the country, there are a lot of state that adopted statutes in like the late 1980s, early 1990s that require companies that say to the board, either thou shalt or thou should or may  consider the interests of those other stakeholders.

And then it kind of went dormant for a little bit. But then again, it ramped back up in the last 10 years or so and a number of additional states have adopted those, what we call multi-constituency or multi-stakeholder statutes. And, then you see the BRT, the business round table statement being a seismic shift, recognizing that, and the courts then following behind, but both of those together.

Beth: [00:26:40] I would say that that’s true. . One thing that, that if you look around the country, there are a lot of state that adopted statutes in like the late 1980s, early 1990s that require companies that say to the board, either thou shalt or thou should or may  consider the interests of those other stakeholders.

And then it kind of went dormant for a little bit. But then again, it ramped back up in the last 10 years or so and a number of additional states have adopted those, what we call multi-constituency or multi-stakeholder statutes. And, then you see the BRT, the business round table statement being a seismic shift, recognizing that, and the courts then following behind, but both of those together.

Joe: [00:27:34] Powerful combination. 

Raza: [00:27:36] I think in terms of value creation, I see it as they say that, take care of your people who will take care of your product, who will take care of your shareholders. So I think it’s, it’s that chain of  values protection that brings the other constituents ,in addition to the stakeholders, in the picture for businesses to run. 

Beth: [00:27:57] And on that point as well, think about the, the power of employees now. , Everybody always talks about all our talent is our greatest asset, and so on. But , it is now amplified so much because those employees feel empowered in a way that they never did before.

Whether it is staging a walkout, because we just gave a severance package of $80 million to somebody who, you know, we think was a serial harasser or whether in  the case of Wayfair. So interesting that, you know, there was a person in there, do you know, who did their procurement, some, you know, fell in procurement who got a request from, Homeland Security to supply goods and so on, to detention centers, immigration detention centers.

In the past one, couldn’t even. Imagine that, first of all, that word of that would have seeped around enough within the company, but second of all, that they would have organized a walkout.

Joe: [00:29:00] Right.  That’s one way to make an impact. That’s for sure. 

Raza: [00:29:03] Beth, on the, startup and new company creation side, we’ve seen a rise, or I’ve seen a rise of the trend where  companies are incorporating as benefits. Corporations are B Corp’s of explicitly stating that there, is a mission oriented and a profit oriented venture. And you know, that, continues to be, another trend where, companies want to do, the mission as well as the, profits. 

Beth: [00:29:31] And on that, on that score, I thought it was brilliant. 

. About two days after the business round table came out with their statement, and I remember I was reading the wall street journal hard copy. I see a full page ad from the BRT.

I nearly fell off my chair when I was reading it, and then two days later in the New York times, there was a full page ad of a number of different CEOs of B Corp’s that said. Come join our club. Wow. And I said, that’s brilliant. That was very smart. 

Joe: [00:30:03] So what is the advantage of the B Corp? What is the motivation  for referring to yourself as a B Corp?

Beth: [00:30:09] Well, I think, and you know, it imposes a lot more responsibility on the company and there’s like certifications that you have to go through and they’re quite rigorous. In order to continue to be a B Corp, but the advantage obviously is,  as more and more employees and customers and clients become mission-driven, it signals to the market very clearly we are a mission driven organization. We are going to practice what we preach and we are going to put our good name behind it and our incorporation behind that. 

Joe: [00:30:44] You know,  when you do that, it means that people can hold your feet to the fire. 

Beth: [00:30:47] Exactly, exactly.

Raza: [00:30:49] A nother trend or possibility that I’ve seen is something called the longterm stock exchange. And the idea is floated by, Eric Reis of the lean startup fame, to say that, I think somebody mentioned that now your typical shareholder is.

You’re a shareholder for only like 10 seconds or something like that because of algorithmic and high frequency trading. And that just misaligns the incentives. Your shareholders are not really your shareholders. they’re just gaining from the volatility and movements. and there, there’s these, initiatives where they are trying to align, things towards the longterm and to align it with the stakeholders and shareholders.

Have you seen anything about that? 

Beth: [00:31:34] Well, I think another venue in which you see that are the increasing number of companies that are adopting proxy access, you know, for their directors, nominations for their directors on their proxies. And those are limited solely to those shareholders who have to, you know, hold a certain amount of stock.

It can’t just be one chair. but they have to have had it for a certain longevity. Okay. And so you see more benefits being offered to longterm shareholders that are not available to short term traders. 

Joe: [00:32:12] Has anyone challenged that?

Beth: [00:32:14] Oh yeah. on the proxy axis, what happened was the SEC came out with regulation, a number, maybe it was four or five years ago, saying that we are going to mandate proxy access for shareholders who, are above a certain level and have held for a certain amount of time that went to the courts and that was invalidated.

And so now there’s a whole movement of shareholders who are asking that companies, I wouldn’t say voluntarily adopted, but put it on our ballots so that the shareholders can vote for it, or they’re just adopting it on their own. So, so even though that particular regulation is not on the books now, you see more and more companies simply adopting it on their own.

Joe: [00:33:04] I could see how it really would add to the long-term value of a company because if you’re owning a share for 10 seconds or less, I mean, you’re not really an owner. It’s just a, it’s a,

Beth: [00:33:16] …different relationship to the company. 

Joe: [00:33:18] You have a completely yeah, you have a completely different relationship. You don’t care about the long-term growth. 

Raza: [00:33:24] To me it sounds like almost a society’s going to soul search and , ultimately come to the conclusion that the only way to assure. shareholder value is by looking at other things as well.

Beth: [00:33:40] That’s Right.

Raza: [00:33:41] In the longterm. So,  hopefully that trickle backs to, legal jurisprudence, cases, other things that happen that will make it a regular part of the business landscape.

Beth: [00:33:53] I think the, the question that  the lawyers, at least are grappling with is in the wake of the Business Roundtable revised statement of purpose. How is that going to actually impact when you decide to sell the company, when you have one of those strategic transformations? 

Are the Delaware courts going to stick in the future with shareholder is king. The only duty you have is for maximization of shareholder value and you know for that transaction, or will there be some companies that said, you know what, we’re going to take a, perhaps a lower price. But with a different company, a suitor that we think really is going to be a better fit for our employees.

And that really is the driver for us. And how much of that, outside of immediate shareholder impact, are the Delaware courts going to allow in the future in the wake of that statement? 

Joe: [00:34:53] Maybe it just leads to a broader view of what it means to maximize shareholder value. 

Beth: [00:35:00] Yes, 

yes.

Joe: [00:35:01] It’s not as narrow as maybe right now the Delaware courts are saying.

Beth: [00:35:05] Right  the price right now, but rather that longterm, especially in a merger where shareholders, they just change stock in one company for the new company and so they, continue to have that interest in the company and shouldn’t they be wanting that there is that longer term view of, you know, it’s not just the money that we’re getting today for our shares.

It is that longterm, return that we get on our shares. 

Joe: [00:35:33] Exactly.

Beth, it’s been great speaking with you. Thanks for joining us today. 

Beth: [00:35:37] I am delighted to have been here. Thanks so much for having this podcast. It really is a great service. 

Thanks.  

Joe: [00:35:44] And thank you all for listening to On Boards with our guest, Beth Boland. Take care Raza 

Raza: [00:35:50] You too, Joe 

3. Yvonne Schlaeppi and the Importance of Corporate Strategy

Yvonne Schlaeppi is passionate about corporate strategy, and she believes it’s one of the most important things a board can do for their company. Spending a significant amount of time on board work, across many companies and several continents, Yvonne is highly experienced and enthusiastic in her work as a board member. 

Having built a strong background working on boards in the U.S., UK and Europe, Yvonne shares her insight into the differences in boards across countries, how to navigate difficult decisions, and what we can learn from observing other boards in action. 

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2. Rick Williams on Trust: Your Company’s Most Valuable Asset

It’s easy to think of companies as big, faceless organizations, valued only for profit margins or stock potential. But it’s precisely when organizations are viewed only by the numbers, and not by the people working within them, that company culture suffers and things can go south.

Rick Williams knows that the key to success is creating an atmosphere of openness and trust that makes for a great board of directors or advisors, and a healthy company overall. Rick spent many years as a consultant, founded his own real estate investment company, and returned to consulting once again. He has been an executive, board member and board chair – in addition to mentoring CEO’s. Now authoring his first book, Create the Future For Your Company and Yourself, Rick shares his most valuable insights into corporate culture and governance boards – namely that the best thing you can do for your company is to honor the people within it.

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