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STRATEGY

Board Stiff

A board of directors just isn't what it used to be.
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Chief Exec

Before you follow your board's advice, take a hard look at its members.

We frequently hear about companies that go bad because of a lack of financing or profitability. In other cases, the blame for corporate failure falls on bad management decisions. What I want to know is, why aren't we hearing more about boards of directors, made up of those revered individuals who are paid to offer advice, steer a company clear of trouble, and ultimately play a large role in making sure the companies they are guiding deliver shareholder returns? When a company fails, fingers are pointed everywhere but at those who are supposedly accountable for keeping it out of the bushes in the first place. I predict that problems with boards are going to get a lot worse before they get better, which is all the more reason to put the spotlight on what's happening out there.

Five years ago I began to notice a rash of problems at the board level. The root cause at the time was probably the vast amount of money flowing into new businesses, which, in turn, needed new boards. And like seasoned managers, qualified board members became scarce fast. While attending numerous board meetings on behalf of my consulting clients, I started to see freshly minted millionaires with more cash than sense sitting at board tables alongside M.B.A. grads from Stanford whose diplomas weren't even framed yet. Don't get me wrong. I'm all for jumping on an opportunity and learning from the ground up. But the core attributes of a good board member -- wisdom, years of experience, and perspective -- are not easy to come by. If board members lack a basic level of expertise, they easily fall into the it's-all-about-me syndrome, which begets political agendas, conflicts of interest, and sometimes even outright unlawful activity.

A colleague of mine, whom we'll call Grant, learned firsthand about the power a single board member can wield. Grant had left his job as vice-president at one company to become CEO at another. That was two years ago, at the height of the technology boom. His new employer was generating revenues, was almost profitable, and had a strong customer base. Grant's job was to raise additional funding and grow the business. The board -- consisting of three venture capitalists and one independently wealthy investor -- supported that endeavor, so Grant got the paperwork ready for another financing round. But the day before the signing, the wealthy investor met with Grant to tell him he had another venture in mind for Grant and his new management team. It would require that Grant and his managers jump ship and join the board member's new company. To prove his intentions, the member handed Grant a check for $5 million on the spot. Grant thought, "Is this guy insane?" Forget the fact that what he was proposing was unethical. It was downright illegal. Grant could have been sued for not fulfilling the financial obligations of his job and also for accepting the money and then poaching his own team. For his part, the board member couldn't figure out what the big deal was all about. He had a good idea and lots of money, and he needed a good manager. The company be damned. It was as simple as that. CEOs, he thought, could do anything they wanted. When Grant said no, the board member pulled his money out of Grant's company. The other VCs took the withdrawal of funding as a lack of confidence and declined to put in additional dollars. Had Grant revealed the truth of the matter, he might have had another legal battle on his hands -- but this one among the board members. So rather than risk damaging his name and reputation by exposing the board member (and face multiple legal hassles), Grant did what many in his place would have done: he resigned and kept his mouth shut. The industry is small and the network tight. If Grant had blabbed, he might have had a harder time finding another job or getting money or recruiting a good board at his next company.

While the "board problem" may have begun with too much money, today's cash-strapped conditions have only exacerbated it. The banks are dry, and the VC coffers are closed to all but a select few. So the financiers of today's growing businesses are increasingly family, friends, and professional acquaintances. Many times they request a seat on the board to "protect and guide" their investment. The reality is that they have no business getting near a boardroom.

Besides hidden agendas and lack of expertise, what else is left to fear from a bad board choice? Plenty. I'll use a phrase that has become a personal favorite: pushed beyond reason. It's a perfect description for situations in which the CEO and his or her top managers want to travel one course, while the board wants to go another route. In the process, the company is pushed beyond reason to make decisions it would normally avoid. I've seen it happen time and again. The most common and publicly visible occurrence is when a board pulls the rug out from under a CEO and forces the sale of a company.

A simple clause in a board's rules requiring a majority vote by the management team in case of an acquisition could prevent such a takeover from happening. Another good clause to add is one that requires limited terms, with members up for reappointment after a set time period. Such a provision guarantees that a CEO will have a board that is aligned with ever-changing conditions in the markets and in the economy in general.

Part of the reason why boards may provide so little value to a company is that businesses often fail to spell out the tangible results they hope to receive from board members. A few years back every board description I received made clear some type of expectation about what I would deliver if I joined. I would have to bring in a set number of customers or help establish certain partnerships. You'd better believe I had some introspective moments about my ability to deliver on those commitments. Now such conditions are nearly nonexistent.

If you have any doubts about a prospective board member, establish a waiting period. A company that approached me several months ago made a great case for a proving period of six months. According to the proposal, I'd attend board meetings, provide insight, and the like. If the company's opinion about my value and contribution was good, my compensation would be retroactive and I'd be promoted from a pro tem position to that of a full board member. Such an agreement reduces the risk on all sides.

Lastly, when it comes to value, I have one comment: avoid the greedy. During a roundtable discussion involving seven CEOs a few weeks back, we all agreed on one thing: the more demanding potential board members are regarding their compensation, the lower their ultimate value to the company is. As each CEO described the "ideal board member," the word retired came up often. The group also favored potential board members who wanted to "have fun" or to "mentor" or to "build a company." Those goals are very different from the desire merely to turn a quick buck or be associated with a hot property.

In the end, what's important is building value in a company itself. That won't happen if accountability excludes board members -- and if the only choice possible for a CEO who is pushed beyond reason is to resign and keep his mouth closed.

Sarah Gerdes is founder and CEO of Business Marketing Group, a Seattle company that specializes in strategic partner development and mergers and acquisitions. She is currently a member of four boards.


Copyright © 2001 Sarah Gerdes.


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