Big Red Car here. Happy New Year!
So The Boss is having a nice bourbon and gingerale with a pal of his and they get to talking about Boards of Directors. In particular, about Boards of startups or small private companies or small public companies. So, if you are on the Board of Exxon Mobil this is not for you but you can read it anyway and you will see the similarities.
The Boss has served on lots of Boards and is constantly being asked to serve on more. He likes serving on Boards as does his pal.
The Boss says that every Board should have what he calls a Gray Haired Eminence. Big Red Car, WTF is a Gray Haired Eminence say you?
Boards of Directors
The Board of Directors of a small private company or a small public company has an awesome duty to direct the affairs of the company. A quick read of Delaware law (the state in which most public companies are chartered) and some contemporary literature — particularly that written for the legal profession — will literally scare you to the extent that you would never voluntarily serve on any Board. Perfectly natural reaction.
The notion that the Board is only responsible for setting policy and directing management to execute that policy and thereafter monitoring management’s performance is a gross over simplification of the duties of a modern Director.
The Board is ultimately responsible — or so say the Courts and contemporary literature — for such a broad set of duties that the notion that one could be a “part time” Director and do a credible job of discharging these duties seems farcical.
The days of checking to ensure that the company has an adequate Directors & Officers insurance policy, a bit of money in the bank, good SEC counsel and comfortable seating are gone.
The SEC, Delaware law, the implications of Sarbanes-Oxley and the Public Company Accounting Oversight Board make the game infinitely more dangerous and challenging.
The Board is constructed of individuals who are elected by the shareholders which in startups and small companies means the largest shareholders control the Board. Why not?
The founders and President/CEO are also typically members of the Board. These members of management are not considered “independent” Directors.
The first distinction is that between independent and non-independent Directors.
Committees are formed — audit, operations, finance, nominations, compensation — to subdivide the oversight responsibilities of the Board and to report back to the whole Board on their findings. Some of these committees are absolutely necessary — audit, as an example — and some are simply for the convenience of the Board itself.
This blog post is not intended to be a complete or exhaustive discussion of Boards but just enough to get to the subject of the Gray Haired Eminence.
Boardmembers are as diverse as sources of funding which is to say not too damn diverse.
The Board is supposed to represent the interests of ALL shareholders but that fiction is attacked by the reality that each Boardmember is likely intellectually representing her own shares a bit more. There are a great number of shareholders whose actions challenge that assertion and I hope you will have such honorable women on your Board.
The Big Red Car is chuckling just a bit. The Big Red Car likes the playful nuance of referring to Boardmembers in the feminine sense. The Big Red Car has a very, very low threshold for amusement.
On your Board, you will have a few venture capital or hedge fund or high net worth representatives — you know them. BMW driving, smartphone carrying, tablet checking, laptop studying important young men busy with their own busy-ness and not really having the time or inclination to actually review the Board materials before the Board meeting and who with just a couple of years experience know EVERYTHING.
It is from this dynamic — management Directors, independent Directors, Brilliant Young Men — that the Gray Haired Eminence emerges and establishes his importance and attractiveness.
The Challenges of a Board
The Board has a number of real world challenges. Most of them arrived on the wings of a financial investment in the company which was likely driven by the long term attractiveness of a product rather than an established company with a seasoned management, organization and a working corporate governance structure.
The Founder, President, CEO may not be very seasoned himself in particular if this is a startup. Stop crying into your beer, that is the business you have chosen — to invest in startups and small companies. It is part of the challenge. Recognize the reality of it and deal with it.
This betrays an obvious sentiment — seasoned multiple startup entrepreneurs, “serial” entrepreneurs in the parlance of the business — and founders are a very attractive commodity for venture capital and private equity and high net worth investors. They have already paid full tuition in earlier deals to learn many of the lessons of not just developing a product but also of building a company and dealing with Boardmembers.
The Boardmembers — who at this stage are likely to be purely financial types — may have next to no operating experience and may not be very seasoned Boardmembers. They lack both experience and good judgement which is the product of experience. They are whip smart and fast learners but nothing substitutes well for experience and good judgment.
Good judgment the product of experience.
Experience the product of bad judgment.
The Board is undoubtedly very busy with other investments and may simply not have the time at critical junctions in the life of a startup or small company to increase the magnitude of their investment particularly when it is especially needed.
The Gray Haired Eminence
Ahh, so finally to the Gray Haired Eminence.
What The Boss and the Big Red Car wish for you and your Board and company is a Gray Haired Eminence.
A Gray Haired Eminence is a Boardmember who has been around the block a time or two. He is likely a bit older, more experienced, perhaps an operator or entrepreneur himself earlier in his career. Literally has a mane of gray hair — Hell, he could be bald but he’s still a Gray Haired Eminence.
The GHE was in business before personal computers though he was always a HP12C guy. Understands numbers but secretly acknowledges that people make the numbers dance. Has patience.
Read a bit of Drucker before he stumbled upon 37 Signals’ Rework or Eric Reis’s Lean Startup. Skeptical of the notion that this generation of young business studs actually invented sex.
Readily acknowledges that the Internet is the future. Watched it develop. Saw AOL and MySpace rise and fall. Is making big bets on that being correct though his judgment is tempered with the brutality of business cycles and the heartless punishment of bubbles. Understands that timing is everything.
Shrewd judge of character but not enamored solely with pedigree or grad schools. Would back a high school grad with grit and passion before putting his chips on a Harvard MBA with no real skin in the game and a perfect manicure.
Drives an old Mercedes convertible (1963 MB 220SE Cabriolet) which he bought with the first good lick he hit. It reminds him constantly of the difficulty and joy of making a trip to the paywindow. But also the luck and odd turns of fate. Worships karma.
This is the guy who will spend the time to get to know your young, scared virginal Founder and will invest the time to understand what is making him tick. He will be a mentor, if required, and always a coach but will not necessarily trumpet that relationship with the Board. He will feed that entrepreneurial flame and make sure the entrepreneur knows that you cannot overdose on Ramen noodles and Mountain Dew or hard work.
A few coffees, lunches and dinners — dinners at the big house or hamburgers after an afternoon of cruising on his Hinckley Picnic Boat.
Getting to know the wife and kids — or the other co-founders if there are no wife and kids. They will talk about balance, life and he will get him into a good looking blue blazer and introduce him to people. Take him to the club and introduce him around. Tempt him with the rewards of success.
Provides a fatherly sounding board for the Founder. When giving advice, coaxes the answer out of the Founder in a subtle and collegial manner — “Well, I have seen it done like this before and perhaps that will work here.” Knowing, of course, that it will absolutely work as it has hundreds of times before. The Founder leaves thinking — “Hell, that was my idea all along.”
Drags the Founder’s dragons and demons — fears of failure which paralyze performance — out into the open and shows him they are really just lizards. To be vanquished and crushed in due course.
When a subject new to the Founder bubbles up, the GHE will reach into his files and provide an exemplar so that full tuition is not paid to continually reinvent the wheel.
“Oh, so you’re contemplating an incentive compensation plan for the lads, let me see what I have in my exemplars file.”
Voila! He has five different ones and gets a colleague to provide the incentive compensation plan from a couple of their other investments — appropriately redacted mind you.
Talks the CEO down off the ledge when things go wrong and when necessary applies a bit of Mercurochrome and a band aide on a skinned ego.
When other Boardmembers are unable to get their hands off their smartphones, tablets and laptops at Board meetings — provides a bit of focus and kids them into compliance with basic courtesies. Never raising a bruise.
In the independent Directors meetings, is the last one to speak and speaks with the courtesy of a diplomat congratulating each of the Busy Young Men on the brilliance of their viewpoints even when he disagrees completely. Focuses solely on outcomes and does not care who gets the credit. Laughs at himself as he manipulates and molds the BYE to his vision.
Possesses the subtle and graceful charm of an old school gentleman — never forgets a birthday, drops a handwritten note to the Founder and fellow Boardmembers to reinforce a lesson or decision and invests time to get to know each Boardmember in much the same manner.
Makes introductions and networks like a fiend.
Offers to drive a fellow Boardmember over to a Board meeting or pick someone up at the airport — that MB Cabriolet — to be able to plumb their thoughts before the Board meeting. Leaves nothing to chance and knows how the Board will vote on everything before the topic even comes up.
When the issue of an additional round of funding comes up, is the first one to speak. ”Well, I would be honored to be allowed to put a few more dollars into this company and to continue to work with the management and my fellow Boardmembers.” Gets to yes quickly.
When it comes to time to exit — through merger, sale or IPO — the Gray Haired Eminence kicks into high gear as this is truly not his first trip to the rodeo.
He makes sure management knows their fate — to ultimately get canned by the new owners while getting paid for the privilege or to deal with the implications of public company scrutiny and regulation. Makes sure that the valuation is right and forces the outcome quickly knowing that buyer’s remorse has killed more deals than anything else.
And, then, having provided his wisdom to another successful trip to the paywindow — shakes everyone’s hand, maintains all of their contact info and moves on.
But the entrepreneur will always remember that experience — the triumphs, the challenges, the failures, the embarassments of learning — and the next deal he conjures up, well, the first phone call he will make will be to the Gray Haired Eminence.
And that is the ultimate payback for the Gray Haired Eminence — enhanced deal flow.
Become that Gray Haired Eminence or go find one
Nice story, Big Red Car, but WTF am I supposed to act upon?
Well, if you are a Boardmember, try tailoring your efforts along the path outlined above. Don’t try to do it all on one long weekend but try it in small doses. Take that Founder out for a coffee and see if you can strike up a deeper and more meaningful relationship. Maybe you can and maybe you cannot. But you can try.
Don’t go buy the Cabriolet and Hinckley — well, OK, go buy them for your own enjoyment. But understand that you have to be the Gray Haired Eminence not just look the part.
Well, if you are a Founder or entrepreneur, when building a Board, look for that guy, the Gray Haired Eminence. Get him on your Board and submit to his mentorship. Don’t be afraid to seek him out.
Venture capitalists, give consideration to finding such folks and have them be stewards of your interests instead of some kid with an MBA in his pocket and mousse in his hair.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.
Tell me about a Gray Haired Eminence you have known or a situation in which you could have used one.