Seven Excuses CEOs Cite for Not Creating a Board of Directors

board

by scott pickard

No company is too small to create a board of directors, and no company is too large and sophisticated that it cannot improve upon its board because directors have the potential to add significant value to management and the company in countless ways.

Here’s how:

  • Directors can give good advice insiders might not hear otherwise.
  • Directors can be frank in a way employees won’t or can’t.
  • Directors ask, “Why would you do that?”
  • Directors help management network into important strategic resources such as partners, talent, capital, and markets.
  • Directors bring new ideas.
  • Directors double-check management’s plans and make them accountable.
  • Directors check for compliance to ethics, laws, regulations, and just plain common sense and good judgment.
  • Directors bring experience – they’ve been there, done that, and there’s no sense reinventing the wheel because that consumes time and money; and, there’s no sense in making mistakes because that’s painful.
  • Directors pitch in and help during periods of rapid growth or crisis.

That said…excuses, excuses

There is no good argument (generally) against using a board of directors, yet owners and CEOs continue to cite the following excuses:

1. I don’t have enough time

There are certain high-leverage activities for CEOs and owners that they must put at the top of their priority list because even though these tasks do take valuable time to plan, prepare, and execute (e.g., financial audits; a strategic planning retreat; a performance review with a key employee; a board of directors meeting), these activities hold the potential to make a substantial positive impact for the business. Executing these high-leverage tasks as a business leader is simply something you have to do, so you make the time.

2. I can’t afford it

The cost and complexity of a board of directors scales to the size of the company. In a large or public company you can expect to attract sophisticated directors and they will expect a compensation package commensurate with company size and the commitment required.

But if you are a start-up company and only a few people are involved, you most likely won’t be attracting public company directors that expect big fees. But you can attract successful local people that were once in your shoes and know what it’s like to start and build a company and they’d be pleased to serve on your board as a way to give back – sometimes only for the price of a dinner and a few beers.

3. I don’t know anyone to ask

Many people say this initially but if they take a few minutes to reflect, they can always think of someone to invite to be a director. Also, they usually know someone who could be an intermediary to a director candidate. Good intermediaries can be a friend; a relative; a business colleague; your accountant, attorney, or banker; a professor; the Chamber of Commerce; a valued and trusted key supplier or client.

There are also organizations that foster better corporate governance and directorship that can match directors looking for board assignments with companies looking for good directors. For larger companies there are search firms that specialize in recruiting directors to large and public boards.

4. I don’t know what value they would bring – I know what to do

An executive with this kind of attitude most likely feels this way about many things, not just a board of directors. This kind of insulated, ivory-tower attitude only limits new opportunities for management and the company.

The objective evidence indicates that boards do provide real value to management and shareholders. However, it is true that boards also hold the potential to screw up royally and there are many examples of that from both for-profit and nonprofit boards, big to small. But that is not because the value proposition of a board is not valid, only that those particular boards were dysfunctional and acted irresponsibly. The overwhelming majority of boards do great work for their constituents.

5. I don’t want anybody to know what we’re doing

It’s a valid concern for many companies, but you cannot operate inside a top-security box forever. You need a few select trusted advisers that you can lean on and use as sounding boards so that your thinking and decision making does not become inbred and myopic. Directors can give you fresh and unbiased insights and they will respect and maintain the confidentiality of your plans and intellectual property.

6. I don’t know how to set up and manage a board

If you can create, manage, and grow a company, you can create and manage a board. Most attorneys are very helpful in making sure you cover the legal basics. Experienced directors themselves will be very helpful and patient as you proceed and learn on the job.

There’s a wealth of good books and training programs at your disposal. In essence, a board meeting is just like any other meeting where you set a prioritized agenda, meet, discuss, and get things done.

7. I don’t want any outsiders involved – this is a family business

It is a truism that there is family, and then there is everyone else. Experienced directors understand this as it relates to the dynamics of a family business board, and still you would be surprised how effective (and refreshing!) an outside director can be inside a tight-knit family business and board.

Family members are constrained in so many ways from being totally honest with each other. The outside director is unconstrained and sometimes the only one to tell it like it is. This can be an invaluable resource for a family business.

Just do it

If you’ve been dragging your feet to develop a board, just get on with it.

At the outset of building a board you will find that you can learn quickly with the help of the directors themselves. In a year’s time you will be the expert. You will find that your directors may refer you to other non-competitor CEOs who are looking for good board members. This is one of the primary ways the community of directors populate their ranks.

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Why is this guy the #1 ranked CEO in the world?

Management and Best Practices CEO CEOs make 300X more than workers, but are they doing 300X the work? performance evaluation What are the metrics for the top performing CEOs? > Board  Is the CEO in touch with the employee rank and file?  Does the CEO have employees' respect? Does the board require the CEO to complete a self-evaluation?  Has the board benchmarked the strategic performance of CEOs at peer companies?  Is the board responsive to the concerns of shareholders about the effectiveness and responsiveness of management?  On what grounds is the board considering firing the CEO? (a) poor company performance; (b) strategic disagreement with the board; (c) personality clashes; (d) consolidation of control due to merger; (e) unwillingness of CEO to comply with a board mandate; (f) personal problems; (g) illegal/improper behavior succession Promoting insiders is a strategy to maintain consistency, whereas hiring outsiders is a strategy for change. Sessions Has the board challenged the heir-apparent to be compared against external candidates?  Has the board been able to observe and evaluate the heir-apparent in representative trial assignments?  Is competition among internal candidates getting out of hand?  Does the board have a healthy collaboration with the incumbent CEO in the succession process?  Has the board established clear performance benchmarks and an exit timetable for the incumbent CEO?  Is the incumbent CEO attracting, hiring, and developing key employees worthy of succession candidacy?  Is there a turnover problem with top management candidates?  Does the incumbent CEO restrict access by the board to top management?  Should the board consider removing the incumbent CEO from the board?  Is the board developing and maintaining a familiarity with top succession candidates within and external to the company?  Is retirement of the incumbent CEO being delayed by lack of a successor? For the incumbent CEO close to retirement, has the board structured a compensation package to incentivize cooperation with a successful transition? interim CEO Does the board have a plan for an interim CEO in the event of a sudden and unexpected departure or death of the CEO? Does the board need to consider an outside turnaround specialist to manage the current crisis in the company? interviews Are we getting continuous improvement after each interview process? | interviews: Conversations from the Corner Office | videos: CEOcast  books/movies, articles, blogs: Steve Jobs: book, movie | CEO Succession Carey | Effective Succession Planning Rothwell Intersections | Poverty/income gap

Evaluation of a potential investment in a hedge fund

by scott pickard

I would ask to see a 1-paragraph synopsis on ALL of their equity positions, not just five. If the stocks they are selecting intuitively make sense to you, then that’s a good sign. Of the five equity positions they profiled, I liked their explanations and logic behind their positions. It was easy to understand and made sense to me.

Arbitrage trading is simply mathematical gaming and making money for money’s sake. It has nothing to do with investing in the value of a company’s technology and products. If they’re only doing a small percentage of trades using an arbitrage strategy, it may not be a big issue.

Can they show a graph of the growth of the total $size of fund?

Have they been successful in building their base of investors? What is the current number of investors? Have any investors dropped out? Why?

I would ask for a few callable references so that you could get a current investor perspective on SC’s performance and the investors’ perspective on the quality of reporting and customer service. I would also ask to see a sample quarterly report.

The 2% management fee + 20% performance fee is standard. You need to make sure that the performance fee only applies to the net profits, i.e., profits after losses in previous years have been recovered.

It is also reasonable to require that the performance fees include a “hurdle,” so that a fee is only paid on the fund’s performance in excess of a benchmark rate or a fixed percentage. That is to say, the manager is only rewarded if the fund generates returns in excess of the returns you would’ve received if you had invested your money elsewhere.

What protections does SC provide in the event of fraud or breach of any of the provisions of the Subscription Agreement? I see none. There should be a reciprocal indemnification by SC to the one you would be expected to sign to in section D of the Subscription Agreement.

The Memorandum indicates that you can liquidate and withdraw your account with a 90-day notice, but the Subscription Agreement does not mention this.

In section E, “Power of Attorney,” the LLC should be required to notify investor of any substantive changes made to the LLC on investor’s behalf.

IN SUMMARY:

  • I would not make any kind of decision on this investment until you receive good answers to these due diligence questions and issues.
  • The documentation is very sloppy, and that is concerning. I wouldn’t sign the Subscription Agreement until some of these errors are corrected.
  • If there is one SC, there are hundreds if not thousands to choose from. By comparison to the pool of equivalent investment funds you could choose from, they are very inexperienced. And with inexperience comes higher risk.
Personal Time Investing Buy the rumor, sell the news. But, are you listening to the music or the noise? in general: alternative investments: secondmarket | consumer investing behavior: dcisions | earnings whispers: www.whispernumber.com | books: The Only Three Questions That Count Fisher | gamify: kapitall | idea investing: motifinvesting | impact investing: Global Impact Investing Network GIIN | IPOs: www.hoovers.com/global/ipoc/index.xhtml, http://biz.yahoo.com/reports/ipo.html | Morningstar: www.morningstar.com | Motley Fool: www.fool.com | MSN Investor: http://moneycentral.msn.com | regulation: FINRA | short selling: dangerous | Silicon Investor: www.siliconinvestor.com | startups: DataFox | The Street: www.thestreet.com brokers: E*Trade: https://us.etrade.com | Fidelity: https://www.fidelity.com | kapitall | Schwab: https://www.schwab.com | TD Ameritrade: www.tdameritrade.com | thinkorswim

Historically only 18% of fund managers beat the S&P500 index on a consistent basis.

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Morale Audit

by scott pickard

Low Morale: One of the toughest challenges for the CEO (or Board)
Companies go through periods of high stress caused by growth, transition, or financial troubles. Stress leads to low morale which is one of the most insidious problems to isolate and cure. The CEO and/or Board must filter out the noise and select the path which is “right” within the corporate culture, which requires accurate, honest, and realistic feedback from employees. Unfortunately, the CEO (and Board of Directors) is always the last to know the true inside story from the employees’ perspective. Each layer of management and supervision filters out a percentage of the truth, when truth is defined as the consensus perception, attitudes, desires, and ideas of the employees.

No amount of best-seller consulting gimmicks or re-engineering formulas can overcome the fundamental forces of human nature at play in the workplace: politics, gossip, fear of losing one’s job, territoriality, and hoarding of information. When these forces lead to a morale climate so bad that it causes employee turnover, mistakes, and loss of productivity, it can spread like a virus if not identified and checked.

Root causes of low morale are often revealed by peeling back layers of issues that have built up over time. Some scenarios involve a few bad apples of the company, often at the highest levels, and often the CEO and Board of Directors are looking for confirmation of what they already suspect. That confirmation is found in the collective voice of the employees, so at this point it is time for management to simply listen to what employees are saying. To promote an unrestricted flow of feedback (ideas, concerns, grievances, perceptions, fears, and attitudes), the CEO and Board are better served to engage a third-party “listener” that employees will trust.

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Employees will reveal the truth
A third-party listener functions not as a consultant, psychologist, or investigator, but simply a trusted liaison between the employee and CEO/Board. This requires someone that has the knack and credibility to relax people, gain their trust, and listen to what they are saying. In a low-morale environment, employees are desperate to talk to someone who will simply listen and clearly deliver their message to the CEO/Board in a way they never could in person.

The listener serves at the pleasure of the CEO/Board and interviews a subset of the organization’s employee base. The interview list can also include managers, executives, the CEO, directors, shareholders, customers, partners, and suppliers. The listener should routinely sign a non-disclosure agreement to safeguard the privacy, security, and intellectual property of the company.

The listener establishes a good-faith contract with each interviewee that guarantees confidentiality. There are no written notes taken during the interview and there is no recording of the conversation. The interview should be held in a private room off the beaten path where employees will feel comfortable. The typical interview lasts one hour or less.

After the interview process has run its course, the listener consolidates the conversations into an oral report to the CEO/Board that does not reveal any names of employees, and is free of any interpretations and recommendations unless specifically requested. The listener then destroys any written/digital notes that she or he may have created outside the interview process and will forever maintain the confidentiality of the employee names and information.

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