On May 17, 2017, I spoke about pre-IPO corporate governance at a terrific event in Seattle entitled, “Keys to Success for High Growth Private Companies.” The conversation was fashioned as a “fireside chat” with renowned CEO and venture capitalist Steve Hooper, and was moderated by veteran CFO Liz Huebner.
Though the conversation was wide-ranging and there was extensive Q&A, I think there were a handful of key takeaways from the event.
Optimizing the boardrooms of venture-backed companies is critical for the U.S. economy.
The event itself. Kudos to Liz and the Northwest Chapter of the National Association of Corporate Directors for staging the rarest of events: a frank, intellectual discourse aimed at optimizing the boardrooms of venture-backed companies. Notwithstanding the size of the venture capital industry and the critical role it plays in the U.S. economy, conspicuously little is said or written about the governance of high growth private companies. Hopefully this event, and the one I presented at the Nasdaq Entrepreneurial Center in January 2017, will inspire more constructive dialogue in this regard. For those of you looking for additional resources in this regard, legendary VC Brad Feld wrote the definitive book on startup boards.
High-profile board failures in the venture ecosystem illustrate that board composition matters.
History repeats itself. High-profile board failures in the venture ecosystem like Zenefits and Theranos illustrate that board composition matters. A lot. Put differently, like Lehman Brothers years ago, it is axiomatic that boards simply can’t manage risks they don’t understand. Board composition seems intuitive, yet officers, directors, and investors struggle with it daily. Perhaps it’s actually not so intuitive? Activist investors aren’t right about everything by a long shot, but the way they assess board composition is right on target. Every company has a handful of key strategic initiatives, key impediments to achieving them, and key stakeholders/customers. If the backgrounds of board members don’t map directly to those three buckets, then your board has an elevated risk of underperforming.
Olive Garden. Seriously. Need more convincing about the nexus between board composition and corporate performance? Two words: Darden Restaurants (the corporate parent of Olive Garden, among other brands). In 2014, activist investor Starboard Value, L.P. won a proxy contest and replaced every board member. What happened after Starboard got the proverbial keys to the car? Years of eroding corporate performance and a stagnant stock price turned conspicuously “up and to the right.” You can quite literally point to the place on the calendar or stock chart when the new guard came in, and the changes since have been transformative. It’s easy to look at situations like Zenefits and Theranos and conclude that poor board composition is falsely correlated to failure. It’s pretty challenging, however, to make the same case regarding Darden. Question: if a properly composed board can drive metamorphic changes in a complex multi-billion dollar company, can you just imagine what it can do for a nimble, high-growth pre-IPO company?
Structural changes needed. Though it perhaps goes without saying, there are many VC’s who are tremendously value-added board members, and who revel in the role. But, there are also many who aren’t. Inexplicably, it’s still common for VC’s to serve on 10 or more boards simultaneously, and there are many VC’s on boards of companies where fast evolving business models have rendered their backgrounds/expertise inapplicable. VC limited partners (i.e., investors in venture capital funds) would likely benefit from discussing some systemic changes: (1) remaining on boards simply because a VC has a contractual right to do so might be a good idea, but it also might be value destructive; (2) remaining on the board of a company because its IPO would be career-enhancing for an investor/board member is an austere conflict of interest; and (3) perhaps large VC’s need to have a “Head of Corporate Governance” role like other large institutional investors (read: BlackRock, et al.).
One venture investor at the event said to me, “I think some of the changes you and Steve were espousing are going to be tough sells; most VC’s already do just fine.”
I replied, “Better governed companies make more money. I never met a VC or an investor in a VC fund who didn’t want to make more money.”