Ma rs governance presentation dave litwiller - march 2013

Governance 201Early- and Growth-Stage Tech Companies

Dave LitwillerExecutive-in-Residence

March 6, 2013

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Copyright, David J. Litwiller 2013 2

Important Disclaimer

This presentation is made with the understanding that the author is not engaged in rendering legal, accounting, securities, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.


Overview

• Difference between Board of Directors and Board of Advisors

• Roles and responsibilities of directors

• Building, managing and evaluating each kind of board

• Evolving governance at the speed of a rapidly changing business


My Background• Twenty+ year trajectory of R&D, marketing, finance and general

management roles in early-, growth-stage and scaled-up tech companies in Waterloo region

• Governance

• Spent a number of years heading M&A, divestiture, turnaround, and corporate venture finance activities in semiconductor and enterprise software businesses, as well as work in instrumentation, automation, and med/biotech

• As EIR, presently advise over sixty tech companies’ founders, boards and investors


Board of Directors vs. Board of Advisors

Directors Advisors

Choice of Members By shareholders By management

Purpose Oversee business affairs Advise as requested

Obligations Under Statutory and Case Law

Yes: CBCA, OBCA, BIA, OESA, others

No

Agenda Sets own Set by management

Power to Hire and Fire Yes: CEO; appoints officers No

Liability Significant and growing Little

Duties Fiduciary, care At convenience of management

Compulsory Disclosure of Business Information

Yes No: information can be selectively disclosed

Time Commitment 250 to 450 hours per year Flexible, by mutual accord

Board of Directors(BoD)


BoD Obligations (I)

• Diligently prepare for each meeting• Appoint CEO and other executive officers• Monitor and evaluate CEO performance• Plan for succession• Adopt strategic planning process• Participate with management developing and

approving annual business plan and multi-year strategic plan


BoD Obligations (II)

• Review with management financial plans• Establish operating and financial goals• Establish sufficiency of risk management• Ensure information supplied by management is

timely and sufficient for the BoD’s work• Review and approve financial statements• Approve material acquisitions and divestitures• Approve securities issuances and repurchases• Declare dividends


BoD Obligations (III)

• Approve nomination of directors• Confirm that processes are in place to comply

with applicable legal, regulatory, corporate, securities and other compliance matters

• Develop the corporation’s approach to corporate governance and improvement thereof

• Carry out other duties specified in the USA, articles or by-laws of the corporation


Directors’ Duties• Fiduciary

– Honesty, loyalty, trust, maintain confidence, independent judgment, avoid conflicts of interest

• Care– Act carefully, be informed, exhibit diligence and skill

• Manage the business and affairs of the corporation

Standard of Performance• Due Diligence

– Information access and review– Deliberative process– Reliance on experts and independent authorities when appropriate– Record proceedings

• Business Judgment


BoD Realities

• It is work, and people need to be work-like about it• Liability is significant• The board needs to collectively be knowledgeable about all

salient aspects of the business and its context, even though individual directors’ skills can be more narrow

• All directors need to be engaged, active contributors, and documented as such

• The risk tolerance of directors needs to match the risk profile and stage of development of the business

• In early and growth-stage tech co’s: Little staff or management board support bandwidth; this isn’t like blue chip company governance


Evolving the BoD - General

• Term limits, typically three years

• Current directors and officers routinely networking to develop director candidates

• Periodic board self assessment to identify weaknesses and skill gaps as the basis for targeting new nominees and better practices


Evolving BoD Skills with the Stage of Company Development

CompanyStage

Typical # of Directors

Typical Director Mix

Key Skills

Concept 1 1 Founder Business formation, F3 funding, early customer and technical discovery

Seed and Start-up

3 1 Founder1 Investor1 Independent

Recruiting, technology, operational set-up, angel/VC funding, ecosystem relationship development critical to success over next 18 months

Growth 5 2 Founders2 Investors1 Independent

Commercialization, operational refinement, institutionalizing know-how, scaling, growth finance, working capital management, international reach

Late Expansion

7 2 Founders2 Investors3 Independents

Increasing financial sophistication, acquisition or IPO savvy, governance discipline, reduction of surprises


Leading BoD IssuesCompanyStage

Sales Accounting Legal

Seed • Customer discovery

• Managing by bank statements

• IP: rights, deadlines, chain of title & assignment, licenses

Start-up • Early sales• Strengthening

value prop• Competitive

strength

• P/T bookkeeper• Monthly I/S and B/S• Tax returns done• Source deductions

made and remitted

• Director resolutions to approve equity rights grants

• Complete minute book• Material contract review

Growth • Accelerating growth

• Revenue predictability and quality

• Rising efficiency

• F/T CFO• Audited financial

statements• Annual forecasts with

predictive value• Variance review

• Records management• Compliance• Risk management• Litigation, real or

threatened, especially employment, partner, and IP


High Impact Board PracticesCompany Stage

Practice Helps

Seed and Start-up

• Prospective hindsight• Reference class analysis• Pre-commitment• Commitment limits

• Manage risk, coaching, coach-ability• Reduce sampling and intuition errors• Catalyze learning, antidote groupthink• Counter decision drift & confirmation bias• Do more with less; pivot effectively

Growth • Executive sessions• CEO and management

performance feedback• Agenda effort

• Independence of board• Correct quickly and early• Keep up spirited inquiry in the most

impactful areasLate Expansion

• Continuous improvement of governance

• Methodical director onboarding

• Evolution of the BoD as a self-regulating body

• Accelerates time to full individual and group productivity, facilitating renewal


BoD Advice (I)• There’s no shortcut for spending the time and doing a lot of reading and

networking for a director to bring an informed, independent viewpoint about a company’s strategic environment

• Speed, decisiveness and dexterity improve with a somewhat smaller board than larger, IFF, sufficiently broad, experienced, and dedicated directors are available to span the requisite disciplines with a marginally smaller group

• Meet eight times per year, in person

• Don’t let the flurry of other business push aside a deep dive each meeting into the matters which are keeping the CEO and CFO up at night, and to understand what alternate data , viewpoints and interpretations exist to richen the discussion on those matters


BoD Advice (II)• Require board packages be delivered to directors 72 hours in advance of

meeting, with a cover memo identifying which items are informational only, and those which will be deliberated and decided

• Structure discussion so that management’s recommendations are clear, yet with room for director input, but stopping short (usually) of unbounded possibilities

• At every board meeting, discuss the quality of information, agenda, time allocation, and deliberation process with each director contributing 1-2 improvement s for future meetings

• Conduct brief executive sessions at each board meeting to discuss management and board performance without members of management present, as well as who will deliver that feedback


BoD Advice (III)• Have executive management provide regular feedback on where it has gotten

the most help, and the most frustration, from the BoD

• In normal circumstances, use 75% of time in the boardroom looking forward (strategic, market), and 25% looking back (finance, ops)

• Always know the company’s financial runway, be proactive raising funds, and become expert in accessing alternatives in the financial model and capital structure to improve funding options

• Rotate which board member will take a hard stand on difficult issues as they arise, so that one person does not always take the role of critic

• Designate one responsible director for the CEO performance evaluation process, even though all directors participate


Chairmanship (I)• The BoD can only be as good as its chairmanship for setting the tone

and interpersonal chemistry– Leading among peers– Tact: ability to disagree without being disagreeable; constructive

dissent– Bringing everyone into the discussion, and not letting one voice

dominate– Encouraging debate while sustaining cohesion– Keeping conflict at a task level, and not a relationship level– Knowing directors’ leading concerns before each meeting– Effort and preparation; collaborative agenda development w/ CEO


Chairmanship (II)– Channel deliberation and decision into a two-step process on

divisive issues– Driven improvement of board practices– Quickly reconciling emerging differences among directors’

visions for the board’s role, and those of management– Promoting openness by encouraging board members to make

direct proposals, not disguised or oblique ones– Weaving themes and points of importance together to create

an integration of each meeting around major current issues– Being able to both criticize and support management– Quickly dealing with director underperformance


Early BoD Warning Signs (I)Signals of insufficient director effort or poor skill correlation with the needs of the business:

• Overreliance on service providers; they do not just provide expert input, the BoD effectively outsources decisions

• Routine over-deference to the one board member with the most subject matter expertise in a subject area

• Vital decisions are almost always made just with the facts and arguments on hand, rather than spending time in some instances to question the source information and get more, varied, and better data


Early Warning Signs (II)• Impractical advice from directors

• Insufficient give and take between directors and management

• Lackluster inquiry into areas of underperformance

• Poor meeting management– Time– Agenda – Spiraling out of control on issues without an ability to summarize work to

date, forward actions, and move ahead to other business

• Insufficient declaration of conflicts


BoD Observers

• More voices in the boardroom makes it harder to reach consensus– In most cases, small company BoDs try to reach consensus, and

not have split votes– In practice, having a voice is nearly as powerful as having a vote

• There is also a liability issue that an observer can be deemed a de facto director if the observer functions to manage the corporation’s business and affairs– By statute, observers are not entitled to indemnity– May not be covered by D&O insurance


BoD Observers

If observers are needed, such as, venture investment fund junior analysts, or strategic investor representatives:

• Then, the role is best defined contractually as a confidentiality-bound listener, with care taken that the observer not prepare agendas, not influence debate and not to influence motions, and, to otherwise bind conduct– Minutes should note the observer’s role in each BoD

meeting, and expressly that the observer did not vote for or against motions when votes were cast

Board of Advisors(BoA)


BoA Roles and Responsibilities

• Provide independent advice to CEO and management without fiduciary or duty of care obligations

• Advise and lend credence to the company in the areas most significant to success over the coming two years

• Can be any number of members, but typically four to seven


Three Common Forms of BoAs

• Customer– To gain heightened voice of the customer in the company’s

product and business strategy

• Scientific or Technical– To help with complex underlying science or technology

• Business– To gain selective input on business issues from advisors

without either side taking on the mutual obligations or formalism of a fiduciary board position


Ideal BoA Member Profile

• Expert and nearly invaluable knowledge• World-class networks• Attracts outstanding employees• Provides an aura of success in advance of the business

achieving it• Works hard and is responsive• Comfortable lending name and credibility to the

business, and advocating on behalf of the company• Someone you’d love to have as a senior employee but is

not affordable or attainable on that basis


BoA Nomination Criteria

• Scientific or technical skill• Business strategy and company building• Product development• Customer and sales channel development• Business development and ecosystem

relationships• Regulatory wherewithal


BoA Challenges

• Only half of CEOs with BoAs are satisfied with them after working together

• Typical issues:– Ongoing responsiveness– Advisors taking the time to fully contextualize the

company’s circumstances – Interpersonal chemistry– Self-interested advisor behaviour


BoA Success

• Likelihood of constructively using a formal BoA:– Highest: Tech start-ups requiring $ millions of funding and

several years to get to revenue • Biotech/pharma, med devices, semiconductors, telecom/datacom

capital equipment, utility-scale cleantech, advanced materials • Enterprises with large regulatory hurdles and risks

– Mid: Enterprise software, consumer electronics, industrial technologies

– Low: Consumer web services, mobile apps


BoA Advice

• In lower investment stake businesses, formal advisors who aren’t also investors can raise more questions about the business for outsiders than they help solve

• Have an hour+ working session at the outset with a nominee BoA member to assess communication, thinking style, energy, and mutual fit

• Have a written charter or mandate which lays out expected commitments and contributions


Managing the BoA for Impact and Productivity

• BoA will typically only put out as much as the CEO and management team puts into it:– Be explicit about the expected time commitment and speed of

responsiveness– Hold meetings regularly, typically two to four times per year– Set agendas and send materials beforehand– Ask advisors to present on specific topics for information or discussion

to management and the BoA– Ask advisors for feedback on industry reports and management plans– Ask for referrals and introductions– Poll for input on point issues 1:1 as they arise– Keep advisors up to date on the company’s progress, such as with a

monthly summary e-mail


BoA Advice

• Set term limits, typically one to two years– Interest and impact typically wane over longer periods– Forces everyone to revisit relevance and changing circumstances

with a fast growing business– Removes stigma of departure, particularly when customers or

partners are represented on the BoA– Terms should be renewable if the relationship is working out well

• To keep attention up, consider compensating not on a retainer basis, but linked to deliverables such as meeting preparation and attendance


Renewing the BoA

• Regularly revisit the top three things that the business needs to achieve to go to the next level over the coming two years– Early stage: De-risk value proposition or raise funds– Later stage: Drive growth, scale and cash flow

• Ask if the BoA is helping those things happen faster than operating management could on its own– If it is, it is likely the right BoA at the right time– If not, it is time to revisit skills gaps, composition, and even

the ongoing value of a BoA


Resources and Further Reading• Board of Directors

– Directors’ Duties in Canada, Barry Reiterhttp://www.cch.ca/product.aspx?WebID=3688

– Decisions 2.0: The Power of Collective Intelligence, Bonabeauhttp://people.icoserver.com/users/eric/SMR_Collective_Decisions.pdf

– The Big Idea: Before You Make That Big Decision…, Kahnemanhttp://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf

– Winning Decisions, Russo and Schoemakerhttp://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker

• Board of Advisors– The Four Steps to the Epiphany, Steve Blank

http://www.stevenblank.com/books.html

http://www.cch.ca/product.aspx?WebID=3688

http://www.cch.ca/product.aspx?WebID=3688

http://people.icoserver.com/users/eric/SMR_Collective_Decisions.pdf

http://people.icoserver.com/users/eric/SMR_Collective_Decisions.pdf

http://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf

http://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf

http://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker

http://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker



© David J. Litwiller, 2013 37

Follow-up Discussion

Contact:

dave [dot] litwiller [at] communitech.ca

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Ma rs governance presentation dave litwiller - march 2013