I remember during my first year at Cal we’d sometimes see a local band, Psycotic Pineapple [sic], who performed a song entitled “The Devil has Work for Idle Hands.” Every time they sang the chorus, audience members would hold their arms above their heads and dangle their crossed hands as they danced. Keep that scene in mind as we head into today’s post about CEOs, boards of directors, and the relationship between them.
While I don’t claim to have any particular gift in “managing” a board, I have learned a bit over the years by being a CEO, sitting as independent director, and chatting with other CEOs, venture capitalists, and independent board members.
Before discussing the board/CEO relationship, let’s define a framework first.
What Is The CEO’s Job?
The CEO’s job is to run the company, set culture, and manage the relationship with the board.
Setting culture means defining, communicating, and living the norms you want to establish inside the organization. Running the company means setting strategy, putting the team in place to execute that strategy, letting that team do its job, and keeping everyone communicating along the way.
What Is The Board’s Job?
I’ve often quipped that the board’s job is to meet 4-6 times per year to decide if it should fire the CEO. While overstated, it captures my belief that the board should have no operating responsibility because the board’s job is governance.
The board should question the management team on operations and discuss the team’s answers. The board should oversee and approve financial audits, operating plans, compensation plans, bonuses, officer appointments, stock option grants, financing rounds, long-term obligations (e.g., leases), and M&A transactions.
Why Do Boards Exist?
Let’s go back to business school 101. From first principles, boards are needed because of absentee ownership — i.e., when the owners of a company are not the operators of a company they hire agents (all employees, including the CEO) to run the company for them. To oversee those agents, and protect against agency problems, the company creates a board of directors.
Note that in Silicon Valley startups, the absentee owner assumption is less true than in corporate America because ownership is both concentrated and well represented on the board. Founders and VCs together might own 70-80% of company and sit together on the board. While the VCs are absentee in the sense that they don’t work at the company, the founders typically do.
Governance = Discussion plus Approval
I’m not a lawyer, but as far as I can tell, governance is about two things: discussion and approval. For example, when people first see a company’s board minutes, they are typically shocked because they appear devoid of content.
On January 5, 2011, persons A, B, C, and D from the board of directors met at 10:00 AM at the Company’s headquarters in Palo Alto, California. Mr. Smith, the VP of sales presented the sales results for 4Q10 and the forecast for 1Q11 including a discussion bookings, revenues, forecast accuracy, lost deals, and pipeline coverage. The board asked numerous questions of Mr. Smith and a vigorous discussion followed.
But they’re not saying what the forecast is? Or who asked what question? Or what the sales results were? All the facts are missing! But they aren’t. The facts the law cares about relate to whether the board did its job. It convened. It met with management. It asked questions. It had a vigorous discussion.
The content of the discussion matters less, primarily because in business you have the right to be wrong. It’s not a crime to start a company that sells three-headed elephant dolls; it’s just a bad idea. The law isn’t going to go anywhere near trying to decide what’s a good idea or a bad idea – that is left to business judgment. The law wants to ensure that oversight is happening — that the board is meeting and the business is being discussed.
While it might seem quaint, this notion of discussion is so strong in the law that board decisions made without an opportunity for discussion (e.g., not at a duly called meeting, but over an email chain) must be made unanimously. (As an aside, misunderstandings about when such resolutions became effective were a part of the option backdating scandals of the 2000s.)
The Direction Paradox
While discussions, challenges, advice, and questioning are always good, when boards give operational direction (i.e., “you should do X”) they risk creating a paradox for the CEO. It’s easy when the CEO agrees with the direction and in that case the direction could have been offered as advice and still would have been heeded.
It gets hard when the CEO disagrees with the direction:
Case 1: If the CEO follows the direction (and is correct that it was wrong), he or she will be fired for poor results.
Case 2: If the CEO fails to follow the direction, his or her political capital account will be instantly debited (regardless of whether eventually proven right) and he or she will eventually be fired for non-alignment as the process repeats itself over time.
In case 1, the CEO will be surprised at his termination hearing. “But, but, but … I did what you told me to do!” “But no,” the board will reply. “You are the CEO. Your job is to deliver results and do what you think is right.” And they’ll be correct in saying that.
Once caught in the paradox, weak CEOs die confused on the first hill and strong ones die frustrated on the second.
Because the paradox is only created when boards give specific direction (i.e., “you should do X”), I think boards should generally refrain from so doing, and prefer questioning, challenging, brainstorming, and advice-giving to directing.
A Wacky Idea for Resolving the Direction Paradox
As a gamer, I have a simple but admittedly impractical idea for solving the paradox. The CEO and the board each start with three credits. Each time there is a disagreement on a major issue if the CEO goes against the board he instantly burns one credit. If he is eventually proven right he gets 3 additional credits back. The system separates major from minor conflict (“are we talking credits here?”), empowers to the CEO to make the decisions he/she believes in, reminds the CEO that going against the board is costly, but rewards him/her for the gumption to do so if they are eventually proven right.
A Better Idea for Managing the Whole Situation: Drive the Board!
But there is a better way to handle the problem. Why does the direction paradox happen? I think for many good reasons:
- Board members want to be helpful
- Board members want to make an impact
- Board members want to participate, not just sit and experience death-by-PowerPoint at every board meeting
In the past 6 months, three different VC ecosystem types have told me something akin to the following:
“You know, I love Joe, the CEO of company X. You know why? Joe is in charge. Unlike most CEOs, Joe sends out his board deck 4 days early. Then he calls me to make sure I’ve reviewed it and to ask if I have any questions. So he’s both holding me accountable for doing my job and he’s speeding up the (boring) operational review part of the board meeting. So the board meetings largely become discussions about important topics. They don’t always take the full three hours, so sometimes I get to leave early, but they always energize me and let me contribute. Heck, the craziest thing about Joe is that he’s got me working for him. I leave the board meeting with 10 action items that can help the company and Joe calls me the next week and the week after to make sure I’m doing them.”
Joe has clearly taken control of the situation. Joe knows the board has energy and wants to help. And Joe learned from Psycotic Pineapple that idle hands are dangerous. So Joe channels the board’s energy the way he sees fit, controls the situation, engages the board, and wins their esteem in the process. That is clearly a better way to manage the situation.
Framing the Board Relationship
The other thing that Joe got right was framing the board relationship. Many, many CEOs see their board as a tax, a group that takes time, saps energy, and distracts from running the operations of the company.
Joe has reframed things: he has framed the board not as a tax, but as a value creation partner. This is another smart move that sows the seeds for a healthier long-term relationship among the board, the CEO, and the whole executive team.
And if you don’t get the framing of that relationship right, your board might end up singing one of Psycotic Pineapple’s top songs: I Wanna, Wanna, Wanna, Wanna, Wanna, Wanna, Wanna Get Rid of You.