Building exceptional boards of directors in growth stage technology businesses litwiller - june...

© David J. Litwiller, 2012 1

Building Exceptional Boards of Directors in Growth Stage Technology Businesses

Dave Litwiller

June, 2012

Keywords: Board of Directors; Supervisory Board; Governance; Leadership; Growth Stage; Technology; High-Tech;

Venture Capital; Angel Investor; Management Oversight; CEO Performance Management; Risk Management;

Chairmanship; Financial Oversight

Introduction

High performing companies have even higher performing boards of directors. A great board vastly

outperforms a good one in a growth stage technology enterprise. There are several reasons for

amplification of the board’s workings.

One is the largely self-regulating nature of the directorate. Second is the strong positive feedback within

the board and in its relationship with executive management. Third is the velocity of change in

technology and competitive ecology. These dynamics combine to make the composition, operation and

leadership of the board of directors a principal lever for building and sustaining value.

Growth stage technology companies face distinctive governance challenges as they work to optimize

value creation and competitive strength. Risk tolerance and risk management has to suitable to the

company’s stage of development.

The pace of change in a growth stage technology business requires agility even when the directors are

uniformly strong, group dynamics efficient, and interaction with management effective.

Building an outperforming board starts with choosing the right people, training them well, and ongoing

renewal to achieve peak output. Next comes establishing a culture of excellence, both within the board

and in the directorate’s interaction with management. And, finally, superior results come from

maintaining a coherent set of interacting practices which evolve at the speed of the business and its

environment.

People

There is no bigger driving force in the performance of the board than the quality and commitment of its

directors. Directors should be:

• Voracious readers, who keep current, and take in enough data to be able to develop an informed,

independent point of view about the company’s circumstances. They need this basis to form their


own expectations about what constitutes strong decision processes and results, and to develop

ideas which can augment those of management;

• Prepared, for discussions and deliberations. Consistent preparation delivers a direct benefit by

maximizing productivity. It also sends a clear signal to management about the expected standard of

performance;

• Have time and give it priority. Each director needs to dedicate a minimum of 250 hours per year to

the company. Audit committee members and the chairman can require as much as 450 hours per

year. The hours spent outside of the boardroom in preparation should match at least two to one

the hours spent in full board and committee meetings. A director’s board responsibilities have to be

a personal priority;

• Strongly competitive in expectations for the business, but balanced with integrity. The best

directors have a powerful desire to be associated with a winner, and want to push themselves, each

other, and executive management to deliver the full potential of the enterprise. At the same time,

they have internal governors so that aggressive, considered pursuit of the highest output does not

tip over into underhandedness or willful blindness that becomes corrosive to the long term capacity

of the business;

• Optimistic, tempered with relentless skepticism, a dash of paranoia, and unwavering belief that the

business can always be improved. These individual and group characteristics expunge complacency.

They keep up a culture of spirited inquiry and open debate in the boardroom;

• Tolerant to risk, matching the business’ stage of development and competitive environment. There

can be no liability paralysis. The directorate has to constructively and rapidly move forth in the face

of the uncertainty inherent to the stage of development and the environment of a rapidly growing

technology-based business;

• Collectively knowledgeable, so the board in aggregate knows enough about the key drivers of the

business in all of its most impactful respects to be able to provide constructive input to the

executive on the most substantial issues. Aggregate breadth and depth is also necessary to be

intolerant of weak facts and arguments that may be presented by management, auditors or

consultants in error, let alone to justify omissions, specious actions or overly expedient thinking.

These traits set the foundation for superior leadership from the boardroom. From this basis, rapid

adaptability is most easily achieved as the board keeps its composition and operation at the fore of a

dynamic business.


Advancing and Renewing the Board

There are several contributing facets to helping provide the right skills at the right time and with low risk

to keep the board evolving to fully support the needs of a growing business:

• Develop an ongoing pipeline of director talent. There needs to be continual identification of the

skills that the board should be looking to add or augment, not last minute heroics responding to a

trigger event. A rolling effort to assess current and forward looking skill gaps forms the basis for

routinely developing a short list of candidate directors. Better candidate directors will be interested

in joining when they see an orderly, ongoing effort to attract talent.

• Balance candidate origination. Candidates should be nominated by all board members, including

the CEO. There has to be balance of origination between CEO’s choices and those of outside

directors. Doing so avoids the all too common case where the CEO’s nominees are acclaimed when

times are good, whereas outside directors’ choices are when the business isn’t executing as well.

Particularly with the self-interest of the CEO’s assessment and remuneration being decided by the

board, consideration of the CEO’s nominees needs to be evenly considered with candidates from

other board members.

• Resist path dependency. Directors can be inclined to bring on new directors just like themselves,

creating path dependency where the future resembles the past. A counteracting measure in

director assessments and skill gap profiling is to require directors to identify gaps and shortcomings

of the current directorate. It can be helpful too to periodically gain outsider perspective on

changing skill needs. Doing so helps ensure different kinds of people are recruited as new board

members to keep the board evolving with the company.

• Reference-check candidate directors in person, not through a headhunter and not by electronic

correspondence. Past associates of candidates will often hold back through headhunters or

electronic inquiry because of litigation risk. Reference discussions need to take place face to face

between current directors and collaborators of nominees to gain the most unfiltered feedback

possible.

• Be wary of narcissists as candidate directors. This personality type can be very successful in an

operating role through a complex mix of charm, bullying, single-mindedness and self-aggrandizing.

Such people often attract a lot of media attention. A significant portion of successful entrepreneurs

and business leaders in technology are of this personality type. As such, these peoples’ names often

come up as prospective directors. But in general, they neither criticize themselves well nor accept

criticism from others. A board member has to be able to capable of self-criticism because of the

self-regulating nature of the body. Moreover, narcissists are frequently unable to consistently exert

the kind of influence on management or the board to activate the complex alchemy of how this

personality type leads well in hands-on situations. There are rare circumstances where several

narcissists on a board push each other competitively to positive effect, especially to help advance


the company with networking and introductions. But, the path of stability is very narrow where

these kinds of motivations and contributions are productive. Narcissists are usually best avoided as

directors.

• Get beyond the skills matrix, to find directors who can be independent thinkers and can disagree

constructively. Directors need to be cohesive most of the time, but still able to be contrarian

without going so far as to routinely become lone wolves.

These techniques and orientation give the board the best opportunity to renew and adapt at the speed

of the company and its environment. A related challenge can sometimes be how to handle low

performing directors.

Identifying Weak Directors

In boards of established companies, the drive for high performing individuals and group interaction

often comes down in part to knowing who the weak directors are and doing something about them.

Identifying the weakest or highly conflicted directors is usually straightforward. Typically they’re

sycophants who always parrot the prevailing opinion or a stronger personality on the board, narrow in

viewpoint to the extreme of taking energy away from others, or those who are visibly in over their

heads, unprepared, unwilling or unable to engage directly in difficult issues. Or, they may just express

such strong bias or have outside relationships to promote detrimental courses of action. These traits

make other directors highly apprehensive of bias and thus tentative about adopting offered viewpoints.

Strong directors advance the collective discussion at each turn; weak directors take it sideways,

backwards, in oblique directions, or simply contribute little to the dialog.

More complex weaknesses to identify in directors are those which only become clear when summing up

the individual’s impact over a significant number of meetings, issues, and time. There is no substitute

but for attuned chairmanship to identify these shortcomings as quickly as practicable.

Below are frequent archetypes of weak directors from my experience which people can be slow to

identify, unless they know early what to look for. First are some general personality types of concern,

then common background personas which often cause issues.

Problematic Personality Traits

Over-Generalizing: One who generalizes an overreaching amount. “This must be like that”, can be one

of the strongest primitives in the human brain. Such a person’s experience may not be sufficiently

typical. This situation often arises from an investor, founder or observer of a past business in a related

space which achieved particularly notable success or failure. He is overly drawn to anecdotal examples

from those experiences. This person is then powerfully attracted to make the new emulate the past, or


repelled to keep the new away from any such resemblance at all cost, when such strong polarization

either way is unsuitable for the business at hand.

Would-Be Clairvoyant: Someone who assumes too early how complex situations are likely to play out,

and then shuts out relevant information which limits thinking prematurely.

High Pass Filter: The individual who is overly influenced by the last thing he heard or that happened.

Happy Eared: One who suffers from selective hearing, usually with an affinity for good news, restricting

ability to synthesize, question or comment in a balanced fashion.

Scattered: The director whose input is fragmented, inconsistent or otherwise not actionable.

Other challenges with director quality take the following common pattern forms of background and

reputation:

Frozen in Time Legend: The highly respected, retired founder or CEO of another company for whom the

game has passed by, or who exhibits a strategic blindness or overreaching leap of faith. This

circumstance is difficult to deal with because much of what the person says and does makes terrific

sense. He often is charismatic, persuasive and highly regarded. But, there is an area of insufficiently

founded confidence in present circumstances which he carries forward from the past. The mismatch

distorts strategic thinking and decision making. Often, the sheer force of effort when the person was a

working executive was enough to overcome this liability, or the competitive circumstances of his

business were such that the leap of faith was sufficiently true. But, at a different time and in a different

setting where the person isn’t working ninety hours per week steering and cajoling the business forward

to adapt at necessary speed, the blind spot ends up being debilitating. As a director in a changed

context, the ability to assess and correctly decide the most pressing and generative issues is

compromised. This individual weakness can infect larger portions of the board if there is strong

deference among other directors because of his past success.

Political Animal: One who achieved high station in his career more through sharp elbows than

excellence in what he does. These people tend to politically charge the boardroom over time, making it

harder to have the right discussions the right way. Defensiveness often grows. Dialog then gravitates to

justifying past decisions and actions, rather than ongoing renewal of objectivity and circumspect

deliberation with sufficient view to the future.

Superficial Salesperson: This is often someone who has been successful in sales, but in situations where

the success formula had already been substantially worked out by the time he arrived. Despite past

achievement, he struggles to make the cognitive leap to the more nuanced world of selling and

otherwise building a market presence in a young technology company or in different functional

domains. These people tend to be very good speakers, working a room very well and cheerleading.

They can be equally harmful for moving sentiment off the mark for revenue growth and market

expansion models that will position the business to perform best.


Uni-dimensional Technology Guru: He is enamored with the potential of the technology to the

exclusion of providing reasonable judgment and governance in other functional areas. The most difficult

form of this phenomenon is the technologist who shows balanced business wherewithal on routine

matters, where his technology enthusiasm is held in check. But, his overreaching belief in technology

becomes overpowering at the time of deliberating the higher risk, higher consequence commitments

the business is making. Technology passion and optimism occludes other functional forces necessary for

balanced business judgment, when breadth of thinking is needed most.

Later Stage Company Executive: One who is unable to transpose her experience to match the stage of

development issues the younger company faces. A common scenario is someone who leaned,

restructured, or outsourced parts of a mature business at the apex of his career to great effect. Such a

person is usually very strong on dealing with incremental operating issues. But, she may struggle to

carry over the drivers or insights of that experience to a growth stage enterprise. At an earlier stage, key

success factors over the short- and medium-term are often much different.

Another common form of the later stage executive shortcoming as director is someone who built much

of his career in a single functional area, and then assumed general management later on. In this case

usually much of the operating infrastructure of the business over which she presided was already put in

place by others. People from such backgrounds often lack the direct experience across a breadth of

functions at a sufficiently tactical level to be able to best help identify risks or opportunities for the

governed business.

Social Media Zealot: Someone who spends much of his time pushing himself out to his online presence,

as well as keeping up with others’. He has little time or reflection capacity for larger matters. When

people distribute themselves entirely out to the periphery, there can be very little left at the core for

what really matters.

On the whole, these kinds of shortfalls of personality types and background can be subtle to detect.

Knowing in advance what to look for can help to pick-up on these weaknesses quickly. This helps when

looking at new director candidates, evaluating directors, renewing the board, and deciding what target

skill profiles to seek with new director nominations. The chairman needs to be able to assess all of each

director’s contributions and actions over time to develop a total picture as rapidly as possible of who the

strongest contributors really are, to counterbalance any problematic effects of reputation or

personality.

See Appendix 1 for suggested approaches to deal with weak or conflicted directors.

With the right directors, the capacity for the board to perform well is geometrically higher than with

lesser raw material. Having the right people on the board allows matters to lastingly turn to doing the

most constructive things in the best way possible.


Management Talent Development

In my experience, more than any other single area of board operation, the ability to develop executive

talent in a high growth technology business reflects most informatively upon the real quality of the

board as a force for excellence and resiliency.

CEO performance feedback needs to be routine. CEO performance should be discussed at every

executive session accompanying regular board meetings, as well as more formal semi-annual reviews.

All too often, CEO evaluation is the item that gets pinched for time. In addition to regularity, feedback

to the CEO best occurs right after each executive session. It should be delivered by two directors so that

criticism is less likely to be received as an axe being ground by one delivering director in case the CEO

would presume that such sentiment not be more broadly shared by the rest of the board. The

cautionary motivation for regular feedback is that in situations where the board is unwilling or unable to

provide enough of it, what tends to happen over time is the board comes to harbor apprehensions

about the CEO that it is not voicing and managing. When that occurs, a loss of confidence can take hold

leading to inefficient divides among the governance and leadership. Methodical performance feedback

to the CEO helps the board achieve the right balance to provide constructive feedback and positive

tension routinely, while not usurping the authority of the CEO. Lapses in CEO performance feedback

often sow second guessing or back channel manoeuvers to develop counteracting measures or even

shadow contingency plans.

There are several techniques to help CEO performance feedback take place, in the most productive way:

• Designate a director who is responsible for the process, even though the whole board contributes;

• Perform semi-annual formal evaluation, starting with self-assessment by the CEO for the past half

year delivered to the board in writing, and plan for both the six months ahead and full year;

• Have the board evaluation start with a survey of open ended questions to be responded by each

director qualitatively, as well as each question having a quantitative rating scale. This helps

compare board members responses and quickly pick up on where differences lay which can be the

most revealing areas for further discussion;

• Evaluate not just financial results, but also organizational agility and adaptability, morale, R&D

effectiveness, customer satisfaction and preference, and the company’s outward image;

• Resist retroactive lobbying by the CEO for softer targets when the past period has been tough;

• Use executive discussions in part to talk about how performance criticism will be delivered to the

CEO.

CEO succession planning, covering both emergency situations and planned transitions. The half-life of

the CEO of a growth stage technology company is about three years. As such, CEO selection and


management is one of the cardinal responsibilities of the board of directors. The credibility and capacity

of the directors to manage enterprise risk can be significantly measured by their ability to plan CEO

succession, and related matters of broader executive management development.

The board has to have an ongoing dialog about succession planning. Directors should collaborate on

who would take the reins in a sudden crisis, and who the promising senior managers are to potentially

assume the leadership under a planned transition. Even when the business is performing well, the

velocity of change can require rapid CEO change, let alone unexpected debilitating health changes or

integrity breaches.

The board should redouble its succession planning efforts when there is evidence of character issues

with the CEO. The main ones indicating trouble are if the CEO sticks with trying the same solutions that

have been of limited effectiveness in the past, always thinks he has the answer to problems, is

superficial, or where he exhibits seeing himself as smarter or better than others. Such character

deficiencies are difficult to correct through performance appraisal and feedback. Change may be

needed. Other areas which signal a growing likelihood of renewal is if the CEO is distracted, hurtling

without control, caught up in excessive hype, unable to focus on the most important things, committing

prematurely to major investments, or inclined to make matters overly complex.

Succession planning for the CEO position tests the mettle of the board to exert the right kind of

influence, as much as any of its other responsibilities. Selection and continuation of a CEO is a very

personal and emotional one for the directorate. The board needs to collaborate with this manager on a

range of matters. There is often a dual board chairman and CEO. The CEO may be a founder, and the

CEO is often a major shareholder and a persuasive leader, as well as influential person in the

enterprise’s industry. Nevertheless, loss of momentum from poor succession contingency planning can

be disastrous, yet all too common for more weakly governed companies. The board delivers outsized

impact through a disciplined and multi-faceted CEO succession dialog.

A further derived benefit of regular CEO succession planning is that it reminds the senior executive that

he is not above reproach, as no one should be with fiduciary responsibilities. Explicit evaluation

prompts better behavior, adaptability, and humility. Done well, preparation for CEO succession serves

to lower not just the negative impact of succession events, but also in an anti-fulfilling way, to reduce

rate at which they need to occur.

Get to know the managerial up and comers, taking an active role with the rest of the executive and high

potential management. Interacting with the CEO’s reports and high potential managers provides mutual

feedback and awareness, complementing the board’s more regular interaction with the CEO and CFO.

Directors can then contribute to mapping out and shaping those who can grow into significantly broader

roles. Typically a two year planning horizon is the appropriate time frame in a high growth technology

business – long enough to do planning for key management personnel, but still short enough for current

circumstances and people have predictive value. The board should provide guidance and input on the

assignments the high potential individuals receive, and keep up with follow-on performance evaluation.

In the normal course of activity, it is good to have executives other than the CEO and CFO deliver


presentations during a minority portion of each board meeting, so that the directors get to know them,

and get a more detailed view of parts of the business. More important though is that directors have the

opportunity to interact with other management outside of the formal board proceedings, such as at

scheduled dinners afterwards. More social settings foster a freer form discussion to get to know these

people and exchange ideas about operations, culture and competitive standing for mutual benefit.

Boardroom Dynamics

Several techniques, practices and protocols help boost board productivity:

• Education and rapid onboarding of new directors in a structured process so that they contribute

quickly and well, helping set the tone early about the standard of performance to which the board

holds itself, the executive team, and the rest of the company;

• Regular executive sessions. These meetings of directors, without those in management or

observers present, are one of the most significant and lasting practices to improve board

governance. There should be an executive session adjacent to every regular board meeting.

Regularity prevents their occurrence causing the CEO or other executives to take issue or raise acute

apprehensions about why one is occurring. Sometimes it is best to have two briefer executive

sessions with each regular board meeting. With two, one takes place right before to identify issues

that have come up in the course of reviewing reading packages or other late breaking developments

which need to be raised at the board meeting. The other occurs right after the board meeting while

recollections are freshest to gain feedback about the quality of the meeting, improvements for the

next, or concerns to be raised with management about performance or risk management. The

agenda for these sessions should always include management performance along with whether the

board is spending its time on the right things and with the right information. To keep executive

sessions at top vibrancy, it is often helpful to change or at least rotate the format to allow different

perspectives on major issues to come out. If these sessions are always run the same way, they can

tend to fall into a routine pattern which can develop blind spots and miss important signals.

Executive sessions with some variation help the board to detect, question, and act most suitably.

• Advance distribution of reading packages. Reading packages need to be delivered to board

members well before each meeting. At a minimum they should be received three days ahead of

each, and more appropriately one week. Directors need time to consider the materials, issues, and

central questions to be most productive at the meeting. The reading package should include all of

the presentation materials to be delivered at the meeting, so that the time in session can be

dedicated at least 50% to discussion.

• Prior identification of the main issues to discuss. The reading package should have a cover memo

from the chairman, developed collaboratively with the CEO, indicating which items will be discussed

in depth at the upcoming meeting, and which items are informational only. As well, there should be


companion cover memos from the CEO and CFO indicating the most pressing opportunities, issues

and worries they face to guide directors’ preparation, as well as management’s recommendations

on major issues to be decided. Potential changes in strategic goals and objectives should also be

indicated.

• Minutes showing fiduciary duty of care. All board members are responsible for and entitled to

minutes which convey not just decisions, but fiduciary duty of care. The mere existence of meeting

minutes is insufficient to show duty of care. Minutes need to reflect enough diversity of opinion to

substantiate that directors carried out their fiduciary responsibilities. Vanilla, decision-only minutes

do not.

There is though a larger reason for having minutes showing ranges of options which were

considered on major issues. It is that minutes showing diversity of consideration serve as a kind of

time capsule chronicling board conduct which can be observed by others, now or in the future.

Almost always bodies under study, or under prospect of future study, behave better than if they are

not. Vanilla minutes that portray simplistic unanimity or overreaching brevity fail in this essential

regard. They show a lack of confidence, and signal fiduciary and strategic weakness. At the same

time, minutes need not be written so that everything sounds like a contested decision. But, they do

need to show variation of consideration.

Nevertheless, simplistic minutes that mostly show only decisions are often advocated by directors

hoping for a quick flip of the business or who envision idealized downstream financings so there be

little in the board minutes to slow down transaction due diligence. This line of reasoning only holds

up in situations of intense deal heat, which is exceptionally rare. Good buyers and future investors

will do thorough due diligence. If there are underreported issues, they will usually surface in the

course of the acquisition or investment research. Furthermore, vanilla minutes themselves serve as

a warning sign to prospective financiers or buyers. Overall, the self-regulating benefit of board

meeting minutes showing fiduciary care far outweigh their cost for the way they contribute to the

right behaviors and responsibilities and signal the same to others to enhance value.

• In person meetings. Telephone or online meetings are ok for final votes, where the facts and

arguments have been worked through in person, and all that remains the decision. Telephone

meetings are poor when issues are at a less developed state, when reading emotions and gestures is

important to maximize communication and collective intelligence.

• Antidote groupthink. Management teams often fall into groupthink. It is thus crucial that the

board not become tone deaf to new ideas or interpretations. The directorate has to preserve

ongoing capacity to play devil’s advocate in fundamental strategic dilemmas, particularly those that

go on for extended periods of time. The board should be willing and able to ask anew about past

decisions and current escalations of commitments, and not fall victim to herd dynamics. The board


should constantly seek better, actionable information and knowledge and be willing to change

course when the data is persuasive.

• Sharing the load of criticism and taking hard stands on controversial issues. Group dynamics within

a board can lead to an overreliance on one or a few individuals to ask the hard questions, which

changes the self-expectations of other directors to be as energetic and catalytic. When this

dichotomy persists, it impairs the functioning of the board. It is far better to keep the full

directorate on their toes and moving forward by distributing the leadership of the individual who

will press on sensitive or controversial issues. Task leadership is usually worked out during executive

sessions or pre-meeting discussions between the chair or lead independent director and other

directors.

• Collegial, but stopping short of being so cozy on a personal level as to be impeded from speaking up

with alternate viewpoints. Within collegiality as it applies to a board is the capacity for individuals to

disagree, without being disagreeable. This characteristic in all directors is essential to being able to

work together well yet still bring out enough range of viewpoints to sufficiently mentor, support,

and challenge management over time and changing circumstances.

• Asking good questions, rather than telling management what to do. Didacticism eviscerates

management and should be reserved for crisis circumstances which require directors to dictate

actions to carry out their fiduciary responsibilities.

• Fast and agile. In addition to the smallest board size reasonably possible, minimizing the number of

board observers helps speed up cycles of action. While board observers are not entitled to vote or

participate in executive sessions, they are free to participate in the regular discussion. As the

number of voices in the boardroom increases, especially from those who do not share the same

breadth of responsibilities as voting directors, it becomes more challenging to get all perspectives

out in a timely fashion, and to reach consensus.

• Periodically hold board meetings at significant remote sites of operation if those sites are distant

from headquarters. There is no substitute for seeing in person what goes on in a core operation to

get a sense for how things are going. The way to help the board members see for themselves is to

periodically hold meetings at those sites. This also allows management at remote sites to more

easily interact with the board for mutual edification.

Risk Management

Usually, the most important aspect of risk management is the board regularly and honestly confronting

whether the company is pursuing the right strategy, and in the right way. This is about more than how

the business is performing with executing the current strategy. It comes down to periodically retesting


whether the strategy is the right one. High performing growth stage boards spend about 80% of time

gauging and improving current strategy, and 20% looking more fundamentally at the assumptions,

dependencies and adjacent possibilities underpinning the selection of the best strategy. This way, the

company can best keep up with the fitness required to stay ahead of the competitive landscape in which

it operates.

The board needs to be the force for periodically articulating and rearticulating the biggest assumptions

and dependencies upon which the business is based. This applies to financial, strategic, technological,

and personnel dimensions. It further extends to understanding the next best alternatives for each major

course of action. To detail embedded assumptions and dependencies with sufficient care usually

requires some scenario planning about what kinds of conditions would signal for alternate paths, and in

those cases, what information would be needed and actions taken.

Such an understanding of the underlying structure of reliance allows the board has to maintain a clear

and up-to-date view about which activities are longer shots, toss-ups, and nearly sure things. Being

objective like this about risk, reward, and probability is a discipline. So is the related matter of

constantly seeking how to quickly and most cheaply get better data and better odds. Part of the skill of

being data-driven for best impact is the art of selecting the right data by which to be most influenced. A

further part of the craft is insisting on reference class analysis for the most significant risks, and not

merely internal estimates. In particular, objectivity in strategy and execution requires circumventing

the trap of letting anecdotes or superficial arguments overly influence directors. With more statistically

significant data, the board can then better establish the risk level and appropriate localized strategy for

pivotal endeavors.

A frequent form of risk management is having defined stop thresholds. They help prevent the

momentum of history from being overly influential. Commitment limits require defined, quantitative

and written success criteria for major investments. Thresholds help prevent people from drifting away

from more rigorous criteria. People can otherwise overly revise their goals, even to the extreme of

continual variation along the lines of “we’ll know success when we see it”, rather than making a

wholesome effort to define success beforehand. Of course, the board needs to adapt the measures of

success as significant information comes in, and be willing to alter course. But in total, the directorate

has to be objective about not adapting the measurement standard without a sufficiently valid basis.

There are a few other areas which are most impactful for maximizing the success profile of growth stage

technology businesses from the boardroom:

• Provide vigorous scrutiny about whether significant investments are premature. If they are, it

signals overconfidence in the company’s business plan. Such commitments represent unnecessary

execution which typically slows and otherwise harms the business with reduced flexibility.

Premature scaling is the leading cause of preventable difficulty for growth stage technology

businesses. The board’s influence to govern scaling is of outsized benefit to lift the likelihood of

such investments being appropriate to the risk and stage of development.


• Keep an eye on customer satisfaction and customer preference ranking. This requires cohort

analysis showing how fast the company is really improving relative to its competitive environment.

A balanced view of customer sentiment also means getting not just quantitative measures, but also

qualitative ones such as periodic reviews of major lost orders, up-sell opportunities, support calls,

and renewals to fully see the picture of customer behavior.

Other risk management issues are more of a routine checklist nature:

• Major prevailing laws, domestic and foreign, and any recent legislative or enforcement changes

• Securities rules

• Industry-specific laws, domestic and foreign

• Better practices for corporate reputation and company brand management, including public- and

media-relations

• Financial risks

• Related party transactions

• Fraud

• Bribery and corruption, and not just more spectacular possibilities with entities like representatives

or affiliates of foreign governments, but closer to home things like purchasing managers getting

kickbacks from suppliers, facilities managers receiving compensation from real estate brokers, and

sales managers receiving unapproved compensation from channel partners

• Export restrictions

• Disaster planning

• Product and service liability

• Health and safety

• Environmental protection

• Insurance

• Information technology systemic risk


• Intellectual property management, protection and enforcement

• Employment practices and morale

• Family members of executives on the payroll

• Human rights practices

• External stakeholder relations, including investors, relevant government agencies and programs,

lobbying groups, industry associations and standards bodies, and, leading academic and research

institutions

• Defined and widely understood lines of communication from staff to management and the board

about risk management

• Staff and management training about risk management

• Board training about risk management

Chairmanship

Similar to the outsized impact of key playing positions in team sports, board output is greatly enhanced

by strong, engaged chairmanship. The demands of chairing well are distinctive because it requires

leadership among peers.

Board chairs need to lead by example in terms of preparation for board meetings, communication style

outside and inside the boardroom, and their contribution to onboarding for new directors to contribute

quickly.

The chair has a disproportionate influence over creating an environment where the CEO regularly and

openly discusses next milestones, and as results come in, what is working, and what isn’t. This line of

discussion should then extend to what factors will be most significant going forward which are presently

weakest, least understood or subject to varied interpretation. From there, the chair moves the focus on

to what can be done to improve or gain quickest, high quality data to better inform interpretations and

decisions. This then allows the board to weigh in with input on how to improve or structure

experiments that will best reveal how to rapidly improve.

The chairmanship challenge of rapid learning and discussion is often if too much advice comes back from

the board, especially an overwhelming amount of contradictory advice. Incompatible advice muddies

rather than clarifying priorities and objectives for executive management. The chairman needs to

harness the energy of the board’s input to provide a coherent range of ideas to the CEO, in order to

keep up effectiveness of the board. The chairman also has to help the CEO keep the board up to speed


on which ideas are being pursued and which ones are not so that misunderstandings do not develop

which tend to harm trust and communication.

A corresponding piece of the chair’s communication challenge is that he plays a key role in the method

by which executive management presents to the board for input. Strategic options need to be delivered

as a range of possibilities, along with management’s preferred course. This gives the board room to give

more than yes-no feedback, but not so many choices as to be unwieldy.

The chair also influences the contents of the reading package which is distributed before each board

meeting. He identifies major items for discussion in collaboration with the CEO, to help direct directors’

preparation.

One of the biggest structural influences of the chair is the agenda for each meeting, as it largely shapes

the discussion. The agenda should be developed collaboratively with the CEO and with input from other

directors. Explicit time parameters should be noted. Each agenda item should indicate whether there is

clear decision intent at the upcoming meeting, or whether the matter is informational only.

During a board meeting, the chairman should have a parking lot list for issues that are important, but

which need to be followed-up later. This keeps time and discussion on track for the most pressing

matters, without losing sight of important ones to be dealt with subsequently.

The chair also plays an outsized role ensuring the flow of information from individual directors and

board committees to the full board, as well as to management.

In the board meeting, the way that the chair guides the discussion and solicits the input of individual

directors is yet another lever for achieving high output from the group. It starts with the chair

foreshadowing major points of discussion. Then, the board’s role in a particular issue need to be

defined, as well as work that has come before by the board on that matter. The chair should indicate

what is needed from the board now. The right steering influence continues with ensuring the input of

all directors, particularly on major issues approaching decision. Furthermore, the ability of the chair to

treat board deliberation holistically, by periodically weaving themes together, helps build a sense of

overall purpose that is greater than any one issue or individual.

As well, there is a larger suite of techniques which have been analyzed and recorded which serve as

preferred practice for the chairman to help get the most out of each director and contribute to

constructive group dynamics.

These methods are borrowed very directly from the outstanding work of Katharina Pick, as described in

the chapter she authored in the book Boardroom Realities.1

• The tension the chairman needs to actively manage is that individual directors are often appointed

for their individual talents, and typically recognized by themselves and their director peers as such.

This is where they and others expect to make greatest contribution. But, the directorate needs to

1 http://www.amazon.com/Boardroom-Realities-Building-Jossey-Bass-Management/dp/0470391782


operate as a team. Thus, the chairman needs to both harness each director’s special expertise, as

well as drawing them out to contribute to a broader set of issues facing the board, and not let input

become too narrow. The chairman pulling people to contribute beyond their power zone of

expertise liberates directors from negotiating status and ambiguity within the group to comment

more broadly, reducing the sense of posturing and frustration that can otherwise take hold.

• Separate observations from inferences and assumptions.

• Encourage direct proposals, rather than oblique or disguised ones.

• Provide enough time for debate, at the same time as keeping digressing directors from taking up

inordinate time by indicating when it is time to move on.

• For stressful or controversial issues, to keep discussion from spiraling out of control by converging

with a summary and defining future board actions in order to move ahead.

• To bring everyone into the discussion through polling. Polling reinforces a sense of collective effort

rather than individuals jockeying for position. Getting everyone involved also helps ensure that the

board’s work is largely done in the boardroom, rather than in sidebar conversations.

• Call on particular directors where their domain expertise is much greater than others, alleviating

others of that burden.

• Ask directors to pose second or even third follow-up questions on the most controversial issues.

• Ensure unity in front of management. A significant contributing factor to a coordinated approach

with management is by keeping conflict at a task level, rather than at a board or interpersonal level.

Board chairs often do this by framing individual directors’ input in the context of their expertise, and

summarizing points of disagreement along with areas of consensus. Doing so makes disagreement

acceptable, rather than being seen as a sign of failure with expanding tendencies.

• Insist upon confidentiality about what goes on within the boardroom. This builds trust, which is the

only way to sustain open dialog.

• Build bridges between competing points of view, particularly those between the views of the board

and those of management. Doing so through providing context helps keep channels of

communication with management open. Those communication pathways need to remain strong,

since the board relies upon management for so much of its information.

• Handle conflicts of interest. Conflicts are not intrinsically bad, within reason. They are often a

reflection of having suitably knowledgeable directors. The greater issue on routine conflicts is that

they be addressed directly and appropriately by the chair.


Midway between meetings, the chairman should have a business update call with the CEO, to keep the

CEO and chairman in sync by mutually reducing information asymmetries.

Summary

The impact of the highest performing boards of directors is vastly greater than the merely good. The

disproportion of positive impact is very high for high growth technology companies in the midst of

considerable environmental uncertainty.

There is no shortcut to quality. The board can only be as good as the quality of each individual director

and the time he or she dedicates to performing to his full individual and collective potential.

There is a large productivity impact from a thorough and balanced process for identifying skill gaps,

candidate directors, and then onboarding and training new directors. Keeping the board size as small as

is reasonable also boosts efficiency. While prevention is better than cure, the ability to remediate or

excise weaklings is usually part of the real world of achieving and sustaining superior leadership in the

boardroom of established businesses.

The rapid pace and evolution for a growth stage technology business means the board needs to work as

fast and evolve as rapidly as the rest of the enterprise. There is no substitute for hard work, a significant

time investment, and a commitment to frequent dialog to achieve the right dynamics.

The board chair plays an outsized role in delivering the full potential of the board through his actions,

thinking style, communication skill, ability to discern signal from noise, pace of progress, and structured

approach for how to conduct different interactions with other board members and senior management

to best effect.


Appendix 1

Dealing with Weak or Conflicted Directors

Consistent high performance from all directors is obligatory. At the same time, speed and agility of the

board is best served by keeping it as small as possible while still having enough capacity and diversity of

skills to meet the company’s stage of development needs. For a growth stage technology business, the

right size of board is usually five to seven directors. In a board of this size, there is no room for non-

performers. Lagging directors need to be dealt with quickly and decisively.

More often than they should, people try to dilute the impact of an underperforming director by

enlarging the board. This is rarely a good solution, nor is trying to manage around individual liabilities by

other directors and the chairman.

Where a weak director has skills or attributes of ongoing value to the enterprise, he can be moved to a

non-fiduciary, advisory board role to provide select input to the board and executive as needed.

Alternatively, he can become a paid consultant to the company, with the scope of activity and form of

engagement tailored to the situation.

That said, getting rid of a poor director can be much harder than getting rid of an employee, even a

senior executive. If an independent director is weak, unlikely to change ways, or has not improved

enough despite explicit feedback from the chair to do so, then he has to be asked to leave. To move him

out in a timely fashion and without further dispute if the director resists resigning often comes down to

money. A typical settlement to reach an expedient outcome is the outgoing director receives half the

compensation he would have over the upcoming year as a consulting fee to the board, in exchange for a

voluntary, prompt resignation.

Sometimes, removing a weak director is complicated by his being a significant investor or fiduciary of an

investment vehicle with rights to one or more board seats. In the case of a significant individual

investor, he can sometimes be encouraged to step off the board if there is a sufficiently strong

directorate in place apart from him, or candidate independent director to replace him. If he expects to

retain his shareholding substantially as it is, placing his shares in as voting trust so that he rescinds

further voting influence is often the preferable outcome to achieve a clean break. Where a voting trust

is used, care is needed about who acts as the trustee and the way he does so as there can be conflicts

which arise and subsequent risks. The advice of competent legal counsel is needed when contemplating

the use of a voting trust or any similar structure.

In the case of an investment fund representative who needs to be removed, it is usually necessary to

negotiate with his overseers at the investment fund to arrange a stronger alternative appointee. When

this delicate conversation needs to occur with investment fund senior management, clear evidence of

poor performance by the current appointee and a considered short list of prospective replacement

directors can help move the change dialog forward.


Appendix 2

Financial Monitoring and Reporting

The quality of governance is largely mirrored by the board’s financial monitoring and oversight. Strong

financial governance on its own is not sufficient, but it is a necessary contribution for a high performing

board of directors. Durably high performing companies always have attentive audit committees that are

meticulous, challenge, and advocate improvement in specific and actionable ways.

The first priority to lift performance is through the quality, credentials, independence and periodic

renewal of the company’s outside auditors. Second is the performance of internal auditors. Third is to

be clear about what accounting regulatory compliance and legal standards are being used, the

interpretation of those standards in the company’s circumstances, and the classification of the

company’s financial entries into those frameworks. The next ingredient for sound financial governance

is testing the suitability of the assumptions, interrelationships, categorization and major entries during

each reporting period.

The following is not an exhaustive list, but it describes the areas which I find most informative from a

financial governance perspectives:

• Revenue recognition, especially where there is an ongoing service stream accompanying product

sale, entitlements to future upgrades, or complex vendor-customer arrangements. Contract terms

conferring rights of refund, return or discount need to be understood, as does the existence and

nature of any side letters furnishing the similar rights. Side letters are common in Germany, Japan

and many eastern European nations. Allowances related to accounts receivable, defaults and bad

debt are a related area for attention;

• Capitalization of expenses, including sales commissions and R&D. Such capitalizations can have

significant implications downstream if there are impairments, especially if management or the

board becomes reluctant to make competitively necessary changes in order to preserve the

appearance of the value of past investments on the balance sheet.

At a higher orbit, ongoing oversight and testing needs to occur regarding:

• Suitability of the company’s capital structure relative to its risk profile and stage of development,

keeping conflicts within the capital structure and fiduciary roles within reason, and maintaining

sharp focus on delivering returns above the company’s cost of capital;

• Equity documentation and tracking, including stock-based compensation, with a sound process for

establishing valuation and expensing, tax treatment for deferred compensation, as well as grants,

expirations and cancellations.

Growth stage technology companies which gloss over these matters often encounter downstream

difficulties which can restrict access to capital and talent, or harm valuation. Providing strong oversight


in these areas frame much of the audit committee’s and board’s work to provide good oversight and

input in other areas of financial and general management.

The following is a more advanced list of financial monitoring and reporting concerns:

• Productivity performance and trends, relative to payroll and headcount;

• Working capital, efficiency in general and particularly cases where working capital requirements are

growing or could grow faster than the business;

• Gross margin, showing the impact, significance, competitive differentiation, and scale efficiencies of

the company’s products and services.

Other areas to keep an eye on:

• Hedging transactions, derivative transactions, embedded derivatives and foreign exchange

fluctuation exposures, as well as swap and barter transactions;

• Depreciation and amortization calculations;

• Recorded asset values, especially where there may be a tendency to use higher market than cost

values, including property, plant, and equipment. Inventory can be a frequent source of issue, as

can testing and impairment of goodwill;

• Summary of write-offs;

• Accruals and deferrals;

• Recognition of government tax incentives and funding programs;

• The use of estimates and the way they are established using internal and external benchmarks;

• Total reserves, major reserve components, and reserve fluctuations from period to period which are

altering the numbers;

• Higher risk cash investments, such as corporate bonds rather than government treasuries, money

market and bank deposits;

• Regulatory compliance, starting with accounting body compliance such as IFRS or GAAP. If an IPO is

in the offing, financially related regulatory awareness needs to extend to Sarbanes Oxley compliance

or its foreign parallels, and sometimes beyond;


• Internal processes and controls, accounting IT system capabilities and limitations, as well as general

IT security;

• Cost of perks that have grown up since the company was small;

• Restructuring charges;

• Transactions which individually may not be material, but in aggregate are.

To do the best work, the audit committee of the board needs to follow the cash, and not be misled by

net income or any other single measure of financial health. It should always ask if the financials are

based on reasonable assumptions, and if the assumptions are being tested and updated with current

data. One of its most strategic contributions is to help see that the pace of investment is matched to the

attainable growth of revenue and profit, so that the business invests sufficiently to capture the highest

quality portion of its growth potential, but not commit too much or too early which puts the business at

undue risk of financial and strategic harm as conditions change.

This audit committee and board need to strive to have the accounting be crystal clear, with a bare

minimum of one-time charges. Unusual accounting can temporarily make a company look better than it

is, but it will rarely make the company better than it is and if so done usually achieves just the opposite.

Great boards and their audit committees work to keep the company’s financial structure and reporting

most fairly representing the company’s real operating condition as the basis for sound decision making

by management and the board.


About the Author

David J. Litwiller is an Executive-in-Residence with Communitech, based in Waterloo, Ontario. His

background is in wireless devices, precision electro-mechanics, semiconductors, electro-optics, MEMS,

biotech instrumentation, and enterprise software. His work spans functional and general management,

as well as governance of growth stage technology businesses. He serves as an advisor to various private

corporations in matters of strategy, technology, operations, finance, governance, and business

development. Mr. Litwiller is the author of the book published in 2008, “Rapid Advance - Mergers &

Acquisitions, Partnerships, Restructurings, Turnarounds and Divestitures in High Technology”.

Dave can be reached at dave [dot] litwiller [at] communitech [dot] ca.

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