In this lecture, you’ll learn the difference between a board of advisors and a board of directors, and what roles they play in running a business. You will also learn how to build, manage, evolve and evaluate each kind of board.

1. Governance
201
Early-­‐
and
Growth-­‐Stage
Tech
Companies
Dave
Litwiller
Execu>ve-­‐in-­‐Residence
March
6,
2013

2. Copyright,
David
J.
Litwiller
2012
2

3. Important
Disclaimer
This
presenta>on
is
made
with
the
understanding
that
the
author
is
not
engaged
in
rendering
legal,
accoun>ng,
securi>es,
or
other
professional
services.
If
legal
advice
or
other
expert
assistance
is
required,
the
services
of
a
competent
professional
person
should
be
sought.
Copyright,
David
J.
Litwiller
2013
3

4. Overview
• Difference
between
Board
of
Directors
and
Board
of
Advisors
• Roles
and
responsibili>es
of
directors
• Building,
managing
and
evalua>ng
each
kind
of
board
• Evolving
governance
at
the
speed
of
a
rapidly
changing
business
Copyright,
David
J.
Litwiller
2013
4

5. My
Background
• Twenty+
year
trajectory
of
R&D,
marke>ng,
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,
dives>ture,
turnaround,
and
corporate
venture
finance
ac>vi>es
in
semiconductor
and
enterprise
soXware
businesses,
as
well
as
work
in
instrumenta>on,
automa>on,
and
med/biotech
• As
EIR,
presently
advise
over
sixty
tech
companies’
founders,
boards
and
investors
Copyright,
David
J.
Litwiller
2013
5

6. Board
of
Directors
vs.
Board
of
Advisors
Directors
Advisors
Choice
of
Members
By
shareholders
By
management
Purpose
Oversee
business
affairs
Advise
as
requested
Obliga>ons
Under
Yes:
CBCA,
OBCA,
BIA,
No
Statutory
and
Case
Law
OESA,
others
Agenda
Sets
own
Set
by
management
Power
to
Hire
and
Fire
Yes:
CEO;
appoints
officers
No
Liability
Significant
and
growing
Liele
Du>es
Fiduciary,
care
At
convenience
of
management
Compulsory
Disclosure
of
Yes
No:
informa>on
can
be
Business
Informa>on
selec>vely
disclosed
Time
Commitment
250
to
450
hours
per
year
Flexible,
by
mutual
accord
Copyright,
David
J.
Litwiller
2013
6

7. Board
of
Directors
(BoD)

8. BoD
Obliga>ons
(I)
• Diligently
prepare
for
each
mee>ng
• Appoint
CEO
and
other
execu>ve
officers
• Monitor
and
evaluate
CEO
performance
• Plan
for
succession
• Adopt
strategic
planning
process
• Par>cipate
with
management
developing
and
approving
annual
business
plan
and
mul>-­‐year
strategic
plan
Copyright,
David
J.
Litwiller
2013
8

9. BoD
Obliga>ons
(II)
• Review
with
management
financial
plans
• Establish
opera>ng
and
financial
goals
• Establish
sufficiency
of
risk
management
• Ensure
informa>on
supplied
by
management
is
>mely
and
sufficient
for
the
BoD’s
work
• Review
and
approve
financial
statements
• Approve
material
acquisi>ons
and
dives>tures
• Approve
securi>es
issuances
and
repurchases
• Declare
dividends
Copyright,
David
J.
Litwiller
2013
9

10. BoD
Obliga>ons
(III)
• Approve
nomina>on
of
directors
• Confirm
that
processes
are
in
place
to
comply
with
applicable
legal,
regulatory,
corporate,
securi>es
and
other
compliance
maeers
• Develop
the
corpora>on’s
approach
to
corporate
governance
and
improvement
thereof
• Carry
out
other
du>es
specified
in
the
USA,
ar>cles
or
by-­‐laws
of
the
corpora>on
Copyright,
David
J.
Litwiller
2013
10

11. Directors’
Du>es
• 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
corpora>on
Standard
of
Performance
• Due
Diligence
– Informa>on
access
and
review
– Delibera>ve
process
– Reliance
on
experts
and
independent
authori>es
when
appropriate
– Record
proceedings
• Business
Judgment
Copyright,
David
J.
Litwiller
2013
11

12. BoD
Reali>es
• It
is
work,
and
people
need
to
be
work-­‐like
about
it
• Liability
is
significant
• The
board
needs
to
collec>vely
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,
ac>ve
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:
Liele
staff
or
management
board
support
bandwidth;
this
isn’t
like
blue
chip
company
governance
Copyright,
David
J.
Litwiller
2013
12

13. Evolving
the
BoD
-­‐
General
• Term
limits,
typically
three
years
• Current
directors
and
officers
rou>nely
networking
to
develop
director
candidates
• Periodic
board
self
assessment
to
iden>fy
weaknesses
and
skill
gaps
as
the
basis
for
targe>ng
new
nominees
and
beeer
prac>ces
Copyright,
David
J.
Litwiller
2013
13

14. Evolving
BoD
Skills
with
the
Stage
of
Company
Development
Company
Typical
#
of
Typical
Director
Key
Skills
Stage
Directors
Mix
Concept
1
1
Founder
Business
forma>on,
F3
funding,
early
customer
and
technical
discovery
Seed
and
3
1
Founder
Recrui>ng,
technology,
opera>onal
set-­‐
Start-­‐up
1
Investor
up,
angel/VC
funding,
ecosystem
1
Independent
rela>onship
development
cri>cal
to
success
over
next
18
months
Growth
5
2
Founders
Commercializa>on,
opera>onal
2
Investors
refinement,
ins>tu>onalizing
know-­‐how,
1
Independent
scaling,
growth
finance,
working
capital
management,
interna>onal
reach
Late
7
2
Founders
Increasing
financial
sophis>ca>on,
Expansion
2
Investors
acquisi>on
or
IPO
savvy,
governance
3
Independents
discipline,
reduc>on
of
surprises
Copyright,
David
J.
Litwiller
2013
14

15. Leading
BoD
Issues
Company
Sales
AccounBng
Legal
Stage
Seed
• Customer
• Managing
by
bank
• IP:
rights,
deadlines,
discovery
statements
chain
of
>tle
&
assignment,
licenses
Start-­‐up
• Early
sales
• P/T
bookkeeper
• Director
resolu>ons
to
• Strengthening
• Monthly
I/S
and
B/S
approve
equity
rights
value
prop
• Tax
returns
done
grants
• Compe>>ve
• Source
deduc>ons
• Complete
minute
book
strength
made
and
remieed
• Material
contract
review
Growth
• Accelera>ng
• F/T
CFO
• Records
management
growth
• Audited
financial
• Compliance
• Revenue
statements
• Risk
management
predictability
• Annual
forecasts
with
• Li>ga>on,
real
or
and
quality
predic>ve
value
threatened,
especially
• Rising
efficiency
• Variance
review
employment,
partner,
and
IP
Copyright,
David
J.
Litwiller
2013
15

16. High
Impact
Board
Prac>ces
Company
PracBce
Helps
Stage
Seed
and
• Prospec>ve
hindsight
• Manage
risk,
coaching,
coach-­‐ability
Start-­‐up
• Reference
class
analysis
• Reduce
sampling
and
intui>on
errors
• Pre-­‐commitment
• Catalyze
learning,
an>dote
groupthink
• Commitment
limits
• Counter
decision
driX
&
confirma>on
bias
• Do
more
with
less;
pivot
effec>vely
Growth
• Execu>ve
sessions
• Independence
of
board
• CEO
and
management
• Correct
quickly
and
early
performance
feedback
• Keep
up
spirited
inquiry
in
the
most
• Agenda
effort
impacoul
areas
Late
• Con>nuous
improvement
• Evolu>on
of
the
BoD
as
a
self-­‐regula>ng
Expansion
of
governance
body
• Methodical
director
• Accelerates
>me
to
full
individual
and
onboarding
group
produc>vity,
facilita>ng
renewal
Copyright,
David
J.
Litwiller
2013
16

17. BoD
Advice
(I)
• There’s
no
shortcut
for
spending
the
>me
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
>mes
per
year,
in
person
• Don’t
let
the
flurry
of
other
business
push
aside
a
deep
dive
each
mee>ng
into
the
maeers
which
are
keeping
the
CEO
and
CFO
up
at
night,
and
to
understand
what
alternate
data
,
viewpoints
and
interpreta>ons
exist
to
richen
the
discussion
on
those
maeers
Copyright,
David
J.
Litwiller
2013
17

18. BoD
Advice
(II)
• Require
board
packages
be
delivered
to
directors
72
hours
in
advance
of
mee>ng,
with
a
cover
memo
iden>fying
which
items
are
informa>onal
only,
and
those
which
will
be
deliberated
and
decided
• Structure
discussion
so
that
management’s
recommenda>ons
are
clear,
yet
with
room
for
director
input,
but
stopping
short
(usually)
of
unbounded
possibili>es
• At
every
board
mee>ng,
discuss
the
quality
of
informa>on,
agenda,
>me
alloca>on,
and
delibera>on
process
with
each
director
contribu>ng
1-­‐2
improvement
s
for
future
mee>ngs
• Conduct
brief
execu>ve
sessions
at
each
board
mee>ng
to
discuss
management
and
board
performance
without
members
of
management
present,
as
well
as
who
will
deliver
that
feedback
Copyright,
David
J.
Litwiller
2013
18

19. BoD
Advice
(III)
• Have
execu>ve
management
provide
regular
feedback
on
where
it
has
goeen
the
most
help,
and
the
most
frustra>on,
from
the
BoD
• In
normal
circumstances,
use
75%
of
>me
in
the
boardroom
looking
forward
(strategic,
market),
and
25%
looking
back
(finance,
ops)
• Always
know
the
company’s
financial
runway,
be
proac>ve
raising
funds,
and
become
expert
in
accessing
alterna>ves
in
the
financial
model
and
capital
structure
to
improve
funding
op>ons
• 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
cri>c
• Designate
one
responsible
director
for
the
CEO
performance
evalua>on
process,
even
though
all
directors
par>cipate
Copyright,
David
J.
Litwiller
2013
19

20. Chairmanship
(I)
• The
BoD
can
only
be
as
good
as
its
chairmanship
for
seqng
the
tone
and
interpersonal
chemistry
– Leading
among
peers
– Tact:
ability
to
disagree
without
being
disagreeable;
construc>ve
dissent
– Bringing
everyone
into
the
discussion,
and
not
leqng
one
voice
dominate
– Encouraging
debate
while
sustaining
cohesion
– Keeping
conflict
at
a
task
level,
and
not
a
rela>onship
level
– Knowing
directors’
leading
concerns
before
each
mee>ng
– Effort
and
prepara>on;
collabora>ve
agenda
development
w/
CEO
Copyright,
David
J.
Litwiller
2013
20

21. Chairmanship
(II)
– Channel
delibera>on
and
decision
into
a
two-­‐step
process
on
divisive
issues
– Driven
improvement
of
board
prac>ces
– Quickly
reconciling
emerging
differences
among
directors’
visions
for
the
board’s
role,
and
those
of
management
– Promo>ng
openness
by
encouraging
board
members
to
make
direct
proposals,
not
disguised
or
oblique
ones
– Weaving
themes
and
points
of
importance
together
to
create
an
integra>on
of
each
mee>ng
around
major
current
issues
– Being
able
to
both
cri>cize
and
support
management
– Quickly
dealing
with
director
underperformance
Copyright,
David
J.
Litwiller
2013
21

22. Early
BoD
Warning
Signs
(I)
Signals
of
insufficient
director
effort
or
poor
skill
correla>on
with
the
needs
of
the
business:
• Overreliance
on
service
providers;
they
do
not
just
provide
expert
input,
the
BoD
effec>vely
outsources
decisions
• Rou>ne
over-­‐deference
to
the
one
board
member
with
the
most
subject
maeer
exper>se
in
a
subject
area
• Vital
decisions
are
almost
always
made
just
with
the
facts
and
arguments
on
hand,
rather
than
spending
>me
in
some
instances
to
ques>on
the
source
informa>on
and
get
more,
varied,
and
beeer
data
Copyright,
David
J.
Litwiller
2013
22

23. Early
Warning
Signs
(II)
• Imprac>cal
advice
from
directors
• Insufficient
give
and
take
between
directors
and
management
• Lackluster
inquiry
into
areas
of
underperformance
• Poor
mee>ng
management
– Time
– Agenda
– Spiraling
out
of
control
on
issues
without
an
ability
to
summarize
work
to
date,
forward
ac>ons,
and
move
ahead
to
other
business
• Insufficient
declara>on
of
conflicts
Copyright,
David
J.
Litwiller
2013
23

24. 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
prac>ce,
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
func>ons
to
manage
the
corpora>on’s
business
and
affairs
– By
statute,
observers
are
not
en>tled
to
indemnity
– May
not
be
covered
by
D&O
insurance
Copyright,
David
J.
Litwiller
2013
24

25. BoD
Observers
If
observers
are
needed,
such
as,
venture
investment
fund
junior
analysts,
or
strategic
investor
representa>ves:
• Then,
the
role
is
best
defined
contractually
as
a
confiden>ality-­‐bound
listener,
with
care
taken
that
the
observer
not
prepare
agendas,
not
influence
debate
and
not
to
influence
mo>ons,
and,
to
otherwise
bind
conduct
– Minutes
should
note
the
observer’s
role
in
each
BoD
mee>ng,
and
expressly
that
the
observer
did
not
vote
for
or
against
mo>ons
when
votes
were
cast
Copyright,
David
J.
Litwiller
2013
25

26. Board
of
Advisors
(BoA)

27. BoA
Roles
and
Responsibili>es
• Provide
independent
advice
to
CEO
and
management
without
fiduciary
or
duty
of
care
obliga>ons
• 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
Copyright,
David
J.
Litwiller
2013
27

28. Three
Common
Forms
of
BoAs
• Customer
– To
gain
heightened
voice
of
the
customer
in
the
company’s
product
and
business
strategy
• Scien>fic
or
Technical
– To
help
with
complex
underlying
science
or
technology
• Business
– To
gain
selec>ve
input
on
business
issues
from
advisors
without
either
side
taking
on
the
mutual
obliga>ons
or
formalism
of
a
fiduciary
board
posi>on
Copyright,
David
J.
Litwiller
2013
28

29. Ideal
BoA
Member
Profile
• Expert
and
nearly
invaluable
knowledge
• World-­‐class
networks
• Aeracts
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
advoca>ng
on
behalf
of
the
company
• Someone
you’d
love
to
have
as
a
senior
employee
but
is
not
affordable
or
aeainable
on
that
basis
Copyright,
David
J.
Litwiller
2013
29

30. BoA
Nomina>on
Criteria
• Scien>fic
or
technical
skill
• Business
strategy
and
company
building
• Product
development
• Customer
and
sales
channel
development
• Business
development
and
ecosystem
rela>onships
• Regulatory
wherewithal
Copyright,
David
J.
Litwiller
2013
30

31. BoA
Challenges
• Only
half
of
CEOs
with
BoAs
are
sa>sfied
with
them
aXer
working
together
• Typical
issues:
– Ongoing
responsiveness
– Advisors
taking
the
>me
to
fully
contextualize
the
company’s
circumstances
– Interpersonal
chemistry
– Self-­‐interested
advisor
behaviour
Copyright,
David
J.
Litwiller
2013
31

32. BoA
Success
• Likelihood
of
construc>vely
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,
u>lity-­‐scale
cleantech,
advanced
materials
• Enterprises
with
large
regulatory
hurdles
and
risks
– Mid:
Enterprise
soXware,
consumer
electronics,
industrial
technologies
– Low:
Consumer
web
services,
mobile
apps
Copyright,
David
J.
Litwiller
2013
32

33. BoA
Advice
• In
lower
investment
stake
businesses,
formal
advisors
who
aren’t
also
investors
can
raise
more
ques>ons
about
the
business
for
outsiders
than
they
help
solve
• Have
an
hour+
working
session
at
the
outset
with
a
nominee
BoA
member
to
assess
communica>on,
thinking
style,
energy,
and
mutual
fit
• Have
a
wrieen
charter
or
mandate
which
lays
out
expected
commitments
and
contribu>ons
Copyright,
David
J.
Litwiller
2013
33

34. Managing
the
BoA
for
Impact
and
Produc>vity
• BoA
will
typically
only
put
out
as
much
as
the
CEO
and
management
team
puts
into
it:
– Be
explicit
about
the
expected
>me
commitment
and
speed
of
responsiveness
– Hold
mee>ngs
regularly,
typically
two
to
four
>mes
per
year
– Set
agendas
and
send
materials
beforehand
– Ask
advisors
to
present
on
specific
topics
for
informa>on
or
discussion
to
management
and
the
BoA
– Ask
advisors
for
feedback
on
industry
reports
and
management
plans
– Ask
for
referrals
and
introduc>ons
– 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
Copyright,
David
J.
Litwiller
2013
34

35. 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
s>gma
of
departure,
par>cularly
when
customers
or
partners
are
represented
on
the
BoA
– Terms
should
be
renewable
if
the
rela>onship
is
working
out
well
• To
keep
aeen>on
up,
consider
compensa>ng
not
on
a
retainer
basis,
but
linked
to
deliverables
such
as
mee>ng
prepara>on
and
aeendance
Copyright,
David
J.
Litwiller
2013
35

36. 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
proposi>on
or
raise
funds
– Later
stage:
Drive
growth,
scale
and
cash
flow
• Ask
if
the
BoA
is
helping
those
things
happen
faster
than
opera>ng
management
could
on
its
own
– If
it
is,
it
is
likely
the
right
BoA
at
the
right
>me
– If
not,
it
is
>me
to
revisit
skills
gaps,
composi>on,
and
even
the
ongoing
value
of
a
BoA
Copyright,
David
J.
Litwiller
2013
36

37. Resources
and
Further
Reading
• Board
of
Directors
– Directors’
Du>es
in
Canada,
Barry
Reiter
hep://www.cch.ca/product.aspx?WebID=3688
– Decisions
2.0:
The
Power
of
Collec>ve
Intelligence,
Bonabeau
hep://people.icoserver.com/users/eric/SMR_Collec>ve_Decisions.pdf
– The
Big
Idea:
Before
You
Make
That
Big
Decision…,
Kahneman
hep://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf
– Winning
Decisions,
Russo
and
Schoemaker
hep://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
hep://www.stevenblank.com/books.html
Copyright,
David
J.
Litwiller
2013
37

38. Follow-­‐up
Discussion
Contact:
dave
[dot]
litwiller
[at]
communitech.ca
©
David
J.
Litwiller,
2013
38