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Introduction to governance presentation communitech - dave litwiller - jan 21 2014 - copy
- 1. Governance 101 Early- and Growth-Stage Tech Companies Dave Litwiller Executive-in-Residence January 21, 2014
- 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. Copyright, David J. Litwiller 2014 2
- 3. Overview • 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 Copyright, David J. Litwiller 2014 3
- 4. My Background • Twenty+ year operating trajectory in early, growth, and scaled-up tech companies in the Waterloo region – – – – – – – R&D Marketing and sales Manufacturing Finance and accounting HR General management Acquisitions, divestitures and turnarounds • Board director of three early- and growth-stage companies; two in enterprise SaaS, and one in photonics instrumentation • Advisor to several technology start-ups spanning software through clean energy and medical technology Copyright, David J. Litwiller 2014 4
- 5. 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 Copyright, David J. Litwiller 2014 5
- 7. Duty of Loyalty (Fiduciary Duty) • To act honestly and in good faith with a view to the best interests of the corporation – Unqualified priority to the corporation over personal interests or other competing claims – Act openly and honestly – Maintain confidentiality of the corporation’s information – Exercise independent judgment – Act with one voice outside of the boardroom Copyright, David J. Litwiller 2014 7
- 8. Duty of Care • To exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances – Act in good faith – Act rationally, reasonably and on an informed basis – Identify and act upon problems which should have been apparent – Follow reasonable processes and practices Copyright, David J. Litwiller 2014 8
- 9. Standard of Performance • Due Diligence – Information access and review – Deliberative process – Reliance on experts and independent authorities when appropriate – Record proceedings • Business Judgment Copyright, David J. Litwiller 2014 9
- 10. Responsibilities of the BoD • Appoint officers • Set goals, policies and strategy • Evaluate and approve budget, monitor ongoing performance and course changes relative to budget • Appoint auditors (if required) • Review by-laws from time to time and put forward changes Copyright, David J. Litwiller 2014 10
- 11. Leading Practical Issues • Mentoring CEO – Support and appraise – If necessary, remove and replace • Never running out of cash • Deliberating strategic shifts • Selling the company; building buyer value – Next round investors, liquidity event • Shareholder communication Copyright, David J. Litwiller 2014 11
- 12. Director-CEO Relationship Good Directors: • Indicate important questions in advance of meetings to the chair and CEO • Don’t always demand more data to make a decision • Forewarn the CEO about the director’s stance on major issues • Avoid ganging up on the CEO to the extent possible Copyright, David J. Litwiller 2014 12
- 13. BoD Realities • It is work, and people need to be work-like • Liability is significant – Good directors will require D&O insurance • 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 Copyright, David J. Litwiller 2014 13
- 14. BoD Realities • 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 • Little staff or management board support bandwidth; this isn’t like blue chip company governance Copyright, David J. Litwiller 2014 14
- 15. 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 Copyright, David J. Litwiller 2014 15
- 16. Evolving BoD Skills with the Stage of Corporation Development Company Stage Typical # of Directors Typical Director Key Skills Mix Concept 1 1 Founder Business formation, F3 funding, early customer and technical discovery Seed and Start-up 3 1 Founder 1 Investor 1 Independent Recruiting, technology, operational setup, angel/VC funding, ecosystem relationship development critical to success over next 18 months Growth 5 2 Founders 2 Investors 1 Independent Commercialization, operational refinement, institutionalizing know-how, scaling, growth finance, working capital management, international reach Late Expansion 7 2 Founders Increasing financial sophistication, 2 Investors acquisition or IPO savvy, governance 3 Independents discipline, reduction of surprises Copyright, David J. Litwiller 2014 16
- 17. Changing Nature of BoD Issues Company Stage 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 • • • F/T CFO Audited financial statements Annual forecasts with predictive value Variance review • • • • • • Accelerating growth Revenue predictability and quality Rising efficiency • • Copyright, David J. Litwiller 2014 Records management Compliance Risk management Litigation, real or threatened, especially employment, partner, and IP 17
- 18. High Impact Board Practices Company Stage Practice Helps Seed and Start-up • • • • • • • • • 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 areas Late 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 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 Copyright, David J. Litwiller 2014 18
- 19. 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 Copyright, David J. Litwiller 2014 19
- 20. 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 Copyright, David J. Litwiller 2014 20
- 21. 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 Copyright, David J. Litwiller 2014 21
- 23. 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 Copyright, David J. Litwiller 2014 23
- 24. 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 Copyright, David J. Litwiller 2014 24
- 25. 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 Copyright, David J. Litwiller 2014 25
- 26. 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 Copyright, David J. Litwiller 2014 26
- 27. 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 Copyright, David J. Litwiller 2014 27
- 28. 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 Copyright, David J. Litwiller 2014 28
- 29. 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 Copyright, David J. Litwiller 2014 29
- 30. Managing the BoA for Impact and Productivity • The 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 Copyright, David J. Litwiller 2014 30
- 31. 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, attendance and referrals Copyright, David J. Litwiller 2014 31
- 32. Renewing the BoA • Regularly revisit the top three things that the business needs to achieve 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 Copyright, David J. Litwiller 2014 32
- 33. Resources and Further Reading • Board of Directors – Directors’ Duties in Canada, Barry Reiter http://www.cch.ca/product.aspx?WebID=3688 – Startup Boards, Brad Feld and M. Ramsinghani http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118443667.html • Board of Advisors – The Four Steps to the Epiphany, Steve Blank http://www.stevenblank.com/books.html Copyright, David J. Litwiller 2014 33
- 34. Follow-up Discussion Contact: dave [dot] litwiller [at] communitech.ca © David J. Litwiller, 2014 34