Outside Directors, Part Deux: Thoughts on Pickin’ ‘em
January 26, 2011 4 Comments
In a post last week I offered some thoughts on why I think outside directors are so important to early stage companies. Once you’ve accepted the value and importance of building a diverse board you get to the hard part – identifying the right candidates. It can be a difficult process, but I’ve never met a compelling company with a solid CEO fail to recruit some real talent to the boardroom unless they just didn’t try. It takes work, and it needs to be managed (as I suggested in my prior post – make one of your otherwise useless venture investors manage the process, and hold them accountable!), but don’t fall into the all-too-common trap of letting the challenge of the process lead to inaction. You know it’s important, now you have to make it urgent.
The first thing, as with any good process, is to define the successful outcome. What are you actually looking for in a director? That will depend greatly from company to company – sometime it’s industry connections, sometimes it’s product expertise, sometimes it’s general strategic savvy. Only you can identify what you need.
In general, I’d encourage you not to undervalue general savvy in favor of something hyper-specifc. There’s nothing more valuable, over time, than having a really great thinker and strategist around the table with you – an athlete who can add value across a range of issues.
To help get started thinking about candidates, I offer a few thoughts and tips here on some different types – four good, and one not-so-good.
- Current venture-backed CEOs. Often the most appealing candidates given strategic fit, but be careful – if they’re running their own high growth company, they may not have the time to focus effectively and do a good job. Generally the more mature the company, the better.
Niraj Shah, founder/CEO of CSN Stores, is a good friend who has served brilliantly as an outside director for a couple of my companies. But his “startup” is 9 years old and doing hundreds of millions in annual sales now. He’s got a lot of lieutenants that enable him to leave the office and focus on other things. When he was a $15MM company it would have been very different.
- Cashed out in your industry. These guys can be perfect – they know the landscape, they’re proven winners, and they get the entrepreneurial thing. Frequently they’re in demand from a networking perspective, so they stay very much plugged in and can be super-helpful with recruiting, bizdev, etc. A word of caution here – some successful entrepreneurs become overly enamored of the way they did it in building their success story. Make sure as you interview candidates you explore to make sure they have open minds and are good listeners and broad thinkers. They should be generally interested in and curious about your business and how you’re building it, not just walking into the room pushing their personal agenda.
- Successful entrepreneurs from outside your industry. Discount them at your peril. CEOs & boards frequently get overly focused on finding that perfect candidate from a precisely defined industry, passing on people who are just good startup thinkers and company builders. My friend Pete Willmott, a recently retired 25+ year member of the FedEx board, amongst others, tells me that FedEx has always had some ‘obvious’ board members, like the COO of Northwest Airlines. But he maintains that the non-obvious ones have often been the most valuable. He cites a former senator (George Mitchell), a university president (RPI’s Shirley Jackson), and a baking turned spirits CEO (Pilsbury and later Diageo’s Paul Walsh) as true standouts. Not a lot of global shipping and logistics expertise amongst that trio, yet they consistently made huge contributions to FedEx strategy. If those folks can be critical contributors at FedEx, doesn’t it seem a little silly to categorically decide that the founder/CEO of a successful payments company couldn’t bring real value to the table in building a SaaS infrastructure business?
So much of what’s hard in building early stage companies is the stuff that’s common across verticals – challenging HR & hiring issues; strategizing around negotiating key partnerships; capital strategy; product and engineering issues. Having a sane, objective outsider who’s been there before but hasn’t consumed the KoolAid of your sector can really help.
- Retired executives from your industry. For non-startup execs, where you’re looking for industry knowledge, I have a strong preference for recently retired. I had a great experience a few years back bringing Garry McGuire, the immediately retired CFO of Avaya, onto the board of Allworx, a telecomm equipment company we had invested in. Garry was just stepping into a life with no day job and he wanted to find some projects to keep him engaged and focused. So he had plenty of time and energy to give to the company. He had been an active executive in our marketplace only a few months before, so his relationships, market knowledge, sense of the competitive landscape, etc. were all current, and ultimately quite valuable. If you’re looking at a retired candidate who does not have current and valuable networks then I’d suggest you keep looking.
- Execs with no startup experience. This is for me all but a non-starter, unless you have a large board and are also including one or more startup-savvy outsiders. Rising through the management ranks at GE to become a division president is a great way to become a brilliant manager and strategist. But it doesn’t teach you much about wrestling with growing a business from 10 to 100 employees. Some executives are great at making the shift in thinking, but many others are not. In most cases, if it’s someone without any startup operating or board background, I probably won’t want to be their first startup experience.
Once you’ve decided what you want, the trick is holding the bar high enough, but not too high. Have the same standards for excellence that you would have when hiring key employees, but also understand that filling the seat is nearly as important as filling a key operating role in your company. If you’ve worked your networks hard, been aspirational about reaching out to some “dream” candidates, and come up empty, then don’t turn your nose up at the great-but-not-quite-perfect candidate that’s eager, available, and willing to work. Fill the seat – I know you need the help. And remember, directors are like employees – if they turn out to be no good, the board can fire them and try again.
Bottom line – outside directors can be real difference-makers for young companies, and are an essential part of good governance. Finding them will never become urgent, so make it a priority and put someone in charge of the process. If you’re clear on what you’re looking for, work at it, and hold your standards high, you won’t regret it.
I’ll save some thoughts on outside director compensation for a conclusion to this series next week.