Boards of directors have a greater role to play in the success of a business than just the fiduciary responsibilities defined by law. In the words of Mario Morino, “the board should help you grow as an individual and as a CEO, and it should help your management team grow. It's there to ask, ‘How are you going to get from here to there?’” At this Netpreneur Coffee & DoughNets event held January 23, 2002, Morino was joined by a panel of veterans of the board game to provide entrepreneurs with an inside view of what to expect, and practical advice for building and managing an effective board.

speakers:
Bruce Crockett, CEO of Crockett Technology Associates
Raul Fernandez, CEO of Dimension Data North America
Art Marks, Chairman of the Mid Atlantic Venture Association

moderator:  
Jonathan Shames, Partner at Ernst & Young

wrap-up:   
Mario Morino, Chairman of the Morino Institute

Copyright 2002 Morino Institute. All rights reserved. Edited for length and clarity.

Disclaimer: Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided “as is” and your use is at your own risk.

mary macpherson: welcome

Good morning. Welcome to the first Coffee & DoughNets of 2002. Best wishes to you, your families, and your businesses for a great new year.

          Since we're meeting in a movie theater, we thought it might be interesting to visualize what the marquee might look like if it were showing movies on the theme of our program this morning, “The Board Game.” We might look at something like Gladiator, which could be about a board meeting on a restatement of earnings, or A Beautiful Mind could be about how a board deals with a CEO who sees things a little differently than everybody else. Black Hawk Down could be how a board deals with dramatically changing market conditions, and Jerry McGuire could be a discussion of executive compensation. The Godfather, or, if we were showing HBO original programming, The Sopranos, could focus on how the board works together and resolves differences of opinions in a collaborative manner. Of course, we could not leave out any number of possibilities for an Enron board meeting that could be called Titanic or Ship of Fools.

          As it turns out, we're not here to watch a movie today. We're here to look at, listen to, and learn from real life. We'll begin with our panel in a moment, but, first, let me take a moment to mention a couple of items. In your handout, you can see the biographical information about our speakers, and a list of resources on today’s topic that was put together by our teammate Ben Martin with input from many of you in the community. I also want to point out that there is a project under way by the Telecommunications Development Fund to develop website content for early-stage companies on how to set up and operate a boards of directors. If you would like more information on the project or to make recommendations for references or topics to incorporate, you can contact Jack Moore at moore@erols.com or inquiries@tdfund.com. I also want to remind everybody, including our speakers, that today's session is being videotaped and there will be a transcript at our Web site.

          Finally, I'd like to thank our volunteers today, George DeBakey of Plethora Technology, Jim Pettit of iRoute, Inc., and Dave Rosenberg of BudgetReferee.com. We really couldn't produce these events without our volunteers, so thanks very much. I also want to recognize our team: Ben Martin, who put this program together, Fran Witzel, Mitch Arnowitz, Neil Oatley, Ann Slaski, Linda Shives, Lin Plummer, and Adele Rudolph. They make it happen each month.

          Now, let me turn the program over to John Shames, who will introduce and moderate our panel, which will be followed by your questions and answers, and then, speaking of the Godfather, Mario will do the wrap up. On behalf of the Morino Institute Netpreneur team, I'd like to thank the panel for being here with us this morning. Giving back is a large part of how and why our community works, and it is demonstrated in many ways every day by many people. John, Raul, Art, and Bruce, thanks for taking time this morning to give back with your experiences, insights, and wisdom to our Netpreneur community. 

jonathan shames: introduction

Thanks, Mary. It's good to see everyone here. Hopefully 2002 will be a much better year than 2001. It's interesting to note that, today, not only is it going to be 60 degrees in January, but Amazon.com reported that it is profitable. Hopefully this is a new year and a new phase of growth.

          This area of boards and board advisory issues is of a real interest to me and to Ernst & Young. My partners and I spend a lot of time in front of audit committees, mostly, but also boards. We've seen the entire gamut from small company boards to large company boards, and we are fascinated by the changes that take place in a company as it grows through its normal processes. I've sat on boards and audit committees with people who are there only to go through a process, and where the average age is 70 years old. I've had people fall asleep in board meetings. On the other hand, we've been involved with some young, entrepreneurial boards where the average age is 30 and it's a much different conversation. You really have the entire spectrum from here to there. We have partnered with the National Association of Corporate Directors (NACD) to come up with a survey on entrepreneurial boards that will be coming out soon. It highlights differences between what a small company board focuses on versus a large company board. Small companies are much more tactical, focusing on issues like revenue growth, getting customers, and hiring people, compared to a larger company, which deals with things like process and legal issues.

          Today, we're going to talk about all those issues, and we have some great people who will talk about them from different perspectives. We're going to give you some sense of the differences between a board of directors, which is a legally required board in accordance with state statute, as opposed to a board of advisors, and how and why you can use one versus the other. We'll talk a little bit about why people pick certain board members, how to recruit them, what kind of backgrounds you want, and how large a board there should be. After our speakers, we'll take your questions, and we already have some questions that have come in through email.

          I'm going to plunge right into this, now, and we'll begin with Raul.

raul fernandez: making the all-star team

Thank you. Good morning. I'm going to give you just a little bit of background on the boards that I sit on today, then I'll go back in time and tell you about how I grew our first board of directors and, later, advisors.

          Today, I'm on three public company boards. They're very, very different boards, not only because of where the companies are headquartered, but because of what the companies do. I'm on the global board of Dimension Data, the company that acquired my original company, Proxicom. We're listed on the London Stock Exchange and the Johannesburg Stock Exchange. That has a makeup mostly of insiders. The majority of the board members are operating executives and a couple of retired operating executives, with the exception of a few people. That is one of the things I've noticed. At least on European or international boards, they tend to have a bigger percentage of insider representation. The vast majority of boards in the United States strive for outsider representation.

          I'm also on the board of a company called Critical Path. It's a restart, a company that had some accounting issues late last year. We got a new management team in, and a new infusion of dollars through General Atlantic Partners, the venture capital firm that invested in Proxicom. As part of that investment, I joined their board with a partner from General Atlantic. Critical Path is San Francisco-based and is a NASDAQ-listed technology company doing about a $100 million. Dimension Data does close to $3 billion globally, profitably. Critical Path is just about break-even.

          Then I'm on the board of a very, very different company based out of New York, Liz Claiborne. You know it for the traditional brand, but we also own a lot of more progressive brands like Lucky Jeans and many others, which people don't realize. That is a $4 billion retail company listed on the New York Stock Exchange.

          Each one of those board experiences, plus growing my own board at Proxicom, has given me a point of view and allowed me to build some best practices. Hopefully, I'll be able to share some of them with you today.

          As you go from being an entrepreneur, a time when you're doing absolutely everything, to the time when you start building your board, you move from a democracy of one -- which is you -- to a democracy of many, which is you and the board members that you bring in.

          I think that one of the most valuable things that a professional investor can do for you is to lay out structure and give you coaching and guidance on the appropriate type of representation. That is what General Atlantic did for me when they invested in Proxicom in 1995. We had a board of directors that was made up mainly of executives from inside the company. We started with two General Atlantic partners who joined the board. They had rights to one, but I wanted the other individual on as a placeholder while we went off and brought in other talent. I viewed it -- and I think you should view it this way -- as building a team. You are building a team of coaches and players.

          When you are building a team, whether it's a management team or a team of developers, you don't want six or seven people at the same position. When you've got seven draft picks, you don't draft seven quarterbacks or seven running backs or seven goalies, or seven power forwards. You want balance. You want to make sure that the individuals you are looking for have certain strengths and that they're not overlapping so that you can go to them for particular issues. What I mean by coaches and players is that you want board members who will get their hands dirty on specific issues. I'll give you a couple of examples.

          The board we put together over time was built with that philosophy in mind. Proxicom was a young services company that was creating a new market space, a space that combined technical services, traditional ad agency services, and traditional strategy services all into a brand new type of professional services company. We wanted people who had different backgrounds, but we also wanted people who had functional backgrounds. We wanted a real all-star in marketing, positioning, and branding, so, for that, I was able to convince Ted Leonsis [of America Online (AOL)] to join our board very early in the process.

          Since probably half of the time we were selling our services to technology buyers and the other half to buyers from a business background, we wanted somebody who was hard core on the technology side, but who also understood business processes. Through an investment that General Electric (GE) made in Proxicom when it was private, I was able to convince the CTO of GE Capital, a gentleman by the name of John McKinley, to join the board as part of the investment; then to ultimately stay on the board when he moved on to become CIO of Merrill Lynch. John McKinley's background -- running the IT infrastructure for one of GE's largest and most profitable companies -- brought a great point of view, but, more importantly, he had come up through the ranks at Ernst & Young, had been a developer, so his background in professional services was very good. He could understand issues of utilization, visibility, hiring, training, scaling, etc. His skill set was very valuable, and we had to do a deep dive on those issues. I would pull John out separately and would have separate meetings with him when I had to. When we had to deal with market positioning, what sort of campaigns to do, or how we wanted to spend our dollars from a branding standpoint -- TV marketing, etc. -- we'd spend separate time with Ted Leonsis. One of the lessons that I learned was that you want to get different strengths and make sure that the board members’ expectations are set so that you can have that one-on-one time between you and the board member, or your management team and the board member.

          As we started to grow more of our business on the international front, it became clear to me that while all of the people on my board had international experience, I wanted to get somebody who had really led the charge in building an international presence. I again reached into America Online and got the retiring founder of AOL International, a gentleman by the name of Jack Davies, to join the board. That was done as an expansion of our board to specifically help us address a business issue that we had.

          Of course, I remained on the board. I was the only insider on the board. I think that is one of the most difficult situations as an entrepreneur. You feel like you're losing control. It's something that I felt, but, as I got more and more of the value-add from these individuals, I got more and more comfortable.

          General Atlantic remained with one representative, David Hodgson, who was there through the whole period.

          Then, in terms of rounding out, if I couldn't get into an account, I wanted to be able to have individuals who could pick up the phone and get us into a particular Fortune 500 company. I wanted somebody who had that kind of general business and general brand recognition. In this case, it came with the person’s third career, because his first career was football, his second career was politics, and he continues to be generally well known in business circles. That was Jack Kemp, who I had worked for four years on Capitol Hill. After his failed attempt to run for Vice President with Bob Dole, I convinced him to join our board. He wasn't the Vice President, but he got to be on our board, and I think he's made more money that way.

          Finally, I was very, very fortunate because, before there were events like Coffee & DoughNets, it was a matter of reaching out and talking to people who had been through the business process from startup, to venture, to IPO, acquisitions, and sale. There was an all-star in that category, my good friend Mario Morino, who joined our board very early on.

          As you see the team I built, I think you see that each person has different strengths, and, frankly, I used them for help, including help in very difficult situations. For example, I had many people who had grown in a company that went from a few million dollars to $200 million in a short period of time. As you know, in work environments, a lot of people expect to continue to be at the top, even though you have the opportunity to bring in more seasoned individuals. Being able to deal with that growth -- especially being able to sit down with somebody who expected to be President, but who wasn't going to get the job -- I was able to get certain board members who had personally been through that kind of experience to help me through a difficult situation with a particular employee.

          There are some things that I've learned that are just tactical, and I thought I'd share a couple of those. More will come out in the questions and answers.

          Get information to your board members on a timely basis. Make sure that it's readable and usable as you start your dialogue and your relationship with your board. You've got to make sure that the information you are giving them is relevant so that they can get as much out of it as possible in the time they have. Don't be afraid to adjust it and change it over time.

          Communicate with board members both during board meetings, but also independently.

          Don't say yes to every idea or recommendation. I think there are some things that you acknowledge, and you acknowledge as great input, but you don't want to acknowledge as something that you promise to do. If you do, then you build a list of activities and you, as a CEO, become a board meeting to board meeting taskmaster.

          Make sure that the committees, the structure in the committees, the communication between the committees, and the communication between the rest of the board and the committees and the key individuals in your firm are absolutely open and transparent. One of the things that the Enron scandal has taught us is that transparency is king. It is absolutely critical that the audit committee has full access to the accountants and the CFO, and that you make sure that information is flowing freely in all directions.

          Let me stop there so that we save some things for the Q&A.

Mr. Shames: Thanks, Raul. That was great. We'll turn it over to Bruce now to talk about his experiences.

bruce crockett: a few fewer mistakes

Good morning. We didn't coordinate our talks in advance, but I must say that many of the points that Raul made, I'm going to reinforce. I will also try to be brief so that the real fun comes in the questions and answers.

          I serve on big boards -- $200 billion financial service institutions and $30 billion offshore insurance companies -- down to private companies that are begging for angel financing -- let alone venture financing -- as well as the whole spectrum in between. I can give you a lot of different perspectives, and I'm going to share with you some of my experiences over the years on boards. I think that what it really means, mostly, is that I'm getting old.

          The experience that Raul was talking about is really important -- having the diversity of experience on your board. I have a favorite saying, “experience is what you get when you don't read the instructions,” and I have a lot of experience. It means that I learned a lot of things the hard way.

          It turns out that directors, with their wizened visages and gray hair, can often contribute a lot, especially if they can just help you make a few fewer mistakes than you otherwise would have made, either because they made them themselves or because they’ve seen other companies make them. It's amazing how often companies want to repeat the mistakes of history persistently and consistently. I figure, on any one of the boards I'm on, if I can just save them one or two of those brutal mistakes a year, I've earned my keep and then some. Interestingly, when I was a young, brash division manager and CFO and COO and CEO on the way up, I thought, “I want a young board just like me. I want everybody to be an Ivy League MBA. We'll go out and kick butt and really be successful.” At least at that point, I missed the notion that it was the diversity and the perspectives from the life experiences of the very different people on the board that would make them my board and have them be part of the team. It would make me and the company a lot more successful. Without spending a lot of time on it, I think that the board is a perfect place, in terms of life experiences, to consider diversity and ethnicity. People from different cultures and genders bring a different perspective. It's that collection of experiences that leads to a good board.

          Board procedures. As companies get bigger, they get more into process. In terms of frequency of meetings, as the company gets bigger, there tends to be more meetings just because of processes -- although very, very small companies can also have a lot of meetings, because they're acting more like a management team. One of my great accomplishments at COMSAT, where I worked for close to 20 years, was to bring down the number of board meetings from 12 to six. I must tell you that reducing the number of meetings for a big company is incredibly hard. One of the first lessons you have to learn is that you have to make sure that the total compensation of the board members doesn't go down in the process of reducing the meetings.

          Set dates and stick to them. If you have a board of high-powered directors and you want to change the date of a meeting, you'll find it physically impossible to find an alternate date that will serve everybody within two weeks on either side of when you’re trying to move it. The only way to be assured of having your gang there is to set your meetings as much as even two years in advance. As unreasonable as that may sound, it's to be assured of having everybody. That way they can conform their schedules to you and tell everybody else that they can't change, rather than telling you.

          I think it's important to have a mandatory retirement age. The reason I say that -- Jonathan mentioned having a board of directors member falling asleep -- I won't name names since I'm on videotape, and this thing is being transcribed, but a former US senator and presidential candidate from one of the two major parties in our country was on our board without a mandatory retirement age. We're at a board meeting, and, at one point, his head went back, his mouth opened, and he just stared up at the ceiling. The meeting kind of went on, and everybody was afraid to touch him, because one of two things would have happened. If you woke him, it would be embarrassing, but everybody is back there thinking that he might be dead. What do you do if somebody dies in the middle of a board meeting? We sat there, and just continued on. He woke up, and we went back to normal.

          All kidding aside, mandatory retirement age is very important, as is the whole process of self evaluation of a board. You have to create a mechanism for a board to measure how well it's doing and measure its collective effectiveness. Then, if possible, and it's not always easy, measure individual board members' performance. One of the reasons is that once you put somebody on a board, they're basically there forever. It just isn't easy to get board members resign or retire prematurely. It just doesn't work that way, so you really need a process to help that along.

          Insiders versus disinterested directors. Obviously, with little companies, there tends to be a lot of insiders. By the time you get up to big companies where process is king, it usually winds up being the CEO and everybody else is independent. The problems that you see with Enron and others are just reinforcing that, and you will see progressively fewer insiders on boards as we go forward, in my opinion.

          Not everybody is going to like this, but you don't need to put your accountants, your lawyers, your investment bankers on the board. You're already paying them a fortune, you're getting their advice, and they do everything they need to do. What you need are people who have different experiences and perspectives who can work with you and help you move the company along.

          Another former board member who was the President of NBC among other jobs in his life -- he was a very wise guy and I was a young division manager making presentations to the board, standing up there with my knees knocking -- he said to me, "Young man, just remember, a board meeting is no place to make decisions." I'm not sure that I totally understood what he was telling me, then, but I learned. What he was trying to tell me was not to put yourself in a position where you have four-to-three votes. Get things worked out in advance. Grease the skids so that by the time you come to the board meeting it is just process to a certain extent and the decisions are formalities. It doesn't do you or the company any good to get yourself into a contentious situation if you can avoid it. That may be a lot truer for a bigger board where things are more formal, but it sure is true.

          Board effectiveness. The effectiveness of a board goes down as the size goes up. I've never seen a board that had more than 15 people that was truly effective. I'm on the board of my alma mater and there are 40 members of the board. It’s not that it's not effective, but it really doesn't do the work. The committees do the work. The reason there are 40 members on the board is because, when you go on the board of a university, it's really a fundraising mechanism so they can twist your arm and get more money. It just gets too big. You just can't make decisions and you really can't be effective.

          Governance versus management. Obviously, there is the spectrum. As the company gets bigger, it tends to be more process and more governance. Governance is good, as opposed to management. You don't need the board to do your job for you. You need the board to help you do your job, but they can't have their hand on the tiller. Make sure that they understand that. I have seen boards that will nitpick press releases. In my opinion, that is not the role of the board, but sometimes that happens.

          What is important for a board? What are a board's responsibilities? There are the legal issues, the bylaw requirements, and so on, but, in my mind, there are only a couple things that are really, really the responsibility of the board. One is to make sure that there is a succession plan in place, in particular that there is a replacement for the CEO as well as the senior managers; and the board also has to approve the strategic and business plans. They have to be sure to ask the questions so that they understand how and why and where the company is going, to serve as a sounding board for the management team, to make sure that they're going in a way that would seem to make sense. Then the board holds people accountable to accomplish those goals. That is really, in my mind, what a board is all about.

          Committees. You’d better just get used to the idea that as a company gets bigger, everybody on the audit and nominating committees are going to be outsiders. You don't need Enron to see that trend coming. You just can't have insiders on those committees.

          The most important committee of all, the one that I like to be on and to be chairman of, is the compensation committee. Everybody loves you if you are chairman of the compensation committee. [Laughing] It really is an important committee.

          Another kind of committee, and it could have all different kinds of names, but I see a trend towards what I'll call “the committee on directors.” It's kind of a combination of the nominating committee, the compensation committee, and the board’s self-evaluation process. In other words, it's the housekeeping committee of the board that helps run the process of the board itself. Clearly, that winds up being disinterested directors, and makes it a lot easier for a CEO to run his or her company if he has that kind of committee.

          I personally don't like executive committees all that much. An executive committee tends to be a subset of the board that makes decisions in between meetings. It invariably leads to some board members feeling like second-class citizens because they're not part of it. It's a lot easier to appoint a special committee, if you need one, to handle things like a pricing for a debenture or an equity or something like that in the intervening period. Then bring things to the regular, formal committees, either prospectively or retrospectively.

          Recruiting board members. While the nominating committee may be all disinterested people, it is important that the CEO be a part of that process, working with the appropriate committee to be proactive, to manage the process, and to go out and help find the right directors. As Raul was saying, you want to put together a diverse group of people who can help make you more effective as the leader of the company. As surprising as this may seem, don't be afraid to use a headhunter, if necessary, because they can unearth the kind of talent you need, the right people who have the Fortune 500 Rolodex, or the marketing experience, or whatever it is you need to complement your people and help put you in the position to have a better and more effective team.

          I personally like to have sitting CEOs on a board, because it's lonely being the CEO of a company, especially if everybody else is disinterested. If nothing else, a sitting or former CEO is empathetic to you and understands how lonely and how hard it is. He or she can serve as a sounding board and possibly even be a friend, as ironic as that may sound given the roles of governance. It's about having people that can help you be more effective, and having somebody you can talk to is incredibly important. The problem with sitting CEOs is that normally they can be so busy that either their company won't allow them to sit on other boards or they just don't have the time. Being on a board is an incredible commitment of time, and don't ever underestimate the importance of finding the appropriate way to compensate board members. They wind up being incredibly inexpensive consultants that go on the board and have to do a lot of work. Thank you.

Mr. Shames: Bruce, that was great.  Art . . .

[continued]

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