Author: Tom Koor

Tom Koor

How can M&A create value? V3

How can M&A create value? V3

What is the purpose of this article?

  • Enable the board of directors, C-Suite, and investors discuss how to achieve value from M&A.

You can download a PDF of this article from: How can M&A create value V3

What are the critical learnings in this article?

  • More than half of all deals destroy value for investors.
  • Focus on creating long-term value for the merged company’s ecosystem members, especially customers.
  • Create the VCO (Value Creation Officer) role. The VCO’s focus is on value creation.

What are the five types of companies doing M&A?

  • Traditional operating companies that will integrate talent, processes, technology, etc.
  • Private Equity firms, which control their companies, acquiring portfolio companies or add-ons to portfolio companies.
  • Venture Capital firms, which will be actively involved in the portfolio companies.
  • Financial investors, who will be passive and not actively involved.
  • SPACs (Special Purpose Acquisition Vehicle) and Search Funds.

Some of the comments below apply to every type of M&A, some apply only to some of the types.

More than half of all deals destroy value for investors.1

The root causes of M&A failure at the deal stage are:

  • The M&A target does not fit the business strategy and future business model.
  • Synergy estimates (both revenue and costs) are optimistic. Relevant external benchmarks are not used. No bottom-up analysis.
  • Weak due diligence.
  • Those accountable for delivering the benefits are not involved at the deal stage.

The root causes of M&A failure at the integration stage are:

  • Taking too long to put in place the leadership accountable for delivering results.
  • Poor change management.
  • Poor planning and execution.
  • Limited ongoing communications with stakeholders.
  • Losing customers.

The value of the integrated company must be greater than the value of the standalone companies.

I have had the luck to be at a board of directors meeting at which the newly appointed CFO presented the results of the company’s past acquisition to: the board and the newly appointed CEO. The combined sales and profits after the merged company were significantly lower than the pre-acquisition sales and profits.  I assume this is what led to appointing a new CFO and a new CEO.

Why are you doing M&A?

  • Support the purpose of your company.
  • Provide increased value to the members of your company’s current ecosystem and the future merged ecosystem. These members include: customers, employees, investors, suppliers, partners, the broader public etc. Some members may be negatively impacted (e.g. employees let go due to cost cutting).  You’ll also have the challenge of allocating value creation among the members.

How will you create long-term value?

#1 Increase the capabilities of your company’s talent pool to drive long-term value growth.  Talent includes everyone in your company, starting with the board of directors.  It’s possible you may have to exit inappropriate talent.

#2 Enable more customers to achieve more value from your company.

  • More customers with more problems and needs they are willing and able to pay to address.
  • More customers perceive your competitively differentiated value proposition.

You may have to exit some unprofitable customers.

#3 Enable key members of your company’s ecosystem to achieve value.

#4 Increase the ability of your new pool of assets to provide value.

  • Your assets include: Processes, technology, intellectual property, partner, suppliers, channels (marketing, sales, distribution).
  • Your new pool of assets may require a number of changes and exits. Duplication should be reduced. Assets which are obsolete or provide little or no value must be eliminated.

The M&A process may also require divestures of: assets, business functions, business units, subsidiaries, etc.

What will be your synergy targets?

Only 58% of acquiring companies publicly announce synergy targets.  Of those that do announce synergy targets, only 29% update investors regarding progress against targets. Successful acquirers have higher internal targets than what is externally communicated.1

What are your next steps?

Your next steps depends upon what type of company you are what type of M&A you are contemplating.  In call cases, you need the VCO (Value Creation Officer) role, which is focused on the achievement of long-term value from M&A.  The VCO recommend the structure, processes, talent, and decision making principle required. The VCO has no decision making authority. If your company decides to ignore the advice of the VCO, you increase the chances of failure.

Some of the things the VCO will consider include

  • As soon as you start thinking about M&A, create the VCO (Value Creation Officer) role. The VCO is focused on creating long-term value from M&A.
  • The VCO will: outline the overall stages and journey of M&A, ranging from first considering M&A through to the eventual achievement of value; outline how Value Creation should be built into the M&A process; not be a decision maker but will suggest the decision making process and criteria (utilize existing governance structures as much as possible); be a temporary role, and without any direct full-time reports.
  • Help define the decision making principles, process, and participants for each stage of the overall M&A process. Decisions will have to be made regarding the allocation of value creation, and value destruction, to the members of your company’s ecosystem.
  • Outline the purpose of your company and of the post-merger company.
  • Document the purpose of M&A.
  • Describe the ecosystem members of the merged company and the impact on them of the merger. Model how much more value will be created by the merged company compared to the standalone companies.
  • Describe your approach for creating long-term value.
  • Describe why you’ll be able to create more value than competing bidders.
  • Help determine the maximum amount you are willing to pay. This will depend upon the terms and conditions.
  • Outline the various teams e.g. deal team, integration team, talent team, due diligence team. There may be multiple teams e.g. the talent team addressing changes to the board of directors may be different from the team addressing the C-Suite which may be different from the team addressing customer contact centre. Each team is accountable for the creation of their plan and achievement of the benefits arising from plan execution.

The scope of the plans may include changes to: board of directors, C-Suite, talent throughout the company, the organization structure,  processes, technology, channels, partners, etc.

The talent team(s) considerations include the following:

  • Outlining the CEO, President, Chief Operating Officer, C-Suite and C-suite direct reports roles and organization structure for the merged company.
  • Assigning accountability for the roles, within the merged company, which will be accountable for achieving value. Set the targets for each role. If the people occupying the roles will not commit, then replace those people. If the people who will occupy the roles will come from the merged company, then determine their commitment to targets as soon as possible.
  • The people accountable for value achievement are also accountable for the plans to achieve that value.
  • Those who will be accountable for creating and achieving value must have a degree of involvement with the due diligence.
  • Before exiting talent, consider their improvement or reallocation potential, if they had advisors, coaches, or trainers.
  • The two critical ways of looking at talent are; the value of the role and the value (current and potential) of the person in the role.

Who is the VCO?

The VCO may be a part-time or full time role for someone already part of your company OR may be a temporary outsider. Who might the VCO report to?

  • The controlling shareholder (if a private company);
  • The board chair; or
  • The CEO.

 

Footnotes

1 “The real deal on M&A, synergies, and value”, Boston Consulting Group, BCG Perspectives, 2016

https://www.bcg.com/en-ca/publications/2016/merger-acquisitions-corporate-finance-real-deal-m-a-synergies-value

Further reading

Do you understand your customers? V2

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Do you understand your company’s external ecosystem?

https://koorandassociates.org/strategy-and-strategic-planning/do-you-understand-your-companys-external-ecosystem/

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

“The six types of successful acquisitions”, McKinsey, 2017 May

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-six-types-of-successful-acquisitions

“Change management in merger integration” Bain, 2017

https://www.bain.com/insights/change-management-in-merger-integration/

2023 Global M&A Report – Bain

https://www.bain.com/globalassets/noindex/2023/bain_report_global_m_and_a_report_2023.pdf

 

Tom Koor

Do you understand your company’s external ecosystem?

What is the purpose of this article?

Help founders, the C-Suite, board of directors, investors, and others understand your company’s external ecosystem.

You can download a PDF of this article from: Do you understand your company’s external ecosystem

What are the critical learnings in this article?

  • Not understanding your company’s external ecosystem can doom your company.
  • An ecosystem is broader and more complex than your company’s stakeholders.

What is an ecosystem?

A business ecosystem is the network of organizations—including suppliers, distributors, customers, competitors, government agencies, board of directors, C-Suite, employees, and so on—involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive as in a biological ecosystem.1

A stakeholder is a party that has an interest in a company and can either directly affect or be affected by the business. 2

An ecosystem is broader than your company’s stakeholders, interact with each other, and may indirectly affect or be affected by your company.  Ecosystem members may be competing, may emerge in the future, or disappear in the future. The members may not even be aware of your company.

Who are some of the potential members of your company’s external ecosystem?

Cash paying customers, users, suppliers, distributers, established companies, competitors, legislators, regulators, NGO (non-governmental organizations), not-for-profits, technology researchers and academic institutions, communities ranging from local to global, industry consortia, governments at national and local level (including legislators and regulators), entrepreneurs or startups, etc.

Why do you need to understand your external ecosystem?

Imagine if you don’t understand:

  • Why your customers buy from you rather than other companies? How your customers perceive your competitive value proposition?
  • How potential employees perceive the value of joining your company?
  • How current and potential investors perceive your company, relative to other investment opportunities?
  • And so on.

Lack of understanding can doom your company.

What are the three types of interaction with your company?

  • One-on-one people interaction e.g. individual email, phone or video call, in person face-to-face.
  • One-on-one software interactions e.g. chat bot, using the software components of your solution, browsing your website.
  • Indirect interaction e.g. mass emails, reading about your company on social media.

Ecosystem members can impact your company, even if there is no interaction.

  • Some members may have no interaction with your company? E.g. NGOs (Non-Governmental Organization) which drive changes to laws and regulations impacting your industry and your company.
  • Another example is researchers developing and rolling out new technology. E.g. ChatGBT signed up over 1 million users in five days. Netflix took 3.5 years, Twitter took 2 years, Facebook took 10 months, Spotify took 5 months, and Instagram took 2.5 months.

What do you need to understand about your external ecosystem?

All these questions need to customized for your specific situation.

The following are questions regarding members who interact with your company

  • Who are the members of your external ecosystem?
  • How many members are there, of each type?
  • Which members interact one-on-one with people in your company?
  • Which members have one-on-one software interactions?
  • Which members have interactions?
  • What are the members problems, needs, and issues?
  • What are the members perceptions regarding your company, its leadership, employees, and the specific points of interaction?

To complete your picture of your external ecosystem, you also need to identify and understand:

  • Who are the members who can impact your company but don’t interact with your company?
  • How do all these external members interact with each other?

What is the current challenge most large companies face regarding their external ecosystem?

PWC’s 26th annual global CEO survey showed that few companies were collaborating with ecosystem members to generate business value or address social issues. 1

  • With established companies or competitors: 26% to create business value, 13% to impact social issues
  • With industry consortia: 20% to create business value, 16% to impact social issues
  • With entrepreneurs or start-ups: 20% to create business value, 10% to impact social issues.
  • With governments at the national or local level: 19% to create business value; 18% to impact social issues
  • With academic institutions: 16% to create business value, 12% to impact social issues
  • With non-governmental organizations: 10% to create business value, 14% to impact social issues.

What are your next steps?

Recognize that understanding your external ecosystem members will be an iterative, evolving, and ongoing process. This understanding is part of what drives your company’s short and long-term plans and execution. The first few steps include:

  • List your current external ecosystem members.
  • For each one, customize the questions above and answer them. If you don’t have fact based answers, then document your assumptions.
  • Identity the potential short-term impacts on your company.
  • Look 5-10 years into the future and create scenario of ecosystem members and answers or assumptions to the questions above.
  • Identify the potential long-term impacts on your company.

Footnotes

1 Adapted from Investopedia 2021 Jan 20

2 Adapted from Investopedia 2023 Jan 09

3 PWC’s 26th annual Global CEO Survey, Page 18

https://www.pwc.com/gx/en/issues/c-suite-insights/ceo-survey-2023.html

 What further reading should you do?

Do you understand your customers? V2

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Tom Koor

Values – U.S. Army V2

What is the purpose of this article?

  • Enable investors, the board of directors, C-Suite and others to discuss the values of your company.
  • Help identify the role of values in selecting, assessing, and exiting: board directors, C-Suite, and other members of your company.

You can download a PDF of this article from: Values – US Army V2

What are the critical learnings in this article?

  • Values are doing what is right – which is far more than following the law.
  • Acting and behaving on values may come with great personal pain.

 What is the purpose of the U.S. Army?

“To deploy, fight and win our nation’s wars by providing ready, prompt and sustained land dominance by Army forces across the full spectrum of conflict as part of the joint force.”1

“THE ARMY OF 2030

As the Army comes out of the conflicts in Iraq and Afghanistan and refocuses on the pacing challenge of China and the acute threat posed by Russia, Army leaders are directing the most significant reorganization and technical innovation since the end of the Cold War — ensuring our adversaries cannot outrange or outpace us on traditional battlefields, or the new frontiers of space and cyberspace.

The world is changing, and the Army is changing with it.”1

 I observe that the U.S. Army purpose is focused on the long-term future, not the past or near-term.

What are the values of the US Army?1

 LOYALTY

Bear true faith and allegiance to the U.S. Constitution, the Army, your unit and other Soldiers. Bearing true faith and allegiance is a matter of believing in and devoting yourself to something or someone. A loyal Soldier is one who supports the leadership and stands up for fellow Soldiers. By wearing the uniform of the U.S. Army, you are expressing your loyalty. And by doing your share, you show your loyalty to your unit.

DUTY

Fulfill your obligations. Doing your duty means more than carrying out your assigned tasks. Duty means being able to accomplish tasks as part of a team. The work of the U.S. Army is a complex combination of missions, tasks and responsibilities — all in constant motion. Our work entails building one assignment onto another. You fulfill your obligations as a part of your unit every time you resist the temptation to take “shortcuts” that might undermine the integrity of the final product.

RESPECT

Treat people as they should be treated. In the Soldier’s Code, we pledge to “treat others with dignity and respect while expecting others to do the same.” Respect is what allows us to appreciate the best in other people. Respect is trusting that all people have done their jobs and fulfilled their duty. And self-respect is a vital ingredient with the Army value of respect, which results from knowing you have put forth your best effort. The Army is one team and each of us has something to contribute.

SELFLESS SERVICE

Put the welfare of the nation, the Army and your subordinates before your own. Selfless service is larger than just one person. In serving your country, you are doing your duty loyally without thought of recognition or gain. The basic building block of selfless service is the commitment of each team member to go a little further, endure a little longer, and look a little closer to see how he or she can add to the effort.

 HONOR

Live up to Army values. The nation’s highest military award is The Medal of Honor. This award goes to Soldiers who make honor a matter of daily living — Soldiers who develop the habit of being honorable, and solidify that habit with every value choice they make. Honor is a matter of carrying out, acting, and living the values of respect, duty, loyalty, selfless service, integrity and personal courage in everything you do.

INTEGRITY

Do what’s right, legally and morally. Integrity is a quality you develop by adhering to moral principles. It requires that you do and say nothing that deceives others. As your integrity grows, so does the trust others place in you. The more choices you make based on integrity, the more this highly prized value will affect your relationships with family and friends, and, finally, the fundamental acceptance of yourself.

PERSONAL COURAGE

Face fear, danger or adversity (physical or moral). Personal courage has long been associated with our Army. With physical courage, it is a matter of enduring physical duress and at times risking personal safety. Facing moral fear or adversity may be a long, slow process of continuing forward on the right path, especially if taking those actions is not popular with others. You can build your personal courage by daily standing up for and acting upon the things that you know are honorable.

What are your next steps?

  • Compare your company’s purpose and values to the U.S. Army purpose and values.
  • Outline the purpose of your company.
  • Describe how your company’s values enable the achievement of your company’s purpose and your company’s long-term competitive success.
  • Describe how values are used to: select, assess, and exit – board directors, the C-Suite, and other employees, contractors, suppliers and partners.

Footnotes

1 U.S. Army website November 14, 2022

https://www.army.mil/about/#:~:text=Our%20purpose%20remains%20constant,part%20of%20the%20joint%20force.

 What further reading should you do?

Why are values, morals, and ethics important?

https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

Society’s trust in corporate leadership and political leadership is low.

https://koorandassociates.org/values-morals-and-ethics/societys-trust-in-corporate-leadership-and-political-leadership-is-low/

Tom Koor

What does the Toronto startup ecosystem look like? V6

What is the purpose of this article?

  • Help participants of the Toronto Startup Ecosystem understand the broad scope and many components.
  • This document focuses on the high-tech and software startup ecosystem, and outlines the different types of members comprising the ecosystem.

You can download a PDF of this article from: What does the Toronto startup ecosystem look like (V6)

What are the critical learnings in this article?

The Toronto Startup Ecosystem is global, with hundreds or even thousands of interreacting members.

What is a business ecosystem?

“A business ecosystem is the network of organizations—including suppliers, distributors, customers, competitors, government agencies, board of directors, C-Suite, employees, society, and so on—involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive as in a biological ecosystem.” 1

What is the value of taking an ecosystem perspective?

  • Members who have no direct involvement with your company may have a massive impact on your company. e.g. social license to operate.

How do you picture an  ecosystem?

  • Each ecosystem member is in a circle.
  • Each member has a line to every other member.
  • You’re right – this is a complex diagram.
  • It is reality today e.g. a local community around a proposed mine in a third world country has the potential to stop the development of the mine, thus impacting your company’s profits.

The Toronto ecosystem is global in scope

  • Startups based in Toronto may have global customers, investors, employees, etc. Toronto funds may invest globally.

The following is a list of the 26 components of the Toronto startup ecosystem,

The is not intended to be 100% complete. It’s my current understanding.

#1 Founders

May be in Toronto, or anywhere in the world.

 #2 Cash paying customers and users

May be in Toronto, or anywhere in the world.

 #3 Employees

May be in Toronto, or anywhere in the world

#4 Accelerators and incubators

There are a broad range of incubators and accelerators and almost every one is different. As a startup evolves, it may move among several different types of incubators and accelerators.  Incubators and accelerators focus on startups where they  can have maximum impact by utilizing admittance criteria and processes. Common characteristics of incubators and startups are:

  • Links to investors.
  • Access to lawyers.
  • Access to mentors and advisors
  • Networking with other startups.
  • Financing is sometimes provided.

Incubators

The goal of an incubator is to help take a start-up to the point where there is a MVP (Minimum Viable Product). The process takes 12 to 24 months.  The founders decide what incubator resources to draw upon and at what time.

The key characteristic of an incubator is co-located office space with other start-ups.

Accelerator

The goal of an accelerator is to quickly grow the size and value of the startup to enable future funding. The key characteristic of an accelerator is taking a start-up company (which already has a Minimum Viable Product) through a very structured 3-4 month process. Actions and outcomes are required every 1-2 weeks.

As of November 21, 2022, Toronto has more than 97 incubators and accelerators2

  • Toronto startups also join incubators and accelerators elsewhere in Ontario, and around the world.

#5 Venture studios

A venture studio comes up with an idea, assembles a team of founders, and provides capital for the Startup. A venture studio has some combination the of the following 6 characteristics:3

  • The Guild: The internal resources of a venture studio. Includes a strong core team of startup operators, financial capital, space, connections, and infrastructure.
  • The Idea: venture studio either generates ideas internally or sources them externally.
  • The Structure: venture studio either operates as a holding company or has a holding company and VC fund.
  • The Funding: venture studio provides the financial capital to source, test, and validate the idea but then have the option to continue funding in-house or seek outside investment.
  • The Volume: The number of startups to work on at any one time is a differentiating factor among venture studios.
  • The Focus: venture studios either operate as generalists or specialists within an industry, technology, or region

As of Nov 21. 2022, Toronto has more than 43 funding organizations.  Countless more from around the world invest in Toronto based startups.2

#6 Angel investors

There are individual angel investors as well as angel investor groups. Angel investor groups have government supported infrastructure (e.g. staff, office space), but the government does not provide capital to startups applying to the angel investor groups.  The capital comes from the angel investors.

 #7 Funding platforms

  • Non-equity. This may only be a donation, the investor may receive some type of tangible award, or the investor receives a future product once it is available. g. Kickstarter
  • Equity and debt. The investor does get equity or debt. The OSC (Ontario Securities Commission) has several prospectus exemptions which a crowding platform may utilize.  Depending upon the legal structure of the platform, and investor characteristics, an investor may be able to invest any amount.   g. AngelList, Gust.
  • Private placement e.g. DealSquare.

#8 Equity Investment Funds

  • There are a large number based in Toronto. There are many funds outside of Toronto and outside of Canada that also invest in Toronto startups.
  • Most have specific investment criteria e.g. where is company headquarters, type of customers or market, type of technology, whether or not the startup has a specific social purpose.

#9 Corporate Venture Capital

A large established company (not an investment fund)  takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.

#10 Debt Investment Funds

  • Traditional bank loans, line of credit, etc.
  • Venture debt for startups and companies that don’t have significant assets or positive cash flows and therefore often don’t have access to traditional bank loans or material amounts of bank financing.

#11 Income revenue sharing funds

The capital is repaid from a percentage of the startups cash flow. E.g. Clearbanc.

#12 Investment dealers/underwriters

Sartups can raise equity by listing on the CSE (Canadian Securities Exchange), or on the TSX Venture Exchange.

#13 Organizations to buy or sell your company

These organizations will help you sell your startup, once it’s achieved some success.  They can also help you buy other companies.

#14 Organizations to meet your talent requirements

  • Outsourced or offshore talent providers. These provide contract resources.
  • Talent acquisition. There may acquire employees for the startup, from around the world.
  • Talent development. These aim to improve the capabilities of your existing talent.

#15 Associations

There are associations focused on specific types of ecosystem members e.g.

  • Angel investor groups e.g. AIO (Angel Investors Ontario), NACO (National Angel Capital Association – Canada), ACA (Angel Capital Association – United States)
  • Founders e.g. BFN (Black Founders Network)
  • etc.

#16 Advisors – legal, financial, functional

Every startup requires a range of advisors.  For example, financial software can collect and report on a broad range of information.  An accountant can advise on how to set the software up.  Lawyers are key to providing advice on the range of legal and regulatory requirements, and how best to meet them.

#17 Tools and services for startups

These address a range of issues including:

  • Understanding customers and users
  • Creating prototypes
  • Building and maintaining the solution
  • Marketing and sales
  • Customer onboard and ongoing
  • Billing, payment processing, payroll, financial reporting, etc.

#18 Reviews of startup companies

Some companies are focused on reviewing startup solutions.  Other companies enable reviews of startups as a sideline to their main business (e.g. job boards enable employee reviews of the CEO).

#19 Conferences

Conference organizers manage Toronto conferences focused on startups.  Many of the organizations in the Toronto ecosystem also host events.

#20 Regulators

Every startup needs to be aware of regulatory requirements as soon as they start raising capital.  Financial Services startups must be compliant with many more regulatory requirements.

#21 Federal government programs

Startups can benefit from tax credits, financing, and advisory support. When going global, Canadian trade commissioners are based in 160 global cities.  The startup Visa program enables a foreign employee with a job offer to quickly obtain a visa to work in Canada.

#22 Ontario government programs

The Ontario government has numerous programs.

#23 Municipal programs

Toronto has the Startup Here program and other programs.

#24 Ecosystem researchers

  • Some individuals and organizations analyze and publish research regarding the ecosystem e.g. Charles Plant
  • A variety of databases have collected different types of information regarding the ecosystem e.g. Crunchbase, HockeyStick, etc.

#25 Startup charities

The Upside Foundation focuses on startup companies donating stock options.

#26 Coworking space companies

Once the startup leaves the founders’ homes (or accelerator) they may move to a coworking space. Coworking spaces also enable a startup to quickly establish a global physical presence.

Footnotes

1 Adapted from Investopedia 2021 Jan 20

2 Startup HereToronto   https://startupheretoronto.com/startup-support/

3 https://medium.com/datadriveninvestor/how-to-differentiate-startup-studios-d3cb394e3ecf

 What further reading should you do?

What does the startup journey look like?

https://koorandassociates.org/the-startup-journey/what-does-the-startup-journey-look-like/

Is your startup planning to fail?

https://koorandassociates.org/the-startup-journey/is-your-startup-planning-to-fail/

Tom Koor

What is a competitively differentiated board of directors?

What is the purpose of this article?

  • Enable investors, founders, the board of directors, and C-Suite discuss the value of a competitively differentiated board as well as the process for creating and maintaining this differentiation.
  • This article only considers those companies where all decisions are made by the board as a whole. This excludes companies with: controlling shareholders, shareholders agreements, golden shares, one director dominating and controlling board behaviour, etc.

You can download a PDF of this article from: What is a competitively differentiated board of directors

What are the critical learnings in this article?

  • A long-term competitively differentiated company required a competitively differentiated board of directors, decision making processes, and supporting technology.
  • There are several components to the director selection process, concluding with an evaluation of their value contribution during a one-year period as a board observer.

 Why do you need a competitively differentiated board  of directors?

I assume that a competitively differentiated board results in a competitively differentiated company.

  • Directors are ultimately responsible for the long-term success of the corporation.1
  • It is difficult for your company to competitively succeed if your board makes poor decisions regarding: CEO appointment and termination, strategies, budgets, crisis management, etc.
  • Sometimes luck plays a role, but you must not depend upon luck to be successful.

How do you measure your company’s competitive differentiation?

Competitive differentiation is perceived differently, by different members of your company’s ecosystem.  Every perception is a combination of facts, analysis, and emotions.

  • Investors may consider total shareholder return over a number of years, or at exit time if a private company.
  • Bond holders may consider their returns and no default.
  • Your company’s economic performance is in the top quartile or even decile. You company may not be the #1 economic performer relative to your competition. Why? You company is balancing the sharing of economic wealth among ecosystem members such as: employees, local communities, overall society, etc.  For example, I know companies with a fantastic economic result but: employees are not paid a living wage, there is zero concern about the impact on local communities, etc.
  • Employees may consider: alignment of company purpose, values, morals, and ethics with their own views, and compensation. Your employee’s rating of your leaders and recommendation of your company to people they know is higher than the competition. Other companies poach your employees because you’ve been able to develop and grow them. This isn’t a problem for your company, because it’s easy to hire new people. People want to work for your company rather than your competition.
  • Customers: Market share increases because your company better understands customers and provides solutions from which the customer gets more value from, relative to your competition
  • Local communities and society think highly of, and trust, your company’s board of directors and C-Suite.
  • etc.

What are the characteristics of a competitively differentiated board?

There are three parts: talent, processes, and technology.  Poor talent, combined with poor processes, and poor technology results in a poor board. A company with a poor board is counting on luck in order to beat the competition.

  • The board as a whole is competitively differentiated team.
  • Each board member has 1 or more characteristics where they are competitively differentiated.
  • The board has differentiated decision making processes.
  • The board may also have differentiated technology support.
  • Every single board member must have the required values, morals, and ethics.

What are your next steps?

  • Review the purpose of your company.
  • Identify the key members of your company’s ecosystem.
  • Determine how the key members of your company’s ecosystem currently measure your company’s differentiation.
  • Decide what differentiation will look like to each key ecosystem member. You will have to do trade-offs – your company can’t be the everything for every member of your ecosystem.
  • Determine what collective board decisions, actions, and behaviours will result in the desired perception of differentiation. Director actions and behaviours will be visible in many ways, including: at the Annual General Meeting, management meetings, social media, and countless interactions with a variety of people and organizations.
  • Outline the board’s decision making processes, for both the board as a whole and each board committee. The intent is to have a better process than competitors.
  • Based on the above, define what relevant past experience, skills, and expertise are required for the board as a whole, for each board committee, and for each individual director. Assess each individual director for: cognitive skills2, fluid intelligence3, and perseverance. Behavioural interviewing and psychological testing are key.  Director candidates should also undergo a simulation. This results in competitively differentiated directors.
  • Value, morals, ethics, and integrity are mandatory. Warren Buffett supposedly said “..looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
  • Each potential director nominee should spend one year as a board observer, with their value contribution being assessed prior to being nominated and elected.
  • Establish an ongoing process to understand how ecosystem members perceive your company’s competitive differentiation. This must be done yearly as well as when any major external changes or crisis occur.
  • Regular assess: the board as a whole, each director, the board decision making processes, and supporting technology. Every year, you need to make the decisions on whether or not your have the best directors OR if should exit some directors.  This is the same concept as zero based budgeting.
  • Your crisis management process must include the board of directors. g. every year, run a simulation with the board using a potential crisis.  I assume that you have a crisis management process, a leader (or team) supporting the process, and a crisis war room.

Footnotes

1 Professor Didier and Estelle Metayer, “Does your board really add value to strategy?”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/board-strategy/

2 What are cognitive skills?

https://www.mindmattersjo.com/what-are-cognitive-skills.html

3 Fluid vs crystallized intelligence

https://www.simplypsychology.org/fluid-crystallized-intelligence.html

Tom Koor

Why should a Venture Capitalist invest in you? V2

What is the purpose of this article?

  • Enable founders and investors to discuss and understand some of the VC (Venture Capitalist) investor process in early stage companies.
  • This understanding will help founders create and manage their VC relationship building and two-way communications’ processes.

You can download a PDF of this article from: Why should a Venture Capitalist invest in you V2

What are the critical learnings in this article?

  • A VC is focused on making a large amount of money from an investment, because most investments generate little or no return
  • The VC decision making process has many steps, with variety of criteria at each step.
  • When it’s time to make the final investment decision, the team is the most important factor for the VC.

 What is driving the actions of a VC?

The primary focus of a VC is to make money for the investors in the fund. A secondary focus may be to have a positive impact on society.  The VC likely has a fund. The fund exists for a finite period of time and is expected to produce significant returns to the fund investors (e.g. significantly better than a liquid S&P500 ETF.

  • Often 10 year fund lifetime.
  • First 2-3 years investing in new companies.
  • Most of the capital invested within 5 years
  • Retuning capital to investors in the last 5 years and winding up the fund at the 10 year point.

What is the state of your startup?

  • You already have revenue from your solution. Few VCs invest in pre-revenue companies.  There are exceptions such as new drugs and new technologies (e.g. fusion power).

Why is the VC looking for companies which can return 10 to 100 time the investment? 1

Andreessen Horowitz, a U.S. VC fund with over $10 billion of asset under administration, has public shared their experience.  They receive 3,000 startup applications per year. 200 startups are looked at seriously. 20 startups are funded.  They commented that in the VC industry overall, 8% of investments generate the bulk of the economic return.  The other 92% of investments are a loss or generate little return.

What are the VC questions and decisions leading up to the decision to give you cash?

VCs get many requests for funds (sometimes dozens a day).  VC’s also seek out desirable startups, often using software to create large databases of startup companies.

The foundation for many of the questions is based on:

  • What’s the market size? How did you determine the number of potential cash paying customers who have urgent problems and needs they are willing and able to address?
  • What’s unique about the team? What does the team know that no-one else knows?
  • What’s unique about the solution? How easy is it to copy?

What are the three different routes to get VC funding?

  • Ask them for funding, either via cold call or introduction.
  • The VC reaches out, as a result of you staying in touch if the VC turns your down initially.
  • The VC proactively contacts you. This may occur because: the VC’s software scanning and analysis of the internet has identified your startup, they’ve seen you pitch somewhere, they’ve met you and talked with your for 2-3 minutes,

When you ask VCs for funding, their questions include:

  • Why should they open (rather than immediately delete) your cold call email or introductory email from someone the VC knows?
  • Why should they read any attachments?
  • Why should they have a brief call with you?
  • Why should they have a meeting with you?
  • Why should they start a due diligence process with you?
  • Why should they start to negotiate terms and conditions with you?
  • Why should they decide to give you cash?

Each one of the above questions will have a number of detailed supporting questions and analysis

What are the key VC questions when they decide to not-invest but still ask your startup to stay in touch with them?

These include:

  • Did you email them (or update their database) on the schedule they asked for? (Most commonly monthly.)
  • Did you accomplish in the past month what you said you would, in an earlier update?
  • How much have customer interactions grown, month by month. E.g. number of cash paying customers, number of customers who signed LOI (Letters of intent), how many asked to be emailed once your product is ready, number and type of interactions on your website, number of signups to your newsletter, etc.

The VC will have different decision making criteria at each stage. VC don’t all ask the same questions or have the same process.

What has the VC determined prior to their final investment decision?

  • Prior to the final investment decision, many VC questions will have been answered, especially in the due diligence stage, as noted above.
  • Few startups make it to the point where the VC makes the final decision on whether or not to invest.

 What is the most important factor early stage VCs consider when it is time to decide on whether or not to write the check.

  • 53% of VCs believe the team is the most important factor in making the decision. Fit with the fund was 13% and the solution was 12%.2
  • 64%% of VCs believe the team was the most important factor in their startups’ success3
  • 60%% of VCs believe the team was the most important factor in their startups’ failure4

Why the focus on the team when it comes to the final investment decision?

  • The team needs to be constantly learning and unlearning about customers, their ecosystem, technology, etc.
  • Often the team must change direction as they learn more about their customers and the customers’ problems. E.g. YouTube started out as a dating site and Slack started as a multi-player online game.
  • Incredible grit and perseverance are required.
  • If the team’s initial assumptions about a large target market for their proposed solution prove invalid, a brilliant team will find out what the unmet customer problems are and create an appropriate solution.
  • A poor team will continue to create and sell a solution for which there is little demand.

What are your next steps?

As a founder:

  • Understand the different decision making stage each of your target VCs go through, including the final decision to fund you.
  • Design your VC relationship building and two communications processes to support the variety of target VCs.
  • You’ll need a CRM (Customer Relationship Management System), and two up-to-date data rooms. The external data room will be visible to potential investors.  The internal data room is used by the startup team, and not visible to potential investors.  Some content will be in both data rooms.

Footnotes

1 https://corporatefinanceinstitute.com/resources/knowledge/other/how-vcs-look-at-startups-and-founders/

2 Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42  This survey of VC firms included: 63% of all VC US assets under management, 9 f the top 10 VC firms and 38 of the top 50 VC firms.

3  “How do venture capitalists make decisions”, Page 53

4 “How do venture capitalists make decisions”, Page 54

Further reading

Touko Kontro & Ari Seppänen, “How to get your startup funded?”, NewCo  Helsinki, City of Helsinki, https://newcohelsinki.fi/app/uploads/2018/01/Fundingworkshop-2.2-1

Is your early stage startup planning to fail?

https://koorandassociates.org/the-startup-journey/is-your-startup-planning-to-fail/

What does the startup journey look like?

https://koorandassociates.org/the-startup-journey/what-does-the-startup-journey-look-like/

Tom Koor

Massive social and economic turmoil is approaching

I fear that massive social turmoil, accompanied by economic upheaval, is coming in the next decade.  This fear is due to what I heard at the Toronto Global Forum earlier this week.

Panelists described the need for massive government investments in health care, climate change, sustainability, incentives, etc.  But no discussion about where the money will come from and the need to increase taxes. Individuals will also have to make major changes and spend money.

I will summarize what I heard from the leaders about their approach to getting the public to make major changes……tell people it’s important and tell them they must change.  They leaders had no concept that they need to listen to the public, understand their concerns, help the individuals understand the urgent need for personal change. This approach of dictating change will lead to even more social upheaval than COVID.  Our leaders have no idea how to change the behaviour of large groups of people.

There is a science to large scale change of human behaviour.  I’m saddened that our leaders are unable to learn and plan to take the simple approach of dictating change. This will result in massive resistance by the public.

When I got home that evening, I read two articles in the newspaper.  One was about the need to increase defense spending in Canada given the war in Europe and tensions elsewhere.  No mention of increasing taxes.  The other article was about the deterioration of physical infrastructure of Toronto, the  city I live in.  Deterioration is occurring because billions of dollars of maintenance is being deferred into the future.

The public complains and wants more spending but doesn’t want to pay more taxes to correct the problems.

Tom Koor

My annual fundraising campaign for Lupus Ontario is underway

My annual fundraising campaign for Lupus Ontario is underway.  Over the past 16 years, family, friends, neighbours and colleagues have contributed over $251,000.

 Why am I fundraising?

My daughter was diagnosed with lupus in 1996, and I have personally experienced the challenges of this complicated disease.

 How does your donation help improve the lives of people living with lupus?

100% of the funds we raise are being directed towards the $65,000 Lupus Ontario Geoff Carr Fellowship. This Fellowship is offered annually to a qualified doctor to work under supervision at an accredited Lupus Clinic in Ontario.

The Fellowship also provides the recipient opportunities to conduct research in either adult or paediatric lupus, to gain additional in-depth knowledge of diagnosis and treatment options for the disease, and to provide patient care and education.

 For more information and to make a secure financial on-line donation, visit my fundraising page:

https://sna.etapestry.com/fundraiser/LupusOntario/research2022/individual.do?participationRef=12744.0.303532049

Stay safe.  Stay well.

Tom

Tom Koor

Traditional risk management dooms your company to failure.

What is the purpose of this article?

Help shareholders, investors, founders, the board of directors and C-Suite discuss and improve risk management governance.

You many download a PDF of this article from: Traditional risk management dooms your company to failure

What are the critical learnings in this article?

  • Traditional risk management in many companies does not address some of the fatal risks:
  • The talent in the board of directors and C-Suite.
  • Understanding of the cash paying customer problems and needs.
  • Understanding the company’s ecosystem.1
  • Enabling company growth and value creation.

What are some definitions of risk management?

#1 “Risk management is the process of identifying, assessing and controlling financial, legal, strategic and security risks to an organization’s capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters.” 2

#2 “Dynamic risk management has three core component activities: detecting potential new risks and weaknesses in controls, determining the appetite for risk taking, and deciding on the appropriate risk-management approach” 3

#3 “ERM (Enterprise Risk Management) is a forward-looking management discipline designed to provide board and senior leaders a top-down, strategic perspective of the portfolio of risks they need to proactively manage to achieve business strategy, financial objectives and, as of 2019, corporate purpose.”4

 What are the fatal risks not addressed in many approaches to risk management?

Driving growth and profitability are not highly important risk management goals in companies. McKinsey did a survey of what goals companies had for enterprise risk management.5Two industries were examined. The companies scored goals from1:low to 4:high.

Energy company scores:

  • Drive profitability and growth 1.8
  • Ensure regulatory compliance 2.2
  • Protect value: 3.4

Advanced company scores (high tech and assembly)

  • Drive profitability and growth 1.0
  • Ensure regulatory compliance 4.0
  • Protect value: 2.5

The greatest risk to a company is not having competitively differentiated talent.  It is talent that understands the company’s ecosystem, provides value to key ecosystem members (e.g. cash paying customers and users), creates competitively differentiated solutions, acquires the necessary technology, make decisions, executes decisions, etc.

Many company leaders (board directors and C-Suite) believe that the only talent issues lie deeper in the organization and not with themselves.  Few have asked “Am I the right person”.  I recall a wonderful meeting with a board director who had great self-awareness.  He resigned from a large company board.  He told me why he felt his value to the board had dropped.

The second greatest risk is not understanding the cash paying customers problems and needs, as well as the perceived value of meeting those needs.

The third greatest risk is not understanding the company’s ecosystem5 or even realizing that the company has an ecosystem.

What do I observe about traditional risk management?

  • Traditional risk management is focused on secondary risks, many of which are addressed by management and staff below the C-Suite.
  • The above fatal risks, especially the talent and capabilities with the board of directors and C-Suite, are often not addressed.
  • Companies controlled by hedge funds, private equity, venture capital, and sophistical family office often do address the above fatal risks, especially the talent.

What are your next steps?

  • Determine who is accountable for ensuring the appropriate talent is on the board of directors, along with the necessary processes for: assessment, recruitment, development, and exiting.
  • Determine who is accountable for ensuring there is a shared understanding of customer problems and needs among the board of directors, C-Suite, and the rest of the organization.
  • Determine who is accountable for ensuring there is a shared understanding of customer problems and needs among the board of directors, C-Suite, and the rest of the organization.
  • Determine who is accountable for ensuring that there is a shared understanding of the company’s ecosystem.
  • Assess how the above items drive your company’s short and long-term actions.
  • Identify who is accountable for the improvements and the results of the improvements.

 Footnotes

1 “A business ecosystem is the network of organizations—including suppliers, distributors, customers, competitors, government agencies, board of directors, C-Suite, employees, and so on—involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive as in a biological ecosystem.” Adapted from Investopedia 2021 Jan 20

 2 IBM Risk Management article – 2022 August 22

https://www.ibm.com/topics/risk-management

3 McKinsey 2022 August 22

https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/meeting-the-future-dynamic-risk-management-for-uncertain-times

4 Ernst & Young

https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/home-index/ey-alm-pacesetter-research-enterprise-risk-management-2020-2021-full.pdf

5 Enterprise Risk Management Practices: Where’s the evidence? February 2014

https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/enterprise-risk-management-practices-where-is-the-evidence

Tom Koor

Critical learnings from Collision 2022

What is the purpose of this article?

  • Share my critical learnings from my three day attendance at Collision 2022 in June 2022. Collision was a North American startup conference with 35,000+attendees, ranging from pre-revenue founders to large established companies, and investors ranging from angel investors to multi-billion dollar funds.
  • These learnings may be from a single person or a composite from many people. In many cases, I’m quoting directly.
  • I believe that these learnings apply to any size company.
  • The learnings in this article are only a tiny subset of my 45 pages of notes.

You may download a PDF of this article from: Critical learnings from Collision 2022

What are the critical learnings in this article?

Partners of investment funds said that there is always money available, they are continuing investments in new companies and portfolio companies

  • The key criterion is that companies are solving urgent problems for customers.
  • Companies must cut costs asap if they are: not solving problems for urgent customers, losing customers, spending too much to get customers, targeting customers who provide declining profits, etc.

Don’t spend any money on advertising or scaling your company until you have customers who are crying in happiness because they have your solution. Customers should be coming to you.

You need to be constantly talking to your customers, regardless of what stage your company is at.  You need to ask them what they’re doing in the 15 minutes before and after they use your solution.

Every company is a data company

  • What do you know about your customers and users that no-one else knows?
  • This unique knowledge drives: your solution, the customer/user experience you create, your marketing and sales approach.

What did the CEO do when the business customers’ urgent problems changed, resulting in 60% of customers leaving and CEO terminating 1/3 of the staff?

  • The CEO talked with every business customer to understand their new urgent problems and needs
  • Using this new knowledge, the CEO then changed the solution, the customer support processes, marketing and sales approaches.
  • The result was a hockey stick revenue growth curve.

How did a startup, working from their kitchen table, get their very first sale, to a company with a $15.7 billion market cap?

  • Solve an urgent problem that is causing pain every single day.
  • Enable the customer to get a 10X performance improvement rather than an incremental 30% improvement.
  • Know more than anyone else about the problem, and how the customer can solve it.
  • Build strong internal relationships with the customer.
  • Take extreme accountability for customer results.

I asked one successful founder (well past the startup stage) “What should an investor do if the startup doesn’t want to talk to customers and users? How can the investor persuade the startup?”  The founder had a two word answer” “Don’t invest”.

The early stage CEO advisor compensation must be 100% equity based. The advisor must have faith in the CEO.

The CEO and investor(s) must have a commonly understood set of expectations for each other. Expectations change over time.

  • The CEO must have a job description for the investor.
  • There are major differences among: lead investor vs major investor vs smaller investors to fill-out the round.

How did a startup founder get 450,000 users in 10,000 businesses in two years with zero spending on customer acquisition?

  • Solve an urgent problem.
  • The user can easily understand the value proposition.
  • It’s easy for the user to get value quickly – ideally in 0 (ZERO) seconds.
  • CEO and developers spend 10% of every single day talking to customers and users.
  • Be obsessed with tracking by customer segment: Acquisition, activation, retention, revenue, and referrals.

The fundraising skillset is different from the sales skillset.

One startup raised funds with no product or solution – absolutely nothing. Except, 400 letters from companies stating they’d buy when the solution was available.

Some seed stage VC funds (targeting startups with 2-12 people) are taking a different approach with what is done with the yearly 2% fund compensation fee.

  • The cash going into partner pockets is being reduced with cash being spent on people to support portfolio companies e.g. providing part-time Chief People Officer, having an on call CFO, helping to structure interviews and surveys, helping to put in place customer metrics such as Net Promotor Score. Two such funds are Primary Venture Partners and First Round Capital. These funds believe that spending to maximize the long-term 20% performance compensation results in the startups, investors, and partners all making more money in the long-term.
  • A partner from one of those funds told me one-on-one that investors considering investment into VC funds should ask how the yearly 2% compensation fee is distributed, and how much goes into partner pockets vs helping portfolio companies.

Some startups said investors should provide a flying squad to help portfolio companies. This flying squad should do actual work (e.g. HR) and not just provide advice.

What are my summary observations after over 40 presentations as well as one-on-one discussions?

  • At Collision, successful investment funds and startups of all size talked a lot about customer/user problems, and customers/users getting value from having problems and needs addressed. g. startup founder who got 400 letters from customers wanting to buy, before spending one cent on building/creating a product solution.
  • Prior to Collision, many of the companies I meet, ranging from pre-revenue to long-term established, talk a lot about their solution. Many of the startups I’ve met first build something and then hope to find customers that have a problem their solution addresses.

What are your next steps?

  • Document your process for understanding customers, including facts, analysis, resulting business changes. Have a third party review and challenge you process, facts, analysis, and resulting business changes.
  • The above critical learnings reflect a number of different scenarios. Compare how your company leadership has responded to these scenarios in the past and would respond in the future.

 What further reading should you do?

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

ou may download a PDF of this article from: Elite talent – what is the purpose

What are the critical learnings in this article?

  • Elite talent and elite company performance are rare.
  • Beating the competition requires talent that is better than the competition.

What is the value and need for elite talent?

In today’s competitive business environment, there is unlimited capital for companies that have major competitive differentiation. This requires competitively differentiated talent

What are the characteristics of the elite talent that can create and transform companies?

#1 Leading strategy firm (when hiring MBAs) and global early stage investment funds (when assessing startup founders) are looking for the same type of talent”.

  • Ability to quickly learn and unlearn: paradigms, frameworks, methodologies, data, facts, knowledge. The founders of the majority of unicorns (startups which achieved a $1 billion valuation) had no previous domain experience.1 Roche paid $1.9 billion US for Flatiron Health, a cancer electronic records company.  The Flatiron founders (Nad Turner and Zach Weinberg ) had no background in cancer. They came from advertising. 2
  • Fast and deep analytical skills.
  • Fluid intelligence: the capacity to think speedily and reason flexibly in order to solve new problems without relying on past experience and accumulated knowledge. For example, successful startup founders, identify problems and needs that have not been well addressed before and create solutions that have never existed before
  • Curiosity – the passion to learn about the world around them and not be silo focused. This broader ecosystem knowledge provides a context for their deep ecosystem knowledge.

#2 Early stage investment funds also look for:

  • The drive and ability to deeply understand customers and users – their problems, issues, emotions, and what influences behaviours.
  • Perseverance: passion and energy to overcome all odds and difficulties to achieve goals. For example, Airbnb was short of cash in the early days. To make money they sold Cap’n McCains and Obama O’s cereal during the Obama McCain presidential run.  The following is a link to the current Airbnb site which still contains the original advertising. (https://www.airbnb.ca/obamaos)
  • Values, morals, and integrity: Warren Buffett supposedly said “..looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”

Business performance follows the power law distribution, not a bell curve.

If you want your company to enable your customers to achieve 10 times more value than the competition, some of your key talent must be 10 times better than the competition’s talent.

  • The distribution of company economic profit follows a power law. McKinsey’s study of 2,393 large corporations from 2010 to 2014 showed that the bulk of the economic profit was made bay a small number of companies e.g. the top 20% earned 90% of the total economic profit with the top 2% earning more than the next 8%. 60% of the companies earned little economic profit.3
  • People performance follows a power law distribution, and not a bell curve. Top 1% of workers generate 10 times average output .4
  • Half of all senior hires fail within 18 months.5

How do you recruit elite talent?

  • The best predictor of how someone will perform in a job is a work sample test (29%) 6 For example, when recruiting board directors, they should serve for one year as a board observer, to enable assessing them.
  • The two second best predictors are: are tests of general cognitive ability (26%); 7 and structured interviews (behavioural (tell me about a time) and situational (what would you do if) (26%). 8
  • Four interviews predict whether to hire someone with 86% confidence and each additional interviewer adds 1% confidence. 9 This assumes that you are clear on what value the role provides, the specific characteristics of people who can deliver that value, and do a combination of work sample and structured interviews.

Can your company be competitively differentiated without a competitively differentiated board of directors?

Some people believe that a company can succeed in spite of the board of directors.

What if the board:

  • Appoints the wrong CEO?
  • Has poor decision making regarding major transactions (e.g. M&A), plans, and policies?
  • Demonstrates poor values, morals, and ethics to employees and other members of the companies ecosystem?
  • Etc.

A poor board can certainly impact your company’s success.  However, I have seen cases where an extraordinary CEO has enough influence, persuasion, and guidance to overcome a poor board. I can recall one partner from a major private equity firm saying that with one board seat, he can turn the company around.

What are the implications for your company below the board and C-suite level?

  • With the right processes, technology, and development programs, your average employees can enable your customers to achieve more value than the competition. What’s key is hiring people at all level who have the potential to learn and unlearn.
  • When Google first built their Human Resources team, 1/3 of hires came from traditional HR background, 1/3 from top tier strategy consultants (because good at figuring out problems), 1/3 deeply analytic, with at least a masters degree in analytical fields (physics to organizational psychology).10 Google took the approach building HR practices with ongoing fact-based analysis rather that commonly accepted best practices. Many best practices are actually myths rather than facts.

What are your next steps?

  • Document the past performance of the company, including economic profit, and impact on key ecosystem members such as customers.
  • Outline the future scenarios for your company.
  • Define the required skills, knowledge, experience, networks, values, morals, and ethics required by each board director and C-Suite member to enable success in the future scenarios.
  • Assess your board and C-Suite relative to the above requirements.
  • Assess your competition’s board and C-Suite relative to the above requirements.
  • Identify: improvements to be made to existing directors and C-Suite, members to exit, and members to appoint.

 Footnotes:

1 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, 49

2 Ibid., 53

3 Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds)

4 Laszio Bock, Work Rules (New York: Hatchette Book Group, 2015), 182

5 Ibid., 294

6 Ibid., 91

7 Ibid., 91

8 Ibid., 91

9 Ibid., 103

10 Ibid., 361