How to assess director and CEO candidates – regarding values, morals, and ethics. (V2)

There have been numerous corporate scandals, with questions as to “where were the directors?”  It is up to each board to establish a common understanding of, and commitment to, what they mean by values, morals, and ethics.  Based on this common understanding, the board can then assess director and CEO candidates. This document is a tool designed to enable discussion leading to that common understanding

This tool does not provide any recommendations or advice as to what are appropriate values, morals, and ethics. The focus on possible behavioural questions (i.e., can be confirmed via reference checking) to ask director and CEO candidates.  Skills or functional competencies are not addressed.  Each board should identify additional questions.  This tool is illustrative and not intended to be a comprehensive set of questions.

The nomination committee/board should have a discussion on each question and document:

  • What might be good, OK, or unacceptable answers.
  • Which answers would eliminate the candidate from further consideration.

Directors and the CEO should be passionately committed to the purpose of the company

What is the purpose of the company? Why does the company exist? The description of the purpose of the company should be positive and outwardly focused on how you benefit customers and society.  For example, Nike’s “authentic athletic performance,” rather than “sell lots of shoes made in China.”  Is the purpose of the corporation to make as much money as possible? How should the company benefit society?  Or, should it?

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors.”1

The passionate commitment to purpose will set the tone from the top and quickly percolate throughout the company.  The purpose is the foundation upon which values, morals, and ethics are based.

I do not have any suggestions as to how to assess a candidate’s passionate commitment to purpose.  It will be clear within a year if a director or CEO doesn’t have passionate commitment to the purpose – which presents a major decision for the board to make.

Which director decision has the greatest impact on long-term corporate value?

Many would advocate this decision is the appointment (or termination) of the CEO.  Let’s first consider some possible questions to ask each director candidate who would have to vote on CEO appointment or termination.

  • What is the most senior level position you have terminated?
    1. Why? Performance (i.e. impact on profit or value creation and preservation)? Non-compliance with laws, regulations or company policies? Ethics or values?
  • Looking back over your career, what’s an example of person you decided not to hire or promote, due to ethics or values?
    1. What were the ethics and values issues?
  • What is the most senior level person you either appointed or recommended for appointment?
    1. What were the three most important reasons for that decision?
  • As you look back over the people you have appointed or recommended for appointment, what was your greatest mistake? How did you determine it was a mistake?  How did your correct your mistake? What have you done differently since then, when appointing people, or recommending appointments?

Now, let’s look at the values, morals, and ethics questions that you could ask of both director and CEO candidates:

  • What is the most courageous business action you’ve taken, and what was the impact on company profit, your career, and your family’s financial situation?
  • What was the most difficult ethical business decision you have made, and what was the impact on company profit? What definition of ethics did you have in this situation?
  • What has been the greatest crisis you have had to resolve? What was your role?
  • When dealing with an issue, what is an example of how your probed deeper into the company to understand the causes of the issue?
  • What is the biggest issue or problem you’ve encountered where you wished you’d informed the board earlier?
  • What was the most significant issue regarding ethics, values or morals, which a subordinate or colleague brought to your attention? How did you deal with it?

The following questions address the beliefs a candidate has:

  • Should a company invest in a country, or have operations in a country, in which:
    1. Child labour is common.
    2. The rule of law does not apply i.e., the government or highly placed individual are not subject to the laws, and the judiciary is not independent.
    3. The press is not free.
    4. Doing business requires payments to government officials or other highly placed individuals.
    5. The government is not elected in a freely democratic process.
  • Should the company arrange its legal structure to minimize taxes, ideally to pay no taxes?
  • Should the company lobby governments to change laws to reduce company taxation?
  • What would be your answers for the first three questions if the country in question was your home country, such as Canada? If your answers differ, why do they differ?

 Footnotes:

1 https://corpgov.law.harvard.edu/2018/01/17/a-sense-of-purpose/

What are the decision-making challenges faced by directors? (V2)

Directors face five challenges in making decisions:

#1 Have the directors agreed upon which decisions are most critical, and agreed upon the criteria for selecting those decisions?

  • Is the criterion: what has the greatest impact on long-term value creation and preservation?
  • Are the critical decisions: setting the strategy; hiring/terminating CEO; approving CEOs strategic implementation plan; monitoring results of executing the CEOs plan?

#2 Do the directors understand the company?

A McKinsey survey of directors1 revealed:

  • 34% agreed their board fully comprehended strategies.
  • 22% said boards completely aware of how firms created value.
  • 16% said boards had strong understanding of industry dynamics.

#3 Does each individual director have the qualifications to make each critical decision?

  • What have been each director’s past experiences in making each critical decision?
  • What is each director’s relevant knowledge and experience regarding the industry, company strategy, and how the company creates value?
  • What have been the past outcomes of each director assessing and selecting advisors?
  • What are the value, morals, and ethics of each director?
  • Do the directors have the interest, ability, and commitment to understand the company and its industry?

#4 Is there an effective board decision-making process?

  • A McKinsey survey of executives2 revealed 28% of executives thought good strategic decisions were frequent.
  • Critical decisions are complex emotional, social, and political processes. Do the directors understand the typical flaws, and take mitigating actions?

#5 The director selection process is almost always flawed.

  • Directors are ultimately responsible for the long-term success of the corporation.3
  • The vast majority of public company directors fail to achieve long-term success.

Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said:  “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”    http://www.csisoftware.com/wp-content/uploads/2018/04/Presidents-Letter-April-2018-Final.pdf

Few major companies survive for the long-term:

  • 16% of major companies in 1962 survived until 1998.4
  • Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.4
  • 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.5
  • 52% of Fortune 500 companies went bankrupt, were acquired, or disappeared between 2000-2015.6
  • 50% of the S&P 500 will not be on the list in 10 years’ time.7
  • Three-quarters of VC-backed firms do not even return all of the investors’ capital. Over 95% do not meet initial projections.8

Why are there so few qualified directors?

The background of many directors does not qualify them to make board-level decisions in today’s rapidly changing world.

  • Many directors are business executive who were not CEOs or members of the C-suite. They were successful because they rose through the ranks of existing companies.  They never had to make company-wide decisions.
  • Some directors are consultants, academics, and others who have never had major P&L or operational accountability.
  • I wonder about why directors who are not qualified to occupy C-suite positions are qualified to make decisions such as whether to: hire a CEO or fire a CEO; sell the company; approve or reject the CEO’s strategy or budget, etc.

Your next steps:

  • To enable discussion with your board and management, download the following one-page PDF.

What are the decision-making challenges faced by directors?

  • Does each director state the board is ultimately responsible for the long-term success of the company? If the board does not agree on this, proceed no further.
  • Document which are the critical board decisions.
  • Define the value creation matrix: what skills, experience, values, morals, and ethics are required to make each of those decisions.
  • Assess each director and remove the unqualified directors immediately, or at the next annual general meeting.
  • Assess future director candidates using the value creation matrix.

This process must be repeated yearly.  In today’s fast-changing world, yesterday’s solutions are not always appropriate for tomorrow’s problems.  Remember: innovation, agility, and transformation start at the top – at the board.

 Footnotes

1 “Corporate Boards need a facelift”, Eric Kutcher, McKinsey, May 04, 2018

2 “The case for behavioural strategy”, McKinsey Quarterly, 2010 Number 2

3 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/

4 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

5 “Unstoppable” by Chris Zook, 2007, page 7

6 Accenture 2016

7 “2018 Longevity Report” by Innosight Consulting

8  Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal,  https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012

How to start an advisory board

1      What is the purpose of this document?

2      What is the value of an advisory board?

2.1       What is an advisory board?

2.2       How is an advisory board different from a group of advisors?

2.3       How do you measure advisory board value?

2.4       What are the major benefits of an advisory board, as perceived by companies with advisory boards?

2.5       Who has advisory boards?

2.6       How do you recruit advisory boards?

2.7       How do you organize an advisory board?

3      Do you have the capability for an advisory board?

3.1       The CEO has time available

3.2       The CEO has a plan with milestones

3.3       The CEO has a cash flow forecast, budget, and tracking process.

4      How do you get people to serve on your advisory board?

4.1       Document the initial set of mutual expectations

4.2       Send a formal invitation letter to the advisor candidate.

4.3       Invite the best people.

4.4       Advisors may change over time.

5      Sample advisory board invitation letter.

5.1       Your company letterhead.

5.2       Start out with your ask.

5.3       Pitch What are the benefits to this advisory board member?

5.4       Overview of the Company – 1-2 sentences per topic area.

5.5       Advisory board’s mandate and focus – What are the advisory board’s goals?)

5.6       Responsibilities of board members.

5.7       (Close and thank you)

6      Follow Up Your Board Invitation Letter.

7      First meeting of the advisory board.

7.1       Plan the First Meeting Agenda Around a Problem or Discussion Topic.

7.2       Gather the Relevant Background Material

7.3       Create the Meeting Agenda.

7.4       Make Arrangements for Recording the Meeting Minutes

7.5       Provide refreshments

7.6       What might an agenda look like?

7.7       Begin Future Meetings With a Review of Previous Minutes

8      Footnotes

 

1       What is the purpose of this document?

This document outlines how to create an advisory board and the agenda for the first meeting.  This document must be adapted and revised for you specific situation.

The audience for this document is CEOs and founder

 

2       What is the value of an advisory board?

Advisory boards have a major impact on sales and productivity, comparing the three years after an advisory board vs the three years before an advisory board:  sales growth of 67% vs 23% and productivity growth of 6% vs 3%.1

2.1      What is an advisory board?

A group of independent people who advise the CEO (or board of directors) on specific problems and meet on a regular basis.  The advisory board has no voting authority and company has no legal obligation to follow advice.

The board is independent.  Ideally the advisors have no other business arrangement with the company other than being on the advisory board.  If the advisors have other financial arrangements, their advice may be biased.

2.2      How is an advisory board different from a group of advisors?

Every CEO/Founder has informal advisors.  The advisors know little or nothing about the company, answer very specific pointed questions and devote little time to the company. The engagement with the CEO/Founder is sporadic and ad-doc.

An advisory board has scheduled involvement with the CEO/Founder.  The advisors have an understanding of the company based upon their ongoing involvement as well as the information provided to them by the CEO/Founder.  The advisors have made a long-term commitment of time to the company, a few hours a month or more.

2.3      How do you measure advisory board value?

There can be two sets of “hard metrics”, especially if it is possible to compare the times before and after the advisory board creation, as well as comparison of any improvements relative to industry benchmarks.

  • What is the impact on sales, earnings, and productivity?
  • What is the impact on key business milestones, growth, and innovation?

It can be difficult to establish a direct cause-and-effect relationship between the advisory board advice and business results.  A key indicator can be whether or not the advisory board impacts the decisions made by the CEO (or by the board of directors).

2.4      What are the major benefits of an advisory board, as perceived by companies with advisory boards?

85% of business leaders believe that the advisory board had a significant impact on success.2

Some of the benefits, according to business leaders (rating on a scale of 1 to 10):3

  • Is an essential tool 8.2
  • Allows you to develop a broader vision 8.0
  • Improves strategic business choices 8.0
  • Forces management to look at the company 7.5
  • Challenges the company’s management team 7.5
  • Puts in place a better management structure 7.4
  • Brings rigour in to the company 7.2
  • Reassures shareholders and investors 7.2
  • Avoids costly mistakes 6.7

What are some of the impacts of an advisory board, according to the business leaders (on a scale of 1 to 10):4

  • Company vision 7.7
  • Innovation 6.9
  • Risk management 6.8
  • Profitability 6.8
  • Survival 6.6
  • Sales growth 6.6
  • Hiring the best employees 6.2

2.5      Who has advisory boards?

  • 75% of SMEs (Small Medium Enterprises)5 have no board. 19% have a board of directors only. 6% have an advisory board (Half of those also have a board of directors)6
  • 11% of companies with more than 100 employees have an advisory board.7

2.6      How do you recruit advisory boards?

56% of the advisories come from the company’s network, 8% from external recruiting such as associations, only 3% from company’s financial institution or investors.8

2.7      How do you organize an advisory board?

  • You need to determine the skills and experience required on your advisory board. Look at your 2-5 year business forecast.  What are the opportunities and challenges over that time-horizon?  What is the talent (skills and experience) you need?  What are the talent gaps when you look at the management team (and board of directors) What is the talent you need on your advisory board?
  • The written advisory board mandate must have the objectives, terms of reference and time commitment. Each advisor commits to reading preparatory documents, actively participating in the meetings and follow-up.  The mandate also addresses advisor out-of-pocket expenses and compensation (if any). If business development is a role, then there can be performance bonuses based on business development results.  The mandate may be the set of mutual expectations i.e. expectations of the CEO/Founder and of the advisors.
  • The mandate must be clear – are the advisors expected to act in the best interests of the owner(s) or the best interests of a broader set of stakeholders? For example, a recapitalization could provide capital to the owner but risk the long-term viability of the company.
  • It must be clear how the company and advisory board interact. (e.g. meetings only with the CEO or including C-Suite members?  Are all questions (from management and advisors) funneled through the CEO?  The advisory board may meet weekly, monthly, quarterly as well as urgent ad-hoc meetings.
  • Is there an advisory board chair? If so, the role of the chair is crucial, working with management, the board of directors, and the advisory board members.
  • The individual advisor roles must be clear, e.g. help develop business by opening doors, act as a company ambassador at social events, etc.
  • Individual advisors bring specialized experience, knowledge and contacts which the board of directors does not have. The advisor capabilities are not a replacement for capabilities which should be on the board of directors or management, but rather be complementary.
  • Each advisor must also have a degree of passion and interest in the business.
  • The advisory board has simpler processes than a board of directors, does not require elections, term limits, committees, public disclosure, etc.

3       Do you have the capability for an advisory board?

You have three pre-requisites for your creation of an advisory board.  Much of the focus is on having the documented thinking of the CEO/Founder and documented company plans and results.  If there are no documents, then its too early for an advisory board.  The CEO may have advisors with whom she has an ad-hoc relationship.

3.1      The CEO has time available

The CEO has the time to prepare for meetings, have the meetings, and follow-up from the meetings.  This implies that there are enough team members to allow the CEO to delegate some of her work.  If the company consists of one sole founder, then it’s too early for an advisory board.

3.2      The CEO has a plan with milestones.

The CEO must have a documented set of future milestones.  There is a least an assumption of the company’s future path.  If the CEO has not documented what the company will be achieving in future, it’s to early for an advisory board.  The role of an advisor is not to document where the company is going.

The advisor will help the CEO think through how to achieve critical milestones.

3.3      The CEO has a cash flow forecast, budget, and tracking process.

The cash flow forecast, budget, and tracking process is directly tied to the set of milestones.  There must be a set of documented assumptions as to what resources are required to achieve milestones.  If the CEO has no documented set of assumptions as to the cash required to achieve critical milestones, it’s too early for an advisory board

4       How do you get people to serve on your advisory board?

When talking with prospective members, focus on two things:

  • The impact the advisor will have on the CEO/founders and on the company. People won’t want to be an advisor if they are asked for advice on minor issues and if the CEO/Founder regularly ignores most of the advice.
  • The benefits to the advisor of being on an advisory board, which could include:
    1. Learning new ideas and getting new perspectives.
    2. Expanding their network.
    3. The personal satisfaction of helping a CEO/founder and company succeed.
  • Compensation is not a reason people join an advisory board. If the advisor puts in significant time or when the company goes beyond the startup stage, then compensation is warranted.

Advisors come from the CEO/founders network.  The network may also suggest advisors.

4.1      Document the initial set of mutual expectations

Document the initial set of mutual expectations:

  • What expectations the founder(s) have of the advisory board and of each advisor. E.g.
    1. Hours per month?
    2. Meetings during the business day? During evening? During weekend?
    3. In person meetings or via Skype?
    4. Reading material before each meeting?
    5. Any follow-up from meetings?
    6. Responding to emails and phone calls between meetings?
    7. Investing in the company?
    8. Doing introductions: to potential customers, partners, suppliers, employees?
    9. Represent the company at social events?
    10. Attend meetings with founders?
    11. Attend meetings with potential customers, suppliers, partners, employees?
    12. Attend internal project meetings?
    13. Review and comment on material produced by the company?
  • What expectation each advisor has of the founders.
  • Expectations may be different for each individual advisor

4.2      Send a formal invitation letter to the advisor candidate

The letter needs to include:

  • A brief overview of the company
  • The advisory board’s mandate and role.
  • the responsibility of the advisors and the time commitment expected (how often the board will meet and for how long)
  • Why you think the person would be a great addition
  • The specific contribution the person would make.

4.3      Invite the best people

You have identified the capabilities you need on your advisory board.  Invite the best people you know.  If they are not part of your network, ask someone in your network for an introduction.  You can also cold call them.

4.4      Advisors may change over time

The advisors you have when you are pre-seed with no satisfied customers and no revenue may be different from the advisors you have when you are a global unicorn about to do an IPO

5       Sample advisory board invitation letter

The following draft invitation letter must be sent after you’ve connected with a prospective advisor and have drafted a draft mutual set of expectations.  Note that there is a fixed time frame for the appointment.  The CEO/founder may at any time for any reason end the appointment of the advisor to the advisory board. The letter must be customized for each advisor.

5.1      Your company letterhead

(Prospective Board Member’s Name and Address)

(Date)

Dear (Board Member’s Name):

5.2      Start out with your ask

I’m pleased to invite you to become a member of the FastGrowth Business Advisory for 20__ – __.

5.3      Pitch What are the benefits to this advisory board member?


FastGrowth is one of the AR (Augmented Reality) industry leaders. You have the opportunity to shape the global growth of this industry and literally change how humanity views the world.

FastGrowth is entering the next stage of its business evolution. Growing from 10 to 50 employees in the next 24 months requires reinvention of every aspect of the business: talent, technology, and processes.

Your experience and insight would be the perfect person to help me think through the critical changes and deal with the issues.

I will cover nominal expenses you incur from attending advisory board meetings such as parking.  I don’t expect you to fly in for the meetings.

5.4      Overview of the Company – 1-2 sentences per topic area

FastGrowth was founded in 2014. Currently,

Target customers are …….

Their problems are ….

Our solution is ……….

In 24 months,

Target customers will be ………….

Their problems will be ………….

Our solution will be ……………

 

5.5      Advisory board’s mandate and focus – What are the advisory board’s goals?)

The main purpose of FastGrowth’s Business Advisory Board is to provide management advice about the direction the company should follow. Specific goals for this year are how the company can get ready for Series B funding and manage the deployment of those funds.

5.6      Responsibilities of board members

The Board will have an initial face-to-face 2-hour meeting.  Subsequently, there will be a monthly 1-hour conference call, with a 2-hour face-to-face meeting quarterly.  Your time commitment is approximately 5 hours per month.  You will also need to sign a confidentiality agreement.

5.7      (Close and thank you)

Thank you for considering being a part of FastGrowth’s Advisory Board. I will call you within 7 days. I’m available to discuss any questions you may have. You can reach me by phone at (phone number) or via email at (email address).

Sincerely,

(Your signature)

Name
Title

 

6       Follow Up Your Board Invitation Letter

Follow up your letter with a phone call. If your prospective advisory board member does not have time to talk with you, they will not have time to be on your board.

7       First meeting of the advisory board

7.1      Plan the First Meeting Agenda Around a Problem or Discussion Topic

Your first meeting, therefore, like all your Advisory Board meetings, needs to be planned around a question or problem. You might find it easiest to ​state the problem as a goal. For instance, “We want to raised Series B funds in 9 months time. How might we do this?” Or there may be a general topic “How can we cut our business costs?”

7.2      Gather the Relevant Background Materials

  • Once you’ve decided on the discussion topic, it’s time to gather the materials that your Advisory Board members will need to read before the meeting.
  • Because this is the first Advisory Board meeting, you should include a business plan and any other documents pertinent to the discussion topic, such as charts, graphs and fact sheets illustrating the background of the discussion topic.
  • You should send a copy of these documents to all Advisory Board members one weeks in advance, along with a copy of the agenda. You can distribute material by providing the Advisory Board with access to an online data room.  Later stage companies should use a Board of Directors software packing to manage information distribution.

7.3      Create the Meeting Agenda

  • Below is an example of a first meeting agenda (with comments for running the meeting efficiently) that you need to revised and adopt for your first Advisory Board meeting.
  • Each agenda item is timed; building a time schedule into your meeting and sticking to it ensures that your meeting doesn’t get bogged down and stimulates on-topic discussion.
  • There is no presentation of the pre-reading material. The focus on the meeting if the CEO/Founder learning from the group discussion.
  • Every advisory board meeting must start with the CEO/founders 1-5 minute pitch. The details supporting the pitch are available in the data room for the advisors.

7.4      Make Arrangements for Recording the Meeting Minutes

Make some arrangements for recording the minutes of the meeting. Don’t try to do this yourself; you need to be able to participate fully by listening and contributing. If you don’t have someone who can attend and serve as a secretary, ask an Advisory Board member to record the meeting.

The minutes are brief and capture:

  • What was the discussion topic?
  • What were the issues, challenges?
  • What were the decisions and next steps?

Lots of the discussion will be on flip charts, whiteboard, or electronic meeting software.  The minutes are not intended to capture every word said.

7.5      Provide refreshments

Provide beverage (coffee, tea, water, etc.). Food is required depending upon when the meeting is held, your advisors are busy people.  E.g. Early morning meeting – breakfast; Mid morning meetings – snacks; Mid day meeting – lunch; Afternoon meeting – snacks; Evening meeting dinner.

Food can be sandwiches, pizza etc.  You will have to learn any food allergies and preferences of your advisors.

7.6      What might an agenda look like?

The sample advisory board meeting agenda below includes suggested activities with notes to guide you through the meeting process. You will have to change this to meet your company’s specific situation

[Your Company Name]

Agenda

[Date]

[Location] 

Beginning/Ending Time Activity
7:00 – 7:05 am Introductions
(Assuming your Advisory Board members haven’t met, introduce yourself and all the Board members, giving a brief outline of their expertise.)
7:05 – 7:10 am Why an Advisory Board?
(A brief statement of how you see the Advisory Board operating and the contributions you hope the Advisory Board can make to your company. Include details such as how often the Board will meet.)
7:10 – 7:20 am Questions
(If there are any. If there aren’t, ask your Board Members how they see the Advisory Board operating and how they hope to contribute.)
7:20 – 7:25 am The CEO/Founder does her 1-5 minute pitch
Discussion Topic: [Insert Your Question/Problem Statement Here]
7:25 – 7:30 am Presentation of the Discussion Topic
(An outline of the history of the topic and how it’s presently affecting the company; refrain from giving your views/solutions at this point.)
7:30 – 8:35 am Discussion
(You want to keep the ideas flowing at this stage; don’t reject or dismiss ideas at this point. Do contribute your ideas/views, too.)
8:35 – 8:50 am Proposals/Resolutions
(Evaluating the ideas the group has heard and choosing the best “solutions”.)
8:50 – 8:55 am Summary
(Summarize the topic, the discussion, and the results for the group and tell them what you plan to do.)
8:55 – 8:58 am The CEO/Founder states what has been the value, if any, of the meeting]
8:58 – 9:00 am Schedule of future meetings
9:00 am Adjournment

 

7.7      Begin Future Meetings With a Review of Previous Minutes

The minutes are in the pre-prereading material.  The minutes will show unresolved issues as well as the CEO/Founders decisions and planned actions.  The review will update everyone on the outcomes of the decisions/actions.

8       Footnotes

Advisory Boards: An untapped resource for businesses  March 2014  Business Development Bank of Canada https://www.bdc.ca/en/Documents/analysis_research/bdc_study_advisory_boards.PDF

1 Page 1

2 Page 10

3 Page 9

4 Page 10

6 Page 6

7 Page 11

 

5 Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

 

 

 

 

 

 

 

 

How can founders and investors create a shareholders agreement?

How can founders and investors create a Unanimous Shareholders Agreement?

1      Purpose of this document

2      How to read and use this document

3      What is a Founders Agreement?

4      What is a USA  (Unanimous Shareholders Agreement)?

4.1       What are the benefits of a USA?

5      How does a USA fit into the overall governance structure?

6      What are the stakeholder expectations?

7      What questions does the founders agreement address?

8      How does the term sheet reflect stakeholder expectations?

8.1       Questions to consider in the term sheet include:

9      How does the USA reflect stakeholder expectations?

9.1       Generic contents

9.2       Decision Making.

9.2.1        Shareholders.

9.2.2        Board of Directors.

9.3       Sale or transfer of shares

9.3.1        Forced shareholder exit

9.3.2        Shotgun provision.

9.3.3        Right of first refusal

9.3.4        Tag-a-long or piggyback.

9.3.5        Drag-along rights.

9.3.6        Option to purchase/call rights.

9.3.7        Option to sell/put right

9.3.8        Auction.

9.4       Issuing additional stock or options

9.5       Dispute resolution.

9.6       Information Rights

9.7       Amending the shareholders agreement.

 

1       Purpose of this document

This document is a tool to help the founders and shareholders of a private corporation develop a common understanding of expectations and objectives.  This common understanding can then enable lawyers to craft a USA (Unanimous Shareholders Agreement).  This tool can be used to both review an existing USA as well as craft a new or revised USA.

The critical action is to document the expectations of the founders and shareholders before starting to spend money on lawyers to develop a USA.  Once the expectations are documented, then any issue can be discussed and resolved, leading to a set of common expectations which can guide the lawyers.

This document poses a series of questions, to stimulate thinking and discussion.  This is not a comprehensive list of questions. It is up to the founders and shareholders to make decisions.  This document does not make recommendation nor does it provide legal advice.  Legal advice must be obtained from qualified lawyers.  A Strategic Advisor can help you think through your answers to the questions.

 

2       How to read and use this document

The co-founders and shareholders will be referred to as “stakeholders”.

The document is organized to 6 groups:

  • What is a USA and what are the benefits?
  • How does the USA fit into the overall governance structure?
  • What are the stakeholder expectations?
  • What is a founders agreement?
  • How does the term sheet reflect stakeholder expectations?
  • How does the USA reflect stakeholder expectations?

The point of view of each stakeholder should be documented for each question.

 

3       What is a USA  (Unanimous Shareholders Agreement)?

The Canada Business Corporations Act defines a USA as “…written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation.”  All shareholders must sign and be part of the USA

3.1      What are the benefits of a USA?

The USA typically contains provisions in two main areas: decision making and share transfers, which are particularly helpful in the case of deadlocks or an unexpected shift in share ownership as a result, for example, of the bankruptcy or death of a shareholder. A USA is generally recommended whenever there are two or more shareholders in a closely held corporation.

The process of establishing a USA defines expectations and creates provisions which will ideally prevent lengthy, expensive, and potentially damaging disputes in the future.

 

4       How does a USA fit into the overall governance structure?

Governance is simply the definition of who makes what company decisions and the process for making those decisions.

  • The founders agreement may be used before there is any legal entity in order to define key decision making roles.
  • The articles of incorporation may limit the actions and decision of stakeholders.
  • The by-laws, which are approved by shareholders, limit the decisions and actions of the board of directors and management.
  • The board of directors, according to the Canada Business Corporations Act “…shall manage, or supervise the management of, the business and affairs of a corporation.” The board of directors mandate may specify which decisions are reserved for the board
  • Board of directors approved policies may constrain the decisions of management and the board. The board of course can approve an exception to any constraints it has placed on itself.  The Board of Directors committee mandates may specify which decisions are made by the committee.
  • The Delegation of Authority to the CEO may specify that the CEO may make all decisions, subject to board of directors approved policies, and except those decisions specifically reserved for the board or shareholders. The Board of Directors and stakeholders still have the authority to veto any decision made by the CEO as well as make any decision which may have been delegated to the CEO.
  • Loans, other financing, and other corporate agreements with third parties may have covenants which in specific situations may provide decision rights to third parties or limit the decision rights of the stakeholders.
  • The USA may specify which decisions are reserved for shareholders and which for the board of directors. The USA takes precedence over any by-laws, board of directors decisions, board approved policies, and management decisions. A unanimous shareholders resolution may be able to make any legal decision, regardless of bylaws, existing unanimous shareholders agreement, or other governance documents, except for the articles of incorporation.  The company must file with Corporations Canada (if federally incorporated) to amend the articles of incorporation.
  • Decision making authority and constraints may also be defined in other documents such as: Share Purchase Agreement or Investor Rights Agreement. Seek to reduce the number of documents which define decision making authority or constraints. Simplicity enables greater common understanding and reduces the costs of creating and maintaining legal documents.

 

 

5       What are the stakeholder expectations?

You should document the stakeholder expectations, which may include the following questions.  The intent is to identify where there are common expectations as well as disagreements. As the stakeholders review and discuss their expectations, they may revise their expectations.

The stakeholder expectations are the foundation for preparing the founders agreement, term sheet and USA.  When issues arise with the founders agreement, term sheet or USA, revisit and revise if necessary, the documented expectations. Do not attempt to come to agreement on expectations by spending large legal fee to revised term sheets and USAs.

In my experience, the agreement on stakeholder expectations may take several months.

  • Why does the company exist?
  • Why is the stakeholder involved?
    1. Make a positive impact on society?
    2. Have a positive impact on stakeholders reputation?
    3. Make money?
    4. Some other reason?
  • What are the stakeholders’ specific objectives?
    1. Realize x times return on investment within y years?
    2. Sell the business within x years?
    3. Growing the value of the company year over year?
    4. What are the key milestones?
  • What is the scope of the business?
    1. Geography?
    2. Nature of the business?
    3. What the business cannot do?
  • What contribution will each stakeholder make?
    1. Capital?
    2. Introductions to potential customers?
    3. Introductions to potential employees?
    4. Introductions to potential suppliers?
    5. Expertise relevant to the business?
    6. Time devoted to the business?
  • How will the stakeholder realize financial value from the business?
    1. Sale of equity?
    2. Sale of business, followed by cash to shareholders?
    3. Dividends?
    4. Fees, salary, or other compensation?
    5. Products and services provided by the business, perhaps at cost?
    6. Other ways?

 

6       What is a Founders Agreement?

The founders of a company may have an agreement before the company is incorporated and a shareholders agreement put into place.  This agreement may or may not be a legal document signed by the founders.  Even if signed, it may only be an intent rather than legally binding on future actions.

6.1      What questions does the founders agreement address?

The following are some of the questions a founders agreement may address.

  • What objectives and timelines does each founder have for the startup and for themselves?
  • Who gets what percentage of the company?
    1. Will the percentage depend upon vesting over time and continued involvement in the company?
  • What will each founder contribute?
    1. Number of hours?
    2. Capital?
    3. Finding customers?
    4. Finding capital?
    5. Creating the product or service?
  • How are key decisions made?
    1. Who will be the CEO?
    2. Unanimous? Majority? CEO only?
    3. What will be the founders salaries, if any?
  • What if a founder wants to leave? Can the other founders buy the equity? And at what price?
  • What happens if a founder becomes disabled or dies?
  • What happens if a founder wants to sell the company or kill the company?
  • What happens if it takes longer than expected to launch the company?
  • Can a founder work on other startups while launching this company?
  • What are reasons for removing a founder as an employee?
  • What happens if a founder does not fulfill the founders agreement?
  • If the business does not succeed, can a founder try again?
  • How much of the company are the founders willing to give up for how much capital?

 

7       How does the term sheet reflect stakeholder expectations?

  • Once the stakeholders have a set of shared expectations, with no fatal disagreements, a legal document know as the Term Sheet is prepared. The purpose of the term sheet is to outline the terms by which an investor will make a financial investment in company. The term sheet is not a legally binding document, with the exception of items such as confidentiality.
  • There may be a negotiation process around the term sheet.
  • Once the term sheet is signed, then the USA can be created (often with more negotiation) as well as the legal documents associated with funding and the other items in the term sheet.

7.1      Questions to consider in the term sheet include:

  • What type of securities are being offered to investors? E.g. common stock? Class A preferred?
  • What happens to the investors investment in the event the company is liquidated?
  • What conversion rights, if any, will the security provide?
  • What are the voting rights?
  • What must be in the shareholders agreement?
    1. What will be the information rights?
    2. What key protections will the investor have?
    3. What pre-emptive rights will the investor have, to prevent dilution?
    4. What happens if any shareholder wished to sell?
    5. How are directors elected?
      1. Will the be a shareholder representative?
    6. How do you define “sale of the company”?
  • What will be the size of the option pool?
  • How many years will the share purchase agreement survive?
    1. Will there by any key representation and warranty items?
  • What will be the founders terms?
    1. What will the founders transfer to the company e.g. intellectual property?
    2. Will the founders have an employment agreement?
    3. What are the terms regarding founders vesting?
  • Will the company pay for investors legal fees?
  • How long is the term sheet valid for?
  • Will the founders be prohibited from soliciting other financing during the time the term sheet is valid?

 

8       How does the USA reflect stakeholder expectations?

8.1      Generic contents

Some of the generic contents include:

  • Is there a table of contents for the shareholders agreement?
  • Is there a statement that this is a unanimous shareholders agreement?
  • Does the shareholders agreement relieve directors of obligations and liabilities regarding decisions make by the shareholders?
  • Does the shareholders agreement prevail over articles of incorporation and by-laws?
  • Is the business defined?
  • Are the business objectives defined?
  • Are there definitions and principles of interpretation?
  • Confidentiality?
  • List of shareholders and shares owned?

8.2      Decision Making

Which decisions are reserved for shareholders and which for directors? The following illustrates some possible decision.  These are neither recommendations nor advice as to who makes the decisions.

8.2.1     Shareholders

  • Shareholder meetings
    1. How many shareholder meetings per year?
  • Are there shareholder representatives and can those representatives bind the shareholders?
  • What is quorum for shareholder meetings? Does the quorum consider any required representation from each shareholder?
  • Do decisions of the shareholder representatives need to be unanimous?
  • What decisions are reserved for shareholders?
    1. Changes to the shareholders agreement?
    2. Changes to capital?
    3. Changes to board size?
    4. Material changes to the business and business objectives?
    5. Mergers or acquisitions?
    6. Sale of the company or major assets?
    7. Going public via IPO or direct listing?
    8. Major financing?
    9. Approval of any contracts which limit the decision-making authority of the shareholders?
    10. Appointment of auditors?
    11. Appointment, termination, and compensation of CEO?

8.2.2     Board of Directors

  • What happens if one of the directors dies or is incapacitated?
  • Do specific stakeholders have the right to appoint a certain number of directors?
  • Do founders have certain rights to nominate certain number of directors?
  • Is the process for appointing board chair defined?
  • How is director compensation (if any) set?
  • What is the minimum number of yearly board meetings?
  • What is the process for calling an emergency board meeting?
  • What is board meeting quorum? What quorum requirements exist regarding director(s) nominated by each stakeholder?
  • How many directors are required to approve a resolution?
  • What are the specific decisions reserved for the board of directors, if any?
    1. Approval of strategic/business pans and related budgets? If so, what must be in these documents?
    2. Approval of material modifications to strategic/business plans and budgets?
    3. Appointment, termination, and compensation of all officers, other than the CEO?
    4. Financing?
    5. Capital expenditures?
    6. Dividends or other return of capital?
    7. Material accounting or tax policies?
    8. What committees, if any, of the board exist?
    9. What are the key responsibilities of each committee?
    10. How is the composition of each committee determined?
    11. Will the committees have any decision-making authority?
    12. What are the minimum number of yearly committee meetings?

8.3      Sale or transfer of shares

  • What is the process?
  • What are the restrictions?

8.3.1     Forced shareholder exit

  • If a shareholder is an individual, what happens if: shareholder dies, is incapacitated, declares bankruptcy, divorces, etc.
  • If a shareholder is a company, trust, etc. what happens if: there is a change of control, bankruptcy, change in leadership of the other company, etc.

8.3.2     Shotgun provision

  • Is there a shotgun provision? (Usually only for a 50/50 two shareholder situation. Allows shareholder A to buy out shareholder B. After A makes the offer, then shareholder B can buy out shareholder A at the same price.)

8.3.3     Right of first refusal

  • Is there a right of first refusal? (This gives a shareholder the option to purchase the shares of another shareholder before they are sold to a third party.)

8.3.4     Tag-a-long or piggyback

  • Is there a tag-a-long right? (The minority shareholder has the option to block the sale of the majority shareholders, unless minority can sell at the same terms.)

8.3.5     Drag-along rights

  • Are there drag-along rights? (The major shareholder has the option to force the minority shareholders to sell at the same terms)

8.3.6     Option to purchase/call rights

  • Does a shareholder have the option to purchase the shares of another shareholder?
  • What are the terms and conditions?

8.3.7     Option to sell/put right

  • Does a shareholder have the right to force another shareholder to purchase the right holder’s shares?
  • What are the terms and conditions?

8.3.8     Auction

  • If there is a fundamental disagreement among the shareholders, is there an auction process. (Each shareholder would submit sealed bids for the shares in question. The highest bid wins the auction.

8.4      Issuing additional stock or options

  • Who makes decisions regarding the size of the stock option pool and issues of stock options?
  • Do existing shareholders have pre-emptive rights to purchase new shares issued?

8.5      Dispute resolution

  • Is there a dispute resolution process?
  • Is there binding arbitration?
  • How is the arbitrator selected?

8.6      Information Rights

  • What information must the corporation deliver to shareholders by what time?
  • Must the corporation provide to shareholders other financial and business information requested by the shareholders?

8.7      Amending the shareholders agreement

  • Is unanimous shareholder agreement required to amend the shareholders agreement or some percentage of the shareholders?

 

How can a startup benefit from an advisory board?

The advisory board provides value in two ways:

  • Helps the founders focus on what is important i.e. what are the future milestones.
  • Helps the founders deal with the challenges and issues associated with critical milestones.

The advisors draw upon their experience, skills, knowledge, and network.

The advisers act as coach, mentor, or instructor.

The base advisor commitment would be approximately five hours a month This would enable attendance (in person or electronically) at advisory board meetings (e.g. one hour a week, 2 hours twice a month, or two hours once a month), participation in quarterly strategy meetings, and brief responses to email requests.  A one hour meeting allows at most two issue to be discussed.

The base founder commitment is to share documented information with the advisory board regarding the issues to be discussed.

Each meeting requires an agenda plus written minutes (e.g. an next steps, any decision made, critical points of discussion.

The agenda issues may arise from both the founders and advisors.  E.g.Founders may not know what they don’t know.

The above is a description of an uncompensated startup advisory board.

A compensated (via equity) advisory board could require up to 20 hours a month from each advisor. The advisors could meet with potential customers, investors, strategic partners, employees, etc.  The advisors may make introductions to their network as well as assist on strategic projects.

Each startup advisory board should be clear on the reason for its being, the value expected, the objective(s), the process, and mutual commitments.  The members of the advisory board should fill expertise gaps which exist in the startup.

The above description drew upon the Founder Advisor Standard Template from the Founders Institute.

 

Why is governance essential for successfully scaling startups?

The management team relationships, and roles of the CEO/founder(s), shareholders, investors, and board of directors rapidly change in a successfully scaling startup. Who makes what decisions is rapidly changing.  A lack of clarity and common understanding of who makes what decisions and is accountable for what results can cause confusion, and slow down or prevent scaling.

The purpose of this article (supported by a one-page slide) is to provide a framework, process, and facts to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. There is no one-size-fits-all answer.  The approach and action plan will be unique to the specific situation of each corporation.

The CEO/Founder(s) may be in the most complex situation: shareholder(s) without investing capital, on the board of directors, and part of management.

Investors need to be clear on governance, their role and accountability before they invest.  Some decisions are reserved for the shareholders and outlined in the shareholders agreement.  The founder(s) may have special voting rights.  Some decisions are made by the board of directors. Therefore, the decisions made by the board, board composition, director nomination process, and board voting need to be clear.  The CEO can make all decisions, subject to those reserved for shareholders and the board.  The CEO must also manage the communications and ensure there is broad awareness of planned decisions and results.

A successfully scaling startup goes through many governance stages, based on the size of the company.

Less that 10 employees.  This is a shared experience with everyone in the team involved with everything.  The CEO/founder is involved in most decisions.  The board is involved in detail and driving after-the-fact documentation of policies.

More than 10 employees.  The team is starting to have clear decision-making roles and accountabilities for individuals.  Everyone is not involved in everything.  The CEO/founder is no longer involved in most decisions.

The board continues to be is involved in detail and driving after-the-fact documentation of policies.

More than 50 employees.  There needs to be a layer of management. The board continues to be is involved in detail and driving after-the-fact documentation of policies.

More than 100 employees.  The CEO is architecting the business.  What got the company to this point is not what will get it to the future.  The board role changes in alignment with the CEO’s changing role. The board is no longer involved in the detail. Staff is driving documentation of policies.  Board talent requirements change but director changes may be constrained by the shareholders agreement.

More than 200 employees.  There is more than one level of management. The CEO is focused on talent (acquisition, retention, development, and allocation) and organization design.  The CEO proactively over-communicates vision and values, while also sharing employee and customer experiences.

Conclusion

The management team relationships, and roles of the CEO/founder(s), shareholders, investors, and board of directors rapidly change in a successfully scaling startup. Who makes what decisions is rapidly changing.  A lack of clarity and common understanding of who makes what decisions and is accountable for what results can cause confusion, and slow down or prevent scaling.

Your next steps

To enable discussion with your board of directors, CEO, and advisory board download the following one-page slide:

Why is governance essential for successfully scaling startups?

Your action plan:

  • Select investors with the talent to enable scaling.
  • Select a director or advisory board member who can coach governance.
  • The CEO/founder needs to regularly communicate who is making what decisions, based on the vision and values.
  • The CEO/founder must manage the stress and resistance which arise because: some people will no longer be involved in certain decisions; people will be making decisions they have never made before.

What is the value of a for-profit advisory Board?

What is the value of a for-profit advisory board?

Advisory boards have a major impact on sales and productivity, comparing the three years after an advisory board vs the three years before an advisory board:  sales growth of 67% vs 23% and productivity growth of 6% vs 3%.1

What is an advisory board?

A group of independent people who advise the CEO (or board of directors) on specific problems and meet on a regular basis.  The advisory board has no voting authority the and company has no legal obligation to follow advice.

The board is independent.  Ideally the members have no other business arrangement with the company other than being on the advisory board.  If the members have other financial arrangements, their advice may be biased.

How do you measure value?

There can be two sets of “hard metrics”, especially if it is possible to compare the times before and after the advisory board creation, as well as comparison of any improvements relative to industry benchmarks.

  • What is the impact on sales, earnings, and productivity?
  • What is the impact on key business milestones, growth, and innovation?

It can be difficult to establish a direct cause-and-effect relationship between the advisory board actions and business results.  A key indicator can be whether or not the advisory board impacts the decisions made by the CEO (or by the board of directors).

What are the major benefits of an advisory board, as perceived by companies with advisory boards?

85% believe that the advisory board had a significant impact on success.2

Some of the benefits, according to business leaders (rating on a scale of 1 to 10):3

  • Is an essential tool 8.2
  • Allows you to develop a broader vision 8.0
  • Improves strategic business choices 8.0
  • Forces management to look at the company 7.5
  • Challenges the company’s management team 7.5
  • Puts in place a better management structure 7.4
  • Brings rigour in to the company 7.2
  • Reassures shareholders and investors 7.2
  • Avoids costly mistakes 6.7

What are some of the impacts of an advisory board, according to the business leaders (on a scale of 1 to 10):4

  • Company vision 7.7
  • Innovation 6.9
  • Risk management 6.8
  • Profitability 6.8
  • Survival 6.6
  • Sales growth 6.6
  • Hiring the best employees 6.2

Who has advisory boards?

  • 75% of SMEs (Small Medium Enterprises)5 have no board. 19% have a board of directors only. 6% have an advisory board (Half of those also have a board of directors)6
  • 11% of companies with more than 100 employees have an advisory board.7

How do you recruit advisory boards?

56% of the advisories come from the company’s network, 8% from external recruiting such as associations, only 3% from company’s financial institution or investors.8

How do you organize an advisory board?

  • You need to determine the skills and experience required on your advisory board. Look at you 3-5 year business forecast.  What are the opportunities and challenges over that time-horizon?  What is the talent (skills and experience) you need?  What are the talent gaps when you look at the management team (and board of directors) What is the talent you need on your advisory board.
  • The written advisory board mandate must have the objectives, terms of reference and time commitment. Each advisor commits to reading preparatory documents, actively participating in the meetings and follow-up.  The mandate also addresses advisor out-of-pocket expenses and compensation (if any). If business development is a role, then there can be performance bonuses based on business development results.
  • The mandate must be clear – are the advisors expected to act in the best interests of the owner(s) or the best interests of a broader set of stakeholders? For example, a recapitalization could provide capital to the owner but risk the long-term viability of the company.
  • It must be clear how the company and advisory board interact. (e.g. meetings only with the CEO or including C-Suite members?  Are all questions (from management and advisors) funneled through the CEO?)  The advisory board may meet monthly, quarterly or as required.
  • The role of the chair is crucial, working with management, the board of directors, and the advisory board members.
  • The individual advisor roles must be clear, e.g. help develop business by opening doors, act as a company ambassador at social events, etc.
  • Individual advisors bring specialized experience, knowledge and contacts which the board of directors does not have. The advisor capabilities are not a replacement for capabilities which should be on the board of directors or management, but rather be complementary.
  • Each advisor must also have a degree of passion and interest in the business.
  • The advisory board has simpler processes than a board of directors, does not require elections, term limits, committees, public disclosure, etc.

 Why don’t companies create advisory boards?

57% believe it is too much work.9

The creation of an advisory board does create more work for management, and more fact-based data collection and analysis.  The question for the CEO, board of directors, and/or owners is whether or not the increase in profitability warrants this additional work.

What does an advisory board cost?

The cost is driven by the value the advisors can create as well as the cash available.

  • A small angel-investor-backed start-up may have a volunteer advisory board meeting on an adhoc basis or even once a year. Advisors will focus on survival issues, CEO coaching, and shifts in strategy.
  • A growing company with 4-6 advisors may provide $15,000/yr compensation for each advisor, with more for the chair – and the time commitment may range from 60 to 125 hours a year. The advisors will focus on the long-term direction and initiatives which have a major impact on value growth and preservation.

Is your CEO or board of directors ready to create a formal advisory board?

The advisory board asks questions and challenges the CEO (or board of directors).  The advisory board does not prepare reports or analysis.

There are four criteria to determine if you are ready for an advisory board.

  • There is a management team who can free up some of the CEO’s time. It can take the CEO 120-150 hours to setup and recruit and advisory board, plus another 60 hours per year for ongoing operations (this assumes 4 one day meetings per year of the advisory board).
  • There is a strategic plan. This plan answers several questions:
    • Who are the target customers?
    • What problems or needs do they have?
    • What is your solution?
    • Why do the target customers perceive that your solution is a better value than the competition’s solutions?
    • Who is your team and what are their relevant skills and experience in understanding the customer and to deliver your solution?
    • How are you going to get customers?
    • What is your business model for delivering your solution?
  • There is a 3-5 year financial plan, tied to the strategic plan. The financial plan has two components: the cashflow forecast, and the budget.  There is already a process in place to track budgets to actuals.
  • You have a fact-based, analytical understanding of customers and their needs. This can include: identifying customer needs by reviewing notes of meetings and calls with customers, analyzing what customers buy and don’t buy, analyzing what customers look at in your newsletters and websites, focus groups, surveys, etc.  Once you have customers, the net promoter score survey becomes critical, especially as you analyze why the score changes.  You start your business with hopes and wishes as to what customer needs are.  As soon as you start communicating with customers, you must become fact-based.

If you don’t meet the above criteria, you are not ready for an advisory board.

 Next steps

To enable discussion with your investors, board and management, download the following one-page slide:

What is the value of a for-profit advisory board?

To create a formal advisory board, contact the Business Development Corporation of Canada, who have a proven process for creating advisory boards.

Footnotes

Advisory Boards: An untapped resource for businesses  March 2014  Business Development Bank of Canada https://www.bdc.ca/en/Documents/analysis_research/bdc_study_advisory_boards.PDF

1 Page 1

2 Page 10

3 Page 9

4 Page 10

6 Page 6

7 Page 11

8 Page 13

9 Page 12

5 Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

 Further Reading

Small company boards: Questions for advisors and directors.  CPA Canada https://www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/corporate-governance/publications/potential-small-company-directors-advisors-questions

Survey: What is the role of advisory boards.     https://koorandassociates.org/further-reading/survey-what-is-the-role-of-advisory-boards/

What is the corporate governance ecosystem?

The governance ecosystem is comprised of: the board, management, shareholders, other stake holders, third parties, and society.  All components of the ecosystem interact with all other components. The board and management must understand and plan to manage the ecosystem as it exists today and the future. The assumptions regarding the future governance ecosystem are key inputs to determining board and management talent requirements.

 Overview

  • Why do you need to understand the corporate governance ecosystem?
  • What is the company’s ecosystem?
  • What is corporate governance?
  • The corporate governance ecosystem is the same as the company’s ecosystem.
  • What do you do if you are a SME?

The purpose of this article (supported by a one-page slide) is to provide a framework, process, and facts to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. There is no one-size-fits-all answer.  The approach and action plan will be unique to the specific situation of each corporation.

Why do you need to understand the corporate governance ecosystem?

  • Governance requires management of the conflict of interest among the board, shareholders, management, other stakeholders, third parties, and society – in other words, the governance ecosystem.1 You cannot manage what you don’t understand.
  • Understanding of the governance ecosystem can be a competitive advantage, or disadvantage. A global McKinsey survey showed that less than 20% of executives had frequent success in influencing government policy and the outcome of regulatory decisions.2
  • McKinsey has written “..each company must earn the ‘social license’ to be in business..”3
  • The challenges and opportunities arising from the vision of the future governance ecosystem are a key input regarding the required board of directors talent.

Merely understanding and complying with external laws and regulations is not sufficient to achieve long-term value creation.

 What is the company’s ecosystem?

A corporation’s ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly in the operation of the business through both competition and cooperation. The idea is that each entity in the ecosystem will affect and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem.     The actions and behaviours of the ecosystem vary, depending upon what attribute of the corporation is considered. For example, the ecosystem has different behaviours when regarding the second to second corporate delivery of products or services versus when the corporation is dealing the event of personal information of hundreds of millions of users being hacked.4

The implication is that you need to understand the dynamics and interactions within the ecosystem, and not just how each component interacts with your company.

What is corporate governance?

“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.  Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined”.5 This definition of governance demands and understanding of the ecosystem

The corporate governance ecosystem is the same as the company’s ecosystem.

The involvement of the ecosystem members, their role, expectations, and behaviour will be specific to governance.  Further understanding of the governance ecosystem is based on the above definition of corporate governance.

  • Relationships: What is the nature of the relationship, if any, with the members of the governance ecosystem?
  • Setting objectives: What role do the ecosystem members have in setting objectives?
  • Determining how to meet objectives. What role do ecosystem members have in the preparation and execution of plan to meet objectives?
  • Monitoring performance. How does each ecosystem member assess the performance of the company?

What do you do if you are a SME?6

Everything written here applies to you.  You may have a smaller ecosystem, which is easier to understand and manage.

 Conclusion

The governance ecosystem is comprised of: the board, management, shareholders, other stake holders, third parties, and society.  All components of the ecosystem interact with all other components. The board and management must understand and plan to manage the ecosystem as it exists today and the future. The assumptions regarding the future governance ecosystem are key inputs to determining board and management talent requirements.

 Your next steps

To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide:

What is the corporate governance ecosystem?

Questions for your board and CEO/management to consider

Ask the following questions and document the agreed upon answers, as well as points of disagreement.  Remember, the Supreme Court does not always have a unanimous point of view.

  • Who are the key members of the governance ecosystem? Which members assess the performance of the company?  Which members believe they should have some sort of involvement in the objective settings and planning to meet the objectives?
  • Who is managing the relationship with each ecosystem member? Board?  CEO, C-Suite?  Employees?  Contractors? What is the nature of the relationship? (observing, communicating, meetings, working together or working against)
  • Which members, if any, have you decided not to have relationships with?
  • What is your definition of corporate governance?
  • What is your process for setting objectives for the board and management? How do the relationships impact setting the company’s objectives? What are the various interests of the ecosystem members?  How does the board and management deal with the many conflicts of interests and expectations?
  • What is your process for determining how the board and management meet their objectives?
  • How do you assess the performance of the board and management, in creating long term value and in meeting their respective objectives?
  • How are the members of the ecosystem involved in the setting of objectives, plan preparation, and performance assessment?
  • How do you communicate the objectives, plans, and performance to the members of the ecosystem?
  • What are the different perspectives among ecosystem members as to how to monitor and assess the company’s performance? How is the board’s, and CEO’s performance measured by different components of the ecosystem?
  • Based on the answers to the above questions, what is the action plan, if any, for the board and for management?

Footnotes

1 Professor Didier Cossin and Abraham Hongze Lu, “The four tiers of conflict of interest”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/the-four-tiers-of-conflict-of-interest-faced-by-board-directors/

2 John Browne and Robin Nuttall, “Beyond corporate social responsibility: Integrated external management”, McKinsey Quarterly, March 2013, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/beyond-corporate-social-responsibility-integrated-external-engagement

3 Jim Brennan, Greg Kelly, and Anne Martinez “Tough choices for consumer goods companies” McKinsey Dec 2013, https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/tough-choices-for-consumer-goods-companies

4 Adapted from Investopedia 2018 May 11

5 Based on “G20/OECD Principles of Corporate Governance”, 2015  I added the concept of third parties, https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf

6 Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

Further reading

What does society thinks of institutions and corporations “56% companies that only think of themselves will fail”, “60% CEOs are driven more by greed than by a desire to make a positive difference in the world”,2018  Edelman Trust Barometer Global Report, https://cms.edelman.com/sites/default/files/2018-01/2018%20Edelman%20Trust%20Barometer%20Global%20Report.pdf

Jeffrey Sonnenfeld, Melanie Kusin, and Elise Walton “What CEOs really think of their boards”, Harvard Business Review 2013 April, https://hbr.org/2013/04/what-ceos-really-think-of-their-boards

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

What are your values and morals? Survey Tool

The following is a survey tool designed to gain individual perspectives regarding values and morals.  This tool can be adapted to a specific company situation.  The tool must be used by a trusted third party in order to maximize the chances of getting valid and confidential input.

The tool can be used anywhere in the company, from front line staff to the board of directors, or controlling shareholders.

I have suggested two decision-making values (making more money and career progression) because I’ve perceived these as very important to some people.

Identify the values and morals based on your complete life i.e. 24 hours a day.  Note any differences between your complete life vs your work life.  The last two columns are solely regarding your work life.  In terms of importance, its fine if more than one value has the same importance (e.g. three values are #1)

The survey collects the following information

  • What are the company’s documented values and morals, if any?
  • Which values and morals are used by your leaders and colleagues?
  • Which values do you believe are moral?
  • What are the most important values you use throughout the year to make decisions and guide your actions? Personal financial success and career progression may be some of these.
  • What are the differences between your values vs what you perceive to be the values of your colleagues and leadership?

 

Value and related decision making, actions, behaviours Is this value, decision making, action or behavior a “moral” characteristic? Which values are most important to you? (#1, #2) Which do you perceive as most important to your work colleagues? Which do you perceive as most important to your management?
 

 

       
 

 

       
 

 

       
Making more money        
Career progression        

How do you find governance information?

 

You are in Ontario, Canada and looking for information about governance.  Where do you go?  The attached document provides a partial list of (mostly) non-profit governance organizations.  I exclude most for-profit organizations such as lawyers, accountants, etc.

The type of governance I focus on is the board of directors of a corporation and its relationship with its ecosystem (e.g. shareholders and members; the CEO; etc.).

This document does not recommend any individual governance advisors or consultants.  There are countless numbers of those.

My focus is Ontario.  I do consider Canadian and International organizations whose governance information and resources may be accessible and helpful to Ontario.

The Governance Resource Directory is a 37 page document.

Please contact me with any corrections, updates, or additions you’d like in the document.  This is a volunteer activity, so it may take some time before I can reflect your input.

Governance Resource Directory