Traditional strategic planning dooms companies to failure.

The purpose of this article is two-fold:

  • Help traditional companies succeed when faced with successfully growing startups.
  • Help startups succeed when competing against traditional companies.

You may download a PDF of this article from: Traditional strategic planning dooms companies to failure

What is traditional strategic planning?

Wikipedia (April 20, 2020 definition)

Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.  Strategy has many definitions, but generally involves setting strategic goals, determining actions to achieve the goals, and mobilizing resources to execute the actions. A strategy describes how the ends (goals) will be achieved by the means (resources).

Advice from strategy advisors

The following are some example of the advice from advisors regarding strategic planning.  Remember, it is up to the boards of directors to approve the strategy and for the CEO and management team to execute.

McKinsey Article “How to Improve strategic planning”1

  • Start with the issues. g. ask CEOs what the issues are, ask CEOs what the 12-month priorities are, interview middle and lower management to identify the issues.
  • Bring together the right people.
  • Adapt planning cycles to the needs of each business.
  • Implement a strategic-performance-management system.
  • Integrate human-resources systems into the strategic plan.

BCG (Boston Consulting Group) article  “Your strategy process needs a strategy 2

There are five broad approaches to strategy:

  • Classical – analysis, planning, and execution
  • Adaptive – continual experimentation and scaling up of what works. General Electric was the example of a company adopting an adaptive strategy in 2011. I observed that GE’s adaptive strategy took 2011 revenues of  $146.5 billion and profits of $13.1 billion to 2018 revenues of $121.6 billion and a loss of $22.8 billion.
  • Visionary – use of imagination to create a game-changing product, service, or business model.
  • Shaping – collaboration in environments that are simultaneously unpredictable and malleable.
  • Renewal – execution of necessary radical changes when the environment is harsh or there has been a protracted mismatch between the firm’s strategy and its environment

My observations of traditional strategic plans

  • They are inwardly focused and driven by financial objectives set by the board.
  • Limited facts regarding how users/customers behave and perceive the company. However, there are lots of opinions and anecdotes.
  • Significant time is spent on vision and mission.
  • The bulk of the effort is on allocating financial resources.
  • The implicit assumption is that only need to improve what worked last year.

 What are the results of traditional strategic planning?

Few companies survive

Most public companies will not survive. 3

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

 Few companies generate significant value.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.4
  • Mark Leonard, CEO of Constellation Software, said in his final annual CEO letter. “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.” 5

What is the approach used by successfully growing startups?

  • Focus on a target market with a large number of potential users and cash paying customers. e.g. people doing Google searches are users, people paying for ads are customers.
  • Making assumptions regarding users/customers, based on research. These assumptions include: the number potential customers with urgent needs they are willing to pay for, the benefit to the users/customers if their needs are addressed, the degree to which the benefit is greater than the current situation and the benefit achieved from competitors, and the price the customers might be willing to pay.  Document your assumptions regarding the users/customers value propositions.6
  • The most critical part of understanding is interviewing potential users/customers. This may range from 100 to 300 potential user/customer interviews.  This also provides validation that the potential users/customers believe the solution provides more value that the competition. Note that interviewing is very different from sales calls.
  • Quickly create a minimal solution and get it into users/customer hands. Keep experimenting and changing the initial solution until there are a group of delighted users/customers. Then start charging customers. At this point the solution delivery and sales process are not cost-efficient. At this point the startup doing things that do not scale.
  • Continue experimenting in stages, expanding the solution to meet a larger subset of the target users/customers, and growing the number of paying customers. The solution is still not cost efficient.
  • Implement user/customer focused metrics. There is a never-ending process understanding user/customer needs and measuring user/customer delight relative to the competition. Remember what happened to Blackberry – the number of people who needed keyboards on their phones disappeared.
  • Determine when the solution has reached the point of being able to delight the full scope of target users/customers.
  • At this point, make the solution delivery and sales processes cost efficient and rapidly grow the company.
  • Keep exploring and experimenting with new types of users/customers, new distribution channels, and new partners.
  • Resource allocation decisions driven by fact-based metrics on what large numbers of users/customers perceive as valuable. I recall reading a quote from Google’s CFO, when meeting with a product team. “Why aren’t a billion people using this? If there are a billion people using this, why aren’t we making money?”
  • The sales process is designed based on understanding users/customers and enabling them to achieve value. Most traditional sales processes are designed to sell a solution.
  • The investors, board of directors, advisory board, coaches, and mentors have skills, experience, and networks which the founders and management team lack. The founders and management team have a passion to learn and change.

Why do successful startups doom companies with traditional strategic planning?

Successful startup have a combination of factors driving long-term success while traditional companies with traditional strategic planning have a combination of factors driving long-term failure.

  • They constantly document their key assumptions and validate or invalidate those assumptions. Tradition companies don’t document their key assumptions and don’t constantly validate them, which inevitably leads to crises . “The assumptions on which the company has been built and is being run no longer fit reality.”7
  • Their investment decisions start with and are focused on enabling customers to meet urgent needs. Traditional strategic planning often starts what the company’s opinions and needs are e.g. financial objectives, vision, mission, etc.
  • They have ongoing measurement of how users/customers are achieving value. Traditional strategic planning lacks these facts.
  • They have ongoing measurement of how users/customers perceive the startup relative to competition. Traditional strategic planning lacks these facts.
  • They explicitly assume is that user/customer needs and the competition are constantly changing. Traditional companies assume that change is limited.
  • They are constantly conducting experiments with users/customers, channels, and partners to learn what is valuable to change and what isn’t. Traditional strategic planning is focused on a small number of large projects. Traditional companies don’t have a culture that enable and supports the fact that most experiments fail.
  • They have a passionate curiosity and desire to learn.
  • They minimize what they have to invent by drawing upon proven solutions which don’t impact the user/customer perception of competitive value.
  • They have investors, board directors, advisors, and coaches which provide skills, experience, knowledge, and networks the startup lacks. Traditional companies have board directors who lack skills, experience, knowledge and networks that company management lacks or is weak in.

The external environment has also changed dramatically, enabling startups to take customers from traditional companies.

  • There is unlimited capital (e.g. at least $1.5 trillion of uninvested private equity capital) available to fund startups and rapidly growing early stage companies.
  • The investors passionately support the concept of experimentation and realize that most experiments will fail and most startups will fail – a very different mindset from traditional companies
  • The investors are focused on picking talented founders and putting in additional value-added talent to support the founders.
  • It fast, easy, and low cost to get the infrastructure needed to launch a company e.g. financial systems, CRM, billing, etc.
  • It’s become easier to connect with potential customers via social media.
  • Customer needs and expectations are rapidly changing.

Your next steps.

If you are a traditional company with a traditional strategic planning process.

Assess your strategic planning outcomes:

  • The trend for your economic profit generation.
  • Revenue and free cash flow growth.
  • Market share growth.
  • New channels, new partners, new types of users and customers.

How does your planning process compare to the above approach used by successfully scaling startups?

What are your customer metrics?

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.

What changes to your planning process do you need to start experimenting with and learning from?

If you are a startup

  • Follow the approach used by successfully growing startups.
  • Ensure that your investors, board of directors, advisory board, coaches, and mentors have skills, knowledge, and networks that you lack or are weak in.
  • Start your metrics with assumptions regarding your user/customer value achievement leading indicator and your user/customer success metrics.
  • Once you have revenue paying customers, start with customer churn and customer retention metrics.
  • Understand your customer acquisition costs and lifetime customer value. You’ll need this understanding to make your startup efficient and scalable later on.

Read the research supporting the value of experimentation in the Further Reading section below

  Footnotes

1 Renée Dye and Oliver Sibony, “How to improve strategic planning”, McKinsey Quarterly, August 2007, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-to-improve-strategic-planning

2 Martin Reeves, Julien Legrand, and Jack Fuller November 14, 2018 BCG website, https://www.bcg.com/en-ca/publications/2018/your-strategy-process-needs-a-strategy.aspx

3 “Corporate Longevity”, Credit Suisse, February 7, 2017

4 Chris 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

5 https://battleinvestmentgroup.com/effective-directors/

6 https://koorandassociates.org/understanding-customers/what-is-a-value-proposition/

7 Peter Drucker, Harvard Business Review, November 2009, Page 90

Further reading – Research supporting the value of rapid learning and experimentation

The Marshmallow Challenge is to build the largest freestanding structure with a marshmallow on top and using 20 spaghetti sticks, one yard of tape, and one yard of string.  This is done in small teams.

  • MBA students build structures with an average height of 10 inches.
  • Lawyers average 15-inch structures.
  • CEOs average 22-inch structures.
  • Kindergarten students average 26-inch structures.

What’s the difference in behaviour between MBA students and kindergarten students?

MBA students

  • First sort through who is the leader.
  • Then identify and debate options.
  • Then agree upon a single plan.
  • Then build the structure.
  • The final step is putting the marshmallow on top.
  • Very often the structure collapses at this point.

Kindergarten students

  • No time spent determining who is the leader, identifying or debating options, or creating a plan.
  • Immediately start to build something, with the marshmallow on top.
  • Keep experimenting and learning, building multiple structures until the time is up.

Major incentives result in MBA students teams almost always building structures which collapse.

  • Incentives, without the right mindset, produce worse results.

Teams made up of CEOs and executive assistants did better than kindergarten students.

  • Achieved about 30 inches.
  • The researchers have the hypothesis that the addition of a very different skill set: facilitation and process, enabled the CEOs to perform better than they could with only fellow CEOs.

My observations

  • The passion to begin learning and experimenting as quickly as possible is critical when the team is doing something that has not be done before.
  • Understand the range of skills needed. That’s why teams of CEOs and admin assistants performed much better than CEOs alone.
  • Understand when your startup is doing something new and unknown vs something that has been done before with a base of proven knowledge. In the Marshmallow Challenge teams of architects and structural engineers did the best of all because they knew how to design weight bearing structures. Your startup must know what skills, experience, knowledge and networks are needed in management, investors, board of directors, advisors and coaches.  Your startup needs to know where the gaps are, which are critical gaps, and how to close those gaps.  Your startup will also draw upon a broad range of existing proven solutions – not everything needs to ab an innovation.

https://www.forbes.com/sites/nathanfurr/2011/04/27/why-kindergartners-make-better-entrepreneurs-than-mbas-and-how-to-fix-it/#5047f0871394

https://hbr.org/2014/12/innovation-leadership-lessons-from-the-marshmallow-challenge

Tom Wujec’s TED Talk regarding findings from the Marshmallow Challenge

https://www.youtube.com/watch?v=H0_yKBitO8M

What is corporate governance?

The purpose of this document is to enable founders, CEOs, management investors, shareholders, board of directors, and advisory boards to create a shared understand of their company’s corporate governance.

You may download a PDF of this article from:  What is corporate governance

The challenges of understanding corporate governance.

Discussion around governance is often very silo based and depends upon the specific background of the governance advisor e.g.

  • Lawyers often start with the Business Corporations Act.
  • Regulators often start with financial risk management guidelines.
  • Accountants often start with quality of financial statements.
  • Consultants have a variety of different points of view.
  • IT (Information Technology) governance advisors have an IT-centric perspective.

Etc.

What then results is a deep, detailed, siloed discussion without a broader context or showing the relationship with related points of view. After the stakeholders have heard from several different advisors, there is a confusing and disjoint picture of governance with limited shared understanding.
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. “1

Corporate governance is built on a foundation of relationships.  This requires knowing who the relationships are with and managing those relationships.

This definition has 4 other components:

  • Decision making i.e. setting objectives and approving action plans.
  • Action plans i.e. means of attainting those objectives.
  • Performance monitoring of the objectives, action plans, and communications.
  • Two-way communications and understanding among stakeholders, regarding objectives, action plans, and other information.

What is the purpose of the corporation?

Is the purpose of the corporation to maximize money for shareholders? Is the purpose to make as much profit as possible?

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.”2

 The purpose remains fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. 3

 What is the purpose of corporate governance?

The purpose of corporate governance is to enable the achievement of the purpose of the corporation.

Corporate governance manages the broad set of conflicts of interests which arise. The OECD governance definition starts with relationships: within corporate leadership, as well as stakeholders and third parties.  Any relationship has the potential for conflict of interest, because parties may have different or conflicting interests.  For example, how should both profits and costs be allocated among: CEO, C-Suite, shareholders, employees, other stakeholders, and third parties including society, especially in cases of poor profits or losses.

Perhaps the greatest conflict of interest is deciding the degree to which the corporation extracts value from society versus creating value for society. An example is the decision on whether to whether to replace employees with lower-cost offshore staff which may benefit the off-shore communities or retain the employees in order to sustain local communities.

A common understanding of values, morals, and ethics is needed, to enable decision making.

The Corporate Governance Journey

I outline some of the corporate governance concepts and challenges by an illustrative journey, starting with three founders and ending with a large publicly listed company. Every company will have a different journey, and none will be the same as this illustration.

The initial objectives include;

  • Targeting a large marketplace with customers that are willing to pay for a solution.
  • Delighting revenue generating customers and users by enabling them to achieve significantly more value than the current situation or competitors.
  • Having the right roles and right talent at each point in time to successfully carry the business forward for the next 24 months.
  • Honesty, integrity, and transparency of the founders.

The action plans are focused on achieving the above objectives.

Performance monitoring includes:

  • Constantly validating the number of customers who have a need they are willing to pay for. Needs may be changing. E.g. at one point in time, most people needed cell phones with keyboards.
  • The revenue generating customers and users delight in the solution and value they are achieving. The degree to which customers obtain more value from the company’s solution than from the competition.
  • The value that roles provide and the value that people in those roles provide. This includes: investors, advisors, coaches, mentors, board directors, management, staff, partners, and suppliers.
  • Morals, values, and ethics – including honesty, integrity, and transparency.

Two-way communications of objectives, action plans, and performance monitoring occurs among all the stakeholders, thus enabling a shared set of facts, knowledge and beliefs.  Every stakeholder knows how they are contributing to the value achieved by customers.

The way to read the following journey is that any governance behaviours at a stage, continue in following stages unless other stated.

Three founders have an idea.

  • They decide to work together. The purpose of the company is to solve an urgent need of hundreds of millions of people, especially in the third world.
  • The founders agree that all decisions will be unanimous. This is documented in the decision-making document. This decision-making document may be included as part of a founders agreement.
  • The initial objectives reflect the purpose. The assumptions are that meeting the objectives and moving towards the purpose will enable revenue growth and financial success.
  • Plans are largely oral.
  • Each founder knows what the others are doing, because they are communicating throughout every day.

The founders incorporate under the Canada Business Corporations Act.

  • Some or all of the founders become board directors. Directors need to be elected by shareholders. The founders decide to split equity equally 1/3 each.  There is a unanimous shareholder agreement which clearly defines which decisions are made by shareholders. The decision-making document is revised to reflect which decisions are made by shareholders and which by board directors.  All other decisions continue to be made by the founders.
  • The founders decide whether the social purpose of the corporation requires them to become a B corp.

The founders create a website

  • The website describes the team. One of the founders is described as the CEO. Other founders are also described.  The decision-making document is revised to reflect which decisions continue to require unanimous approval.
  • Plans are written down, using project management software and other tools.

The founders get money from their friends and family

  • Some money is provided as covenant free loans. Some money is provided as equity, but voting rights are constrained.  There may be a voting trust. The unanimous shareholders agreement is revised. The founders begin to focus in different areas and make decisions on their own. The decision-making document is revised.
  • The founders send a monthly communications update to all investors, who are family and friends at this point.

The founders get money from AIs (angel investors)

  • The founders are still focused on the purpose. AIs agree with and support the purpose. The founders communicate documented action plans and objectives to AIs. AIs have made information reporting requirements (including tacking of actual results to plan) as part of their investment.
  • Objectives are set for customer satisfaction. The main objective is to have a small group of revenue generating customers who are delighted with their initial version of the solution. There may be an AI on the Board of Directors.  Decision making at the board becomes more complex.  The personality of directors has major impact on decision making – a strong personality with limited equity may be able to drive the board.  AI investors may have certain decisions under certain conditions. The decision-making document is revised to reflect the current situation.
  • Angel investors only invest if they believe in the founders honesty, trust, and integrity.
  • The unanimous shareholder agreement may be updated or replaced.
  • The founders send an enhanced monthly communications update to all investors.
  • The founders decide whether or not to bootstrap growth or obtain funding from VCs (venture capitalists). This decision is reflected in the 24-month cash flow forecast, by month with monthly milestone assumptions.  There is a supporting forecast for years 3-5, by year.

 The founders get money from VCs (venture capitalists)

  • The VCs are focused on making money by enabling the company to grow its revenue substantially. Understanding the long-term market potential is key. The purpose of the company is unchanged.  Many people in the world who need the solution but who would not make material profit for the company are excluded in the short-term objectives.
  • The VCs objectives focus on ensuring the company leadership has the right skills and experience. Coaches and mentors are put in place as well as an advisory board to assist the CEO.  New talent is brought into leadership.  Some of the founders may exit or assume supporting roles.
  • VCs will also provide advisors and board directors who have skills, experience, networks the founders lack.
  • The VCs have certain decision-making rights and veto powers. There will be a VC on the board of directors. VCs are deeply involved with management. 63% of VC funds will interact with the company at least once a week.4 Decision making often occurs outside of board meetings. Significant, ongoing reporting requirements to VCs.
  • The decisions which require shareholder approval or board approval are clearly documented. All other decision may be made by the CEO, who may in turn delegate decision-making authority.  The leadership team members will be making decisions, as will managers and staff.
  • There may be debt financing. Covenants may provide lenders with information rights as well as decision-making rights, in certain circumstances.
  • The CEO begins to send a monthly communications update to all potential investors.
  • The CEO puts in place two-way communications plans with a broad set of stakeholders, including all employees and contractors.

The founders get money from PE (private equity)

  • PE is focused on maximizing exit value in 5-7 years time. Every major decision is focused on maximizing this value.  PE still has a very long-term focus on total market size. The company will only be attractive to future buyers if there is still major growth potential at the exit time.
  • PE must approve the major decisions.
  • Every three months PE assesses whether there is the right CEO in place. The exit in 5-7 years allows little time for a poor performing CEO.
  • PE provides advisors and board directors with skills, experience, and networks the CEO and management team lack.

The company does an IPO and is listed on a major stock exchange

There is a 50% chance that this new S&P 500 company will disappear within 10 years.5  What governance changes have occurred which have put the company on a path to failure?

  • The founders have exited. Professional management and professional directors have joined. The original purpose of the company is forgotten. The purpose of governance has been forgotten.
  • The objectives are now focused solely on financial returns and shareholder value. There is no longer a focus on enabling customer perceived value.  There are no objectives regarding the value that roles and people provides.  Morals, values, and ethics objectives are secondary. E.g. the code of conduct, and all other company policies are written to minimize legal liability of management and the board directors.
  • Two-way communications with many stakeholders are very limited.

The following are some of the specific governance changes.

  • The planning process driven by meeting customer needs of a large number of customers is dropped and replaced by a traditional strategic planning process. (e.g. Vision, mission, objectives, strategies).
  • Performance reporting has dropped all customer satisfaction metrics and all metrics regarding the value customers are achieving from the company. There is little knowledge or understanding of the customers.
  • The two-way communications with shareholders and other stakeholders have collapsed. 95% of employees are not aware of or do not understand the strategy.6 An even greater percentage of employees have little understanding of how they help meet customer needs and provide value to customers.
  • The director selection process is flawed. The majority of directors do not understand the company’s strategy, marketplace, or how it creates value.7 The directors no longer have skills, experience, and networks which the company leadership lacks. “Directors are not liable if they exercise the same degree of care, diligence and skill that a reasonable, prudent person would exercise in comparable circumstances.”8 The director decision with the greatest impact on company value is the succession planning, appointment, and termination of the CEO.  No director has this experience.  The directors rely on recommendations from outside consultants and the HR leader to make CEO decisions.
  • Board of directors mandate specifically excludes customer focus, value creation, and any board accountability for the board’s performance or the company’s performance. The directors as advised to carry out their fiduciary duty, which is interpreted to mean maximize profits and share prices.
  • The initial focus on honesty, integrity, and transparency has changed. The culture of the board of directors, especially values, morals, and ethics permeates down through the company.
  • Shareholders no longer make material decisions, have little two-way communications with the company. Majority of the shares are held by ETFs, pension funds, sovereign wealth funds, and family offices. Shareholders have a wide variety of expectations and are no longer aligned.
  • Governance was previously driven by experienced leaders and advisors who were focused on growth and talent. Governance is now driven by a variety of advisors, each with their own point of view, with few advisors focused on solving urgent needs of a large number of revenue generating customers.

Your next steps

Your next steps depend upon the stage of your company.

Step #1 Document the current understanding of governance.  This requires asking a number of stakeholders, which may include: founders, CEO, leadership team, employees, the board of directors, the advisory board, investors, and shareholders. Do not just refer to existing documentation.  Asking people reveals what people actually understand.

  • What is the purpose of the company?
  • What is corporate governance?
  • What is the purpose of corporate governance?
  • What are the key objectives and plans to achieve the purpose of the corporation? Do these objectives include the skills, experience, and networks required for board directors, advisory board members, and investors?
  • Who makes the decisions as to what the key objectives and plans should be?
  • What is the two-way communications process with which stakeholders regarding the above 5 points?
  • What is the performance monitoring process regarding the achievement of objectives, plans, decision making effectiveness, and effectiveness of the two-way communications?

What are the results of the current performance monitoring process?

Step #2 What are the implications of your findings from Step #1

Step #3 What needs to change and what is the value of making those changes?

 Footnotes:

1 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

2 https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter

 3Page 17 The five most important questions you will ever ask about your organization (20008)   Book Summary   by Peter F. Drucker,  Jim Collins et al, I adapted

4 How do venture capitalists create value? https://koorandassociates.org/selling-a-company-or-raising-capital/how-do-venture-capitalists-create-value/

5 https://www.innosight.com/insight/creative-destruction/

 6 “Creating the Office of Strategy Management”, Harvard Business School; paper 05-701, by Robert Kaplan and David Norton

 7 Eric Kutcher, “Corporate Boards need a facelift”, McKinsey May 4, 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

8 Government of Canada, Corporations Canada website https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06643.html

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?

 

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/

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

Survey – what is the role of advisory boards?

Survey – what is the role of advisory boards?

I did a survey of people on my LinkedIn network who are on an advisory board or a CEO with an advisory board.  This survey was done because I was appointed chair of an advisory board and wanted to learn from others.  If you are an advisory board member or chair, please contact me – I’d like to include your learnings.

The following contains the email I sent out as well as the responses, which are anonymous.

The email I sent out

Hello XXX

I have a few questions regarding what sort of things you do for your advisory board (I saw your role on your profile). I ask because I’ve been appointed chair of an advisory board for a financial services firm and need to resurrect the board.  I need to learn some details about what other advisory boards do.

Thank you.

Tom

Possible actions:

  • Prepare for and attend regular face-to-face meetings?
  • Available for consultation between meetings?
  • Serve on advisory board committee?
  • Introduce potential clients to the firm?
  • Spend time with potential clients?
  • Introduce other executives to the firm?
  • Provide new business ideas and opportunities?
  • Promote the firm via your personal social media (twitter, website, blogs, Facebook, LinkedIn, etc.)?
  • Provide suggestions and advice regarding functional areas (sales, marketing, finance, HR, etc.)?
  • Have functional meetings outside of regular advisory board meetings?
  • Other????

The anonymous responses

Advisory Board #1 member

That’s right on the money It’s really an opportunity to bring strategic resources and thought leadership to an organization People on the boards usually have some expertise that you can draw on including Sale’s, marketing, finance and leadership. The chair is the quarterback to draw out that experience and knowledge.

Advisory Board #2 member

Happy to help you if I can.

As of this past month, I am Chair of the Program Advisory Council for the XXX program at the XXX School of Business. We basically work with the faculty and students to help support and improve the overall program and the various components within it.

I am also an XXX Advisor on the Board of Directors for the Canadian XXX Council I provide the “XXX” on that Board with a CIO perspective on the various issues that they deal with. In addition, I do serve on various Committees of the Board along with the other Board members. So, I am not sure that my experiences are directly compatible with your Advisory Board role question. However, along with my other two Board of Director roles, I would say the possible actions of #1, 2, 3, 6, 7 and 8 fit best with my general understanding of what needs to be done.

 Advisory Board #3 member

My role is for a small co (very) and it’s really ad hoc to have a halo support group with supplementary skills. If yours is bigger then the types of things you describe could be formalized and scheduled. You want to be mindful of people’s time. Maximize their value add at the time their skills/connections are most useful, minimize procedure…. my 2 cents Congrats and good luck!

Advisory Board #4 member

It can be whatever you define. At the minimum is for pick up the phone when the ceo needs and can go to everything else in your list. At this point my commitment is limited to picking up the phone as I am busy with my own startup. Hope this helps.

Advisory Board #5 CEO who had an advisory board

 Overview

  • The role depends upon the stage of the company and the growth/profitability issues a company faces.
  • In all cases, the network of the advisor is critical. At the very least, the network provides information to the advisor.  In some cases, the advisor may introduce: potential customers, potential investors, potential suppliers, potential new employees.

 Where do you find advisors?

  • They can be senior executives, towards the end of their career, who are somewhat bored and eager to work with other executives on some challenging issues.
  • The executives could come from: current customers, potential customers, other organizations in the company/customer ecosystem.
  • It is key that all advisors be “A” quality. If some are “B” or “C”, then the “A” quality will leave.

What is the role of the advisory board?

  • The advisors provide advice to the CEO and perhaps management.
  • The advisors must have skills, experience relevant to the challenges and issues the company will be facing in the next 2-3 years. g. if going public, then need CFO or another executive who led an IPO.
    1. Advisors should complement the knowledge, skills, and experience of the management team. e. The combination of the advisory board and management team should have the knowledge, skills, and experience relevant to the major challenges and opportunities arising in the next 2-3 years.
  • The board does not make decisions. Thus, requires less information than a decision making fiduciary board. A dashboard of key metrics is useful.
  • The role of the CEO and management is to listen and learn, not to make long presentations.
  • Set the expectations for advisors upfront. Consider a fixed two-year term.
  • If there are 6-8 advisors, there will be a 80% participation rate.
  • There should be no dominant personalities on the board, recognizing that the chair should enable the discussion.
  • The advisors must provide unvarnished input to the CEO and management.
  • Each board meeting and call can be a problem-solving discussion focused on the issues raised by the CEO. It’s not necessary for the advisors to agree on a single solution – what’s important is to maximize the input and learnings to the CEO and management.

What was the advisory board role when you were the CEO?

This was a company with a fiduciary board of directors.

  • The advisory board had a one-day meeting down south in the winter. Fly in day before for dinner. One day meeting, then fly out. The CEO and management attended.
  • Three quarterly advisory board conference calls of 1-2 hours each.
  • All meetings/calls were scheduled 1 month prior to fiduciary board meetings, to enable CEO to learn regarding key issues – almost like a dry run. The CEO also shared strategy and strategic plan with the advisors, to get their comments.
  • The CEO and management also made occasional phone calls to the advisors.
  • The advisors received material before meetings/calls. This enabled the meetings to focus on discussions and not review of material.
  • The advisory board chair was paid $25,000 per year. The advisors were paid $500 to $1,000 per-diem, with out-of-pocket travel costs covered.

What is different about private equity governance?

Overview

 Private equity governance is driven by value growth, not just compliance.  There’s a 100% focus on realizing major growth in shareholder value, either in the short or long-term. Transformation of the board or C-Suite may be required.  Shareholders make decisions which are often made by the board of a public company.  e.g. CEO appointment or termination. Change management principles are critical.

 Private equity governance has six major differences from many public companies

#1 Private equity governance is driven by realizable value growth, not just compliance.  The key is realizable value growth.  Private equity will exit at some point, thus value growth is based on what someone will be willing to pay for the shares.  Value growth is enabled by three sets of changes: 1) sales growth via acquisitions or organically expanding, such as geographic expansion; 2) improvements in the business model; 3) improvements in the management team.

#2 There’s a 100% focus on realizing major growth in shareholder value.  Decision-making is simple when the most important criteria is “How does this impact future shareholder value?”  Private equity has the mindset of “Who will buy?  Why will they buy? What maximizes the amount they will pay?”

#3 The time frame may be short or long-term.  Some private equity firms make “quick fixes” to enable a quick exit with significant increase in shareholder value.  Some private equity firms focus on long-term growth and planning for a strong future growth story to be able to attract buyers at exit time. Surveys show that many public company directors focus decision making on the short-term.  Many shareholders, including mutual funds, do not have a long-term horizon because they only hold the shares for the short-term.

#4 Transformation of the board or C-Suite may be required.  Change starts at the top.  Director and C-Suite changes may be made.  Many public company transformations fail because the transformation is focused on the bottom layers of the organization, while the top layers are unchanged.

#5 Shareholders make decisions which are often made by the board of a public company.  The decisions which have the greatest impact on realizable value are made by private equity:  when to sell the company, under what terms and conditions; setting the strategy and approving the strategic plan; appointing or terminating the CEO; and approving major business changes such as entering a new line of business or major changes to financial leverage.

Note that all the above decisions could be made by a public company board of directors.  It really comes down to the difference in the people with the authority to make decisions:  people on a typical public company board versus private equity decision makers.

#6 Change management principles are critical: the shareholders, board and C-Suite all have a sense of urgency to achieve financial results from a future exit;  the core group of shareholders, board and C-Suite have the commitment and authority to make all required changes; the core group and overall business have a commonly understood and clear vision of what the future success looks like; all business decisions are based on achieving the vision; there are short term wins; all hiring and promotion decisions as well as all new projects and initiatives help achieve the new vision; leadership development programs and succession plans help achieve the new vision; and  there is regular, perhaps weekly, communications among the shareholders, board and CEO.

 Conclusion

The future vision – there is common understanding among private equity, the board and management as what the future company will look like in order to maximize shareholder value, upon exit.  Everyone is committed to the strategy, the strategic plan which builds a business model maximizing value creation. This is all built on a thorough understanding of the customer and marketplace.

The above is perhaps the greatest difference from a public company board.  A McKinsey survey of company directors showed that many did not understand the strategy, how the company created value, nor the market place.

In order to achieve growth in value, private equity may make changes to: the board, the C-Suite, the strategy, and the strategic plan.  How often does the board of an under-performing public company make those same transformational changes?

 Your next steps

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

What is different about private equity governance?