a16z Podcast - a16z Podcast: Independents on the Board

Episode Date: August 4, 2017

with Anne Mitchell, Lars Dalgaard, and Scott Kupor"Orthogonal thinking" but "shared core values" -- that's what makes an ideal board... especially when it comes to "independents", i.e., board members who aren't also investors. But how do you get the most out of those independent directors, who are often in the minority? How do you bring in the best board member for the company, team, product -- not just as another box to check on the road to IPO, but to ensure a fresh and/or missing perspective? And finally, how can the existing board -- and CEO -- best prepare for the changing dynamics? Leaders have to evolve with the company after all.In this episode of the a16z Podcast, moderated by managing partner Scott Kupor, general partner Lars Dalgaard (formerly CEO and founder of SuccessFactors) and executive coach (and former investor) Anne Mitchell -- both of whom have served on boards for companies all the way from private stage to IPO -- share their thoughts and experiences. The conversation took place as part of our annual Director’s College at Stanford University in April 2017.

Hi everyone. Welcome to the A6 and Z podcast. Today's episode continues our ever-ongoing board management series and focuses on how to get the most out of your board, especially when it comes to independence. Why do you need them? How do you bring them in? We share a lot of practical advice for both CEOs and board members on how to decide on the position and functional fit, how do you adjust, how do you onboard, and so on. The conversation took place earlier this year as part of our annual directors college at Stanford University and is moderated by A6 and Z managing partner, Scott Cooper, in conversation. with general partner and success factors founder, Lars Dahlgard, and executive coach and former investor Anne Mitchell. Both Lars and Ann served on company boards all the way from private company stage to IPO. You know, there were two founders, CEO, and I was a third VC board seat. So it went through being a private company board for seven years. And then for three years, I served as an independent director and chair the nominating corporate governance committee. So over those 10 years, you think of it almost like an organization. that had to mature and develop, almost like it was a startup board.

And that meant that we operated like a startup board. The materials, the discussion, the dynamics in the meetings. And then as the company matured, we as a board had to also evolve and grow up and mature with our processes. And that involved bringing in other independent directors, which we did as, you know, I'd say it was two years before an IPO. And then right before the IPO, maybe three months before an additional audit share. And then after the IPO, we also substantively changed the board to, again, move VCs off the board as well. You have to think of it as a life cycle, almost like you would accompany. Bars maybe just give us a little bit of sense from evolution, at the beginning of time to evolution on the success factor side.

Yeah, I started the company, so it was only me. And then when I was – no board. No board. I was just having board meetings with myself. They were very dynamic. And then, yeah, I took it public. Seven years later, and I was the CEO for the company while I was public for 17 quarters, four and a half years, and then I sold it to SAP for $4 billion, and I was on their board.

I made the mistake, I would say, of having all investor, similar to what you said in the beginning, board members. There is this forcing function at IPO, which by regulation, you're forced to change your board and bring in independence. What would be the reason to bring an independent on, and then what would the role that you would want to see that individual serve as a member? of a board that is probably largely going to be a founder and VC dominated board in many respects in terms of number of seats. I think it really allows the CEO to have a trusted

additional partner. Hopefully the venture capitalist is the trusted partner. It's a different scenario what a venture capitalist has a stake versus what an outside director has a stake. An outside director can truly be objective. Now, many founding CEOs don't want that objectivism, but I think they learn over time how valuable that could be if they found the right outside director. The question here is like, so what is the independent doing that's a value in that boardroom? What's very valuable for the independent is they can actually help surface a lot of this sort of hidden assumptions in the boardroom. So if you have multiple investors and multiple cost bases and multiple rounds, you know, maybe one investor wants

the company and you grow faster and burn more money and the other board member wants the company to slow on the brakes because they haven't, they don't have enough reserves in their fund. I mean, there's a lot of hidden agendas. The other thing the independent can do is, be there to provide real feedback to the CEO on how the CEO is doing. Because often what happens in these board rooms is the venture capitalists and in the closed discussion,

the CEOs are just not getting a lot of feedback. They're not getting feedback after every board meeting, maybe in bits and pieces. But an independent can very skillfully solicit around the room, understand what's going on and be that trusted point person back to the CEO. Like, what's on your mind? Why are you worried about the growth rate?

Why are you worried? No, why are you not worried about the growth? So those would be two tangible things. So you've got a minority person here on the independent side who basically has a vote that maybe in many cases doesn't matter if at all given some of these constructs. So I'm just trying to get a sense of if you assume that your vote is not really the reason you're there, how do you go about doing these things? How do you take that leadership role on the board, given that you don't really have the hammer

anymore of I can actually swing votes or make a difference from an actual corporate governance perspective? It takes very long time to find a very good person for you. And so you don't want to rush that the way I did it right before the IPO. You really want to take the chance to get to know them. And it doesn't mean that they become your best buddy. It just means that they're going to be functional for you. I don't think that you can have somebody be independent if they only love you.

I think they have to be in love with your business. But I think it's dangerous if they're smitten by you and sort of bowled over because then they don't become independent. And then the final thing, which be worth listening to, you know, like speak up with your experience and show that it matters. I still remember my second board member saying stuff in a board meeting that stunned me because I'd just been completely in the family with the previous board members. He's a PhD in physics. He basically said, I don't think we're listening to what's being said here. We're just bowling over it.

Could we just hear it one more time? And it was in fundamental transformation of the board dynamics that one issue. He just had a very valid point, said it very firmly. He transformed our board meetings. We've been talking a lot about kind of the board dynamic and from the vantage point of the board members. Maybe we can talk a little bit around the vantage point of the CEO. So, and particularly when you think about the types of board members that you've had on your board, you had VCs, certainly, I'm sure.

And then obviously, as you mentioned, you had independence. Is the relationship different? It's pretty intimidating to being around your VCs. You've thrown your whole life into this. They haven't. And so it's bigger risk for you personally than it is for them. Whereas my external board members, for some, I can't really. really explained reason. I just took them less serious and I wish I had taken them more serious.

But over time, I saw the value that they had because I spent a lot of time with them. And in particular, the trust that they began building with me and how they understood me. It's important. There's some respect. There's some understanding. There's there's some trust. But you have to have a relationship where it's okay for you to say, this is not okay. But how do you deal with whatever kind of institutional intransigence there is against that, either from the founders themselves saying, hey, look, I don't want to potentially dilute my control over this thing or the VCs, in many cases, you know, selfishly saying, hey, look, again, we're here. We like the fact that we control this board. The idea of an independent kind of does, in some cases, either from a voting perspective, change the balance of power or changes the nature of the conversation. So how do you overcome that agenda and help people understand the value of the independent and convince either a, you know, intransent CEO or a difficult VC, member that there's actually value in bringing in a new perspective. Do you really think people are contesting this sort of value of it? Or is it more, you know, so...

If you put it in priority number 12. Right, nothing gets to priority 12. Yeah, that's not important. So what are the objections they're making or are they not actually making a objection? You can imagine it's, that's not going to help sales. That's not going to help customers. I need to go raise another round. You know, that's the dynamic.

And so it's very much survivalist. It's too strategic and long term to think. like that. Their new strategy is execution. That's the philosophy. I think also at least, you know, I think people think about self-preservation too, right? Which is, you know, if I control this board, if I bring in other people, I might get the benefit of some great guidance, but that also could be somebody who tips the balance of power someday against me. I think that's very true. I think if an entrepreneur, I was one, they don't like working for anyone. And so now there comes a person all of a sudden, and it takes away the sense of control that they had in

this whole big gamble they did in their life of taking a chance of actually taking a risk on building a company from nothing. I also now, in my practice, coach CEOs, and one of the things I keep hearing from many of these founders' CEOs is how frustrating they feel in their boardroom. You know, they're frustrated by their board meetings because they want these meetings to go well, but they just don't know how to get the most out of these meetings. And it's almost you can just feel it when they when they look at their calendars and they see a board meeting on it, it's like, it's like, so I think the way you can sort of sell this or position this is ultimately, you know, CEOs are great at wanting to optimize all parts of their business. The board is another part of their

business. They just need to optimize. And they're going to have a lot more fun working with their board if it's running well. Ultimately, a board, you know, the factory of a board is it is a decision-making body. The CEOs are doing their best to put together a board package of 150 slides or less. But the reality is they're trying to tell a story, and a bunch of people around the room are trying to take that story and come up with some decisions. Why not just make that person an advisor, for example, or why not make that person a board observer? Like, I'm just, I just want to, you know, from your perspective, does it change, does it matter what the title is and whether they're actually a board member and have, you know, a voting interest,

or can you get all the benefit of the independent by saying, hey, you know, be my advisor, be my coach, let's do stuff, but let's do it outside the context of a board meeting. Well, I think you just mentioned a way that could be a great avenue into auditioning for a board role. Someone said they gave a lot of free advice when they were looking at board roles. So I think one way in is start as a board advisor, get to know the CEO. I mean, you mentioned that the trust relationship is so important. So how do you get to know a company? How do you get to know a board well?

How do you get to know that CEO well and build? Can you do a project? Can you work on something? Can you start as an advisor? It's very, particularly if it's your first board, it's very easy. to fall in love. This must be it. Now I'm getting that. And it's your ego drives your decision making if you won't admit it. Now I'm on my first board. This is exciting. Maybe not so fast. You know, it's a 10-year marriage. And you might want to take some time to have some additional

meetings and some background checks that are maybe blind and not just say, here it is. That's my board opportunity. But is this actually the one that's right for me? And am I going to be my best self in this board? Let's just assume that we get over all these hurdles and we say, great, like, we're going to add a person. How do you think about how you interview that person and what you're looking for? So are you looking for industry expertise? Are you looking for somebody who, you know, maybe has a skill gap that you don't have? How do you think about the constellation of things that might make an appropriate independent board member?

Well, so, I mean, they make it easy for you. And one of them, audit committees, so they have to have a finance background, right? So that's a no-brainer. So I hired two X CFOs for that. I wish I had listened more to the advice of them giving and think more about how they would fit into the board. I hadn't taken a company public before. I thought that I was going to just be with my venture capitalist board members forever. Didn't really occur to me that there was another world of having people.

And then once we got to that position, we're going public. Then I'd listen to all the advice I got. You should have somebody who has a finance background. Okay, check. And you should have that is not the way I would build the board today. Today I'd build the board with how do we work together. This is our challenge. These are the things we're trying to do.

This is what's important for us. This is what my biggest fears. How do you feel about those fears? Like I would ask somebody, those real fears, very bluntly, because they're going to come out anyway. And so that was just a mistake I made. And I think I suffered for it. I would have much rather taken the time.

Taking the time. I didn't take the time. It was literally like, I hope I'm going to close this person. And then I have my board, and then I can go bubbly. know, because honestly, I didn't really want to go public, but my board wanted to go public. And so I was at a great sense of duty of doing things that. I mean, obviously, I got a lot of runway building your own company the way you wanted. And so I felt the return for me to them, the tax, was that I listened to them when they wanted to go public.

And they wanted to do that a lot earlier than I did. On the Zoom board, I chaired the nominating corporate governance committee. And so that job is you're supposed to, you have to recruit and hire in independent direction. So we went about a recruiting process different in a different way, which was we started by, I did a 360 and I interviewed all the board members. I didn't outsource that to a search firm. I actually took that on myself because I wanted to hear how each board member described their view of the culture and their view of what would make this a higher performing team. And what came out of that were actually criteria that I don't think anyone would have on their own realized we were looking for. It would be great to have board members where we could think about the functional needs.

of the business. So we thought about it in terms of how security is really important. So then we went and we recruited not from someone from our domain or our sector, but just someone who could bring into the board from security compliance perspective. The other area we thought of is the business had a strong consumer component. So how could we think about marketing and consumers? How could we think about someone from a different area in a different market who could just bring a fresh perspective in? So it was the opposite of looking for industry domain recruiting and it was much more driven to this, I'd say, orthogonal thinking, as well as people who shared a common core values. So we actually could name, we actually could name like these

are our core values as a board. And then when we went out to the search firm, the search firm then had that criteria in their mind when they started introducing candidates. So that's just, you know, some boards are high ego, some boards are low ego, some boards are combative, some boards are collaborative, like what kind of board, what kind of, what's the dynamic in that board room. I was so focused on getting the people who had been big in my industry before so that I could advertise that now I had them. I'd much rather have the one who wasn't the biggest today, but the one that was the right

fit with me that wanted to go and fight the battles we had. How do you think about the onboarding process for an independent and, you know, how is it or should it be different from a traditional VC or somebody else who comes on the board? What I have found is that most boards don't think about their onboarding process because it really doesn't fall to it being. any of the director's responsibility. You know, the nominating corporate governance chair, like my job is to go find the directors,

but nowhere does it say, like, I actually have to onboard them. And it's not the CEO's job either. And so it sort of falls through the cracks. So it's one of those processes that really, I would say, you need to almost advocate for yourself as well. There were a couple things we did on the Zoom board when we onboarded two directors that were just tips all pass along. One was we really wanted the new directors to go through,

orientation like a new any employee would like so if you're going to be a director of the company why not go through and be go through orientation as the employees do you'll then see a whole part of the business in that way the other is directors don't often get to get really exposed to the product so maybe if it's a consumer product you've used it but often directors hear about the product know about the product but they're really not getting their hands on with whatever the company's building and making so find a way as part of your on boarding to go to the factory floor and get exposed to the people building the actual product, technology software, so that you really understand the product. So those were just two ideas

that we felt were really important in the boards that I've been on. We didn't do any of that. I'm just thinking how sort of must have been to be a board member joining were like eight months, eight quarters public. And this person sort of just gets shot out of a cannon and is so trying to be part of what we're doing. I don't even know how the hell they were supposed to do that. I can't imagine what I must have been like to be them. Nobody thought about it. It's not on anyone's list, you know. And so, and there's this sort of dynamic if you're a new director. Like, can I ask for anything? What can I ask for? You know, it's like, start with asking for, like, can I have an org chart? Can I actually have an org chart? Show me who your team is

and who's under you. So, like, you have a sense. You know, another area that could be a great way to add value as a new director immediately is asset CEO as a new director. Like, so who, who are you hiring for what are your key open spots? You know, not that you're going to go fill those searches, but then you're immediately aligned, like, let me collaborate, let me know what are the pain points you're trying to solve for. Because that's just an area where you will then, day one, be plugged into thinking what that CEO is trying to solve for as the CEO's building their organization. As that onboarding happens, and then you think about just kind of the day-to-day of the actual board operation, are there best practices that either of you

have seen in your experience that help make both the board itself successful, but also make sure that you can absorb the changing dynamic that comes with having people who are independents. I want to hear about your best practices. What we do is just give them all the last board packages. And it also shows a lot in their realm, whether they actually care about what you're doing. If they don't get through that when you talk to them, it's like, why are you here? So I liked a lot the comment you had about people coming with those fresh eyes, you know, I think it's really powerful. We're seeing that always in our partnership

that when one of us go in and looks at a company, we see completely different things. And these are our peers. We've done the same things. We know the same things. And so I think for the board member that comes in and reads all that stuff, and that's a great way to get to know each other.

And you're like, well, I'm not hired yet. How would you possibly think? But I think at that stage, you should be comfortable under NDA giving somebody this stuff. Because it's such a great test for both of you. The other thing I do a lot is blind reference checking. And I just, both as CEOs and board members, I think the direct references.

So yourself, not the search from doing it. No, no, I never. I always do my own. Yeah, including every single person I hired. And I hired the first 800 people personally. A lot of reference checking. Yeah, yeah, yeah. You get very good at it.

You know, it becomes very efficient. So fix your blind references. I try to ask questions that aren't expected because everybody's so rehearsed. And typically, the reason you can't call the reference you're given is they're just, the person is fantastic. What's there of one issue? They work too hard. It's like, we're wasting both of our time, right? I mean, it's like, why are we doing this?

My favorite question, it's in a New York Times article that did on me is, what did you learn from your mom? Now people come in, prepare, are you going to ask me about my mom? That's a little unfortunate. But it still works, particularly if you ask it while you're basically talking shop like metrics and what was your background, what's my background? background and you all of a sudden slaughtered in what you learned from my mom. Because you bring that to the boardroom. And so I need to figure that out if I'm going to sit at 70 board members meetings with you and talk about really tough stuff. What are your basic value set and how do you deal with the tough things in your life or the good things in your life? You're listening for a

sort of a mission, a values connection? Yeah, I think so. It's more than the checklist of what's on the resume. But it's like, is this person going to be able to share my mission, my approach, my way. I'm only going to do this if I can try and make it legendary. And so I'm not going to make it legendary with people who are just there to tick boxes and aren't part of a bigger thing. And, you know, you learn to do that work up front because you're going to have some very tough value-based decisions that have absolutely nothing to do with math at all.

Okay, good. I want to make sure we have some questions. When things are, when the dynamic is no longer positive on the board and some of the issues are getting played out in the press, how do you continue to work together as a board and how do you prevent public perception and ego from entering the board room? You actually can really see a lot about a board in a time of stress. And so I can just hear from personal experience that in moments when things got tough, I think a board really knows how, can really know how to come together and problem solve.

I think what you see in a moment like that is different directors, they're sort of what they were brought to the board for, their strength. It's almost like you're a baseball team and you know who's, playing what position. And in a moment where there's a challenge, it's like you look around the team and you're like, you've got it, you've got it, go. The deal is you don't, you're sort of asking what happens to the relationship in a tough situation, right? I mean, you don't build the relationship there. You build the relationship before. It has a lot to do how you approach it from the beginning. And, you know, once there's trouble, it's too late to build the relationship.

All right, we've got two minutes left. Let's have a question. Wonderful. How do you do that balance between determining when a CEO really needs support and when he or she needs somebody to really shake them up and move them in a different direction and have that honest conversation and how do you best judge? Because especially as a board member, you want to support them to grow the company, but you also need to nip things in the bud before they show up in the press as a crisis. So one of the great things about when CEOs, and I think in the Valley now, many CEOs do hire coaches, and probably in your portfolio you see it.

You know, an important part of that CEO is hiring a coach is that ability to do a 360. So with my CEO clients, one of the areas I really focus on is saying, look, I'm here for you and to make you the best CEO you can be. It's part of that. Let me call and speak to some of your direct reports and some of your board members. I'm not asking them to fill out a performance survey. I'm just asking to have a question about what they think of their mother. But along those lines, like, what could I find out on their behalf that will surface, what are they doing well, what are their blind spots, you know, where are they falling short?

And then I distill that so that the CEO basically has a game plan or how to improve. No CEO founder started, you know, perfect day one, and they weren't perfect year one and they weren't perfect year five. They have to evolve with their companies. So for them to be successful, they have to constantly reinvent themselves as a leader. So the only way they're going to do that is if, in a way, they have some self-accountability and desire to take on those blind spots head on. To your point, the way you approach it is by bringing data, by bringing perspectives into that discussion, so that you can bring perspectives from the people that the CEO counts. on entrusts. And then that forms that self-growth plan. All right. So that's actually a

great note. Thank you very much. Thank you, Ann and Lars, for your time. Appreciate it.