Demystify Board of Directors

October 17, 2012 · 7 min read

Today's Real-Life Ethics talked about managing board of directors for a startup company.

Confession of a Stanford Sloan Fellow Series EP21

Today's Real-Life Ethics talked about managing board of directors for a startup company. It's the fifth week into this class and I feel my past-life has been miserable because I seem to have lived through 4 out of 5 epic ethical dilemmas mentioned so far by the instructors. For the past 5 years in Beijing, I had served two boards with very different dynamics, involving some of the most illuminating entreprenuears and influential top-tiered VC investors. Not passing any judgment or drawing generalized conclusions here, I just want to share a few observations to demystify some common misconceptions about the Board of Directors of a startup company, at least from a China perspective.

They (board directors) are all such smart people ... they must know what are the best strategies.
They probably all have high IQ (who doesn't...), but IQ means nothing in this business because, for people who get themselves into this game at this level, nobody is stupid.
Many of them know very little about the industry before making the investment. China is such a wide-open canvas that many industries are just opening up for private equity investments.
Many VC investors in China have very little corporate operation experience. 2007-2011 saw a tremendous boom of China's newly born VC/PE industry and a huge increase in numbers of VC professionals. Unlike VC investors in Silicon Valley who are mostly trained engineers or have cut their teeth in corporate trenches before, the VC investors (including VP to partner level) in China often only have MBA degree with thin corporate background.
VC/PE investor has been a trendy title in recent years because they carry so much liquidity capital around. Innocent college graduates/young entrepreneurs would worship any words mumbled by "VC Investor" as if those are Ten Commandments. This imbalance of demand-n-supply significantly boosts VC investors' perception about their abilities.
The combination of all above factors leads to the fact that more often than not, VC investors are seen throwing around their weight in portfolio companies, believing they belong to the achieved elite social class, and making operational decisions for CEOs way over their heads.
To me, they just kept making one bad decision after another, to the point that I had to leave and came to Stanford/Silicon Valley to salvage my sanity.
They are all super-connected and extremely resourceful.
The first part is actually true. They're indeed very well connected. Doing business in China is all driven by guanxi. It's easy to make new relationships when you're the one with money behind.
Are they resourceful/useful? That's an interesting question. For those famous investment rock stars, you would imagine they can fix up any problem just by lifting their fingers. I thought so too when I was allured into my previous companies, trembling in excitement under the shadow of those larger-than-life personalities/directors of the board, fantasizing about the prospect of charging into the wilderness under their wings.
Unfortunately, most of them, if not all, turned out to be utterly unhelpful. It took me quite a while to figure this out: they don't have enough skin in the game, so they don't care and don't want to commit their resources.
It puzzled me initially: what about those tens of millions (US$) of investments? With such a significant stake in the company, how can they not care? It took me even longer to figure out that what's most critical to them is not the money, it's the time, stupid.
They spread their time too thin over too many deals and projects, like every other investor in China's crazy VC boom. What we (as a company) feel like a gigantic investment/stake is actually pretty small compared to their total personal fortunes/size of their VC funds. They do have a lot of political capital, but they know very well that they would only use that for the biggest deal transactions (which always seems like the next one). If your company is not among their top 3 investments, don't count on them to call their friends in high places for help.
It's easy to verify if someone's connection is as good as he/she claims. Ask him to arrange a lunch/dinner with that powerful person that he claims to have access to. If he can't make the appointment happen in 3 days, it's a false claim.
They are always trying to find the best CEO for the company
This topic stirred up a spirited discussion among my classmates. Lecturer Andy's rule of thumb is that if the CEO still needs instructions from the board/chairman for what to do, he/she is no longer fit for this position. He should be let go/fired, and the board should get a new CEO. In principle, this rule sounds correct, but in real business situations it gets a lot blurrier than that.
I was the CFO of two fairly large pre-IPO companies based in Beijing for the past 5 years; a lot of my friends there are CFOs, lawyers, bankers or Big Four partners that work with many CEOs/founders; I was familiar with stories of many TMT startups in China. My experiences led me into believing that in most TMT startup companies, the CEOs are not fit for the job.
Then why are they not replaced by someone better? Replacing a CEO is a major surgical operation for a fast-growing startup company. It'll take at least 6 months for a new CEO to sit down tight with a clean slate of his own VPs. Most companies that are under tremendous pressure to grow revenue to meet the earn-out targets set by investors just can't afford the luxury of going through such an operation. Moreover, in most cases CEO is the founder of the company. It'll take a brutal board room coup to make the transition happen.
It seems that though most of the time the board is not satisfied with the CEO, the board will still make do, as long as the incumbent CEO does not become too much of an obstacle for the company's IPO. As long as IPO is still within reach, the board will tolerate the incompetence of the CEO. The only situation where the board feels CEO has to be replaced is when his existence has clearly become a roadblock for IPO.
The chairman of the board that I used to work for, told me something very simple and profound: the board is not as divided as you guys (VPs) think (so don't play us off against each other); when faced with capital interest, we can put our differences on hold and form a consensus very quickly. (translation: as long as IPO is plausible, any sin committed by the CEO is forgivable)
I don't necessarily subscribe to his school of thoughts, but I know what he said tells the exact story for most of the startup companies in China.

Something to think about.