Ground rules for great board meetings: what's involved in conducting a board meeting that meets everyone's expectations and moves the company forward? Let's open the venture capitalists' playbook to see what governance rules they favor to get results.

• Author: Kristie, James
• Position: Board Meetings - Panel Discussion

RECENT CORPORATE SCANDALS have prompted executives at companies both large and small to reassess the effectiveness of their companies' boards. Many have concluded that their board relationships and processes for conducting board meetings could stand improvement. Early-stage firms in particular are hungry for advice on how best to leverage the experience of their directors, both in and outside of the boardroom.

In the fall of 2002, Eisner LLP, an accounting and advisory firm that works closely with emerging and mid-sized companies through all stages of development, hosted a workshop entitled "The Rules, the Roles, and the Responsibilities for Great Board Meetings." It was an initiative to help venture-backed companies improve board efficiency. In attendance were some 100 CEOs, venture capitalists, board members, and other industry professionals, along with DIRECTORS & BOARDS.

The panel discussion, held at the New York Palace Hotel, was moderated by Bruce Strzelczyk, a partner at Eisner who has extensive experience in representing growing technology companies. The backgrounds of the workshop panelists are detailed on pages 28-29. The group, all intimately familiar with entrepreneurs' concerns and challenges, candidly discussed their experiences as both venture capitalists and board members. Their wide-ranging discussion touched on preparation for board meetings, the board agenda, directors' time involvement, board and CEO relationship, compensation, recruitment, and other issues. Excerpts from the discussion follow.

Bruce Strzelczyk: Let me start off by telling you how this panel discussion came about. I was at a board meeting with one of our portfolio companies. At the end of the meeting one of the VCs got up and said, "This meeting was horrible. Let's fire the CEO." All hands went up, and he was gone. It was an experience I will never forget. Nor will he!

An incorrectly run board meeting can be a painful experience. It takes up more time for management, more time for the VCs, more time for everybody. For a company that is having problems, especially if it involves CEO performance, a badly run meeting is often the straw that breaks the camel's back. Or, when done well and everybody's expectations are met, it is much more efficient and much more effective.

Before we get into some of the basic mechanics of a board meeting, let's start with a few fundamental questions regarding board role and responsibilities. There are those who say that the primary role of the board of directors is to evaluate the appropriateness of retaining the CEO. Is this true?

Ronald Celmer: The board's job is to hire and fire the CEO, and to give advice. The CEO ignores that advice at his peril. In general, in our business, the board members are the people who have staked the CEO to grow the company based on the business plan. If the CEO thinks he's right, he should stick by his guns. But you've generally got a group of board members who have been through the battles multiple times and have won many of those battles because they're still in business and have the gray hair to show for it. So a CEO should consider carefully before he goes toe to toe against the board.

Remember that the CEO is generally a board member, and the first and foremost responsibility of the board is to preserve, protect, and grow shareholder value. It's really that simple. In the final analysis, we're all on the same side.

Frank Brochin: The role of the board is to be the partner of the CEO in building the business. A board is a collection of people who will bring different things to the table. Some will have different business experiences, some will have financial experience, or legal experience, but at the end of the day they will all complement each other. Hopefully, through their synergistic interaction with the CEO, they will actually bring better business judgment to the operations of the company.

Laura Sachar: When you have a board where everyone is rowing together--where you have those complementary skills and people are really working together to execute, to give advice, to support the CEO--then generally you have a more successful company. Where that isn't happening, you can have a lot of problems.

Jay Goldberg: I, too, believe in the partnership model. For me, the idea that at every board meeting I had to evaluate the CEO strikes me as a very unpleasant and not very productive effort. I'm there to help the CEO build the business, and the only time that I would start thinking about evaluation would be way down the road if there was a performance issue.

Question of representation

Strzelczyk: In an early-stage company and almost through the IPO, there are different groups represented--management, VCs, possibly outsiders. As board members, whose interest do you represent? Do you represent your own interest because you as the VC put in your money? Does the CEO represent his own interest? And what about the other players?

Russell Planitzer: Every board member--whether it's the CEO, an investor/director, or independent director--has an obligation to every shareholder in the company. That's a fiduciary duty. Any time you find that your duty to your own organization is at odds with your duty to the company, you have to recuse yourself. Clearly, you should never make a decision or vote as a director that is in your own enlightened self-interest but rather for all of the shareholders at large. We must create value in the enterprise--long-term, sustainable value.

Habib Kairouz: We have situations in portfolio companies where, in the process of negotiating the investment, the entrepreneurs will say, "Why are you asking for all this documentation? You'll be on the board--you'll see everything." There is a clear difference between what you can do as a director and what you can do as a shareholder. Anything that we need to get protected for as a shareholder--especially these days, when you have different classes of shareholders in a company--we make sure that we're protected in the documents. But ultimately, when we go to the board meetings, we have to represent all the shareholders.

Goldberg: There have been cases where I haven't taken a board seat but I've asked a friend of mine from within the software industry to take that seat on behalf of Hudson. Many firms do that, and they do it for exactly the same reason. What you're really trying to do is provide the most value to the company, and our protections don't come as a result of our board seat.

Who does what?

Strzelczyk: Who manages the company? Does the board manage the company? Do the VC investors manage the company? Or does the CEO manage the company? Where is the dividing line for responsibilities, and who does what?

Planitzer: There's no question that the management of the company runs the business. That's what they're paid to do full-time. I can assure you that even the most diligent director who spends a lot of time on a company sees only one layer of the artichoke, so to speak. If a director believes that from that vantage point he'd have enough information to run a business day to day, well that's just not the case. When someone says that directors hire and fire the CEO, what that means is we look to that CEO to exert the leadership of the business. We're evaluating the CEO as he does that, but the management runs the business on a day-to-day basis. We're there for advice, we're there for support, and we're there to make a change if it's necessary.

Celmer: I agree, but there are moments in time when who's managing the business gets a little murkier. Once a year the board needs to get together and agree on a budget for the following year, particularly a capital budget. As the year plays out, there may come a time when you have to decide between being able to invest in the future of the business and being able to make the payroll. That's a moment when it gets blurrier as to who actually makes the decisions about how you focus your limited resources going forward.

Sachar: If you have an "A"-player CEO, then typically he's leading that process and is very receptive to the board's advice as to how to make those decisions. But the CEO is still leading the company.

Kairouz: We're all in agreement that the primary responsibility of the board is to protect and build shareholder value. Unfortunately, at times we get into situations where the board has to look out for other people's interests, such as the employees. And of course, for a venture capital company, at the end of a runway is the flip from being fiduciaries for the shareholders to fiduciaries for the creditors.

Recruiting a CEO

Strzelczyk: Norbert, when boards evaluate a CEO candidate, what should they be looking for?

Norbert Gottenberg: The board knows where the business needs to go because they have been intimately involved with strategy and in developing the road map. What you try to determine is: Do the candidates understand the road map? Can they enhance the road map? What kind of leadership will they bring to the table in motivating their people to execute the road map? That is absolutely critical. Directors should evaluate a candidate's ability to partner with the board in continuing to refine the strategy and the vision, but on the other hand they should definitely pay a lot of attention to the candidate's ability to do the execution.

Sachar: A lot of times when you are recruiting a new CEO, you are moving from the stage of having a technology-oriented founder to wanting a CEO who has more experience in executing. You're looking for someone who can build a relationship with that founder, if possible, and who has the skills to take the business a step further. That person often has other people who they've worked with in the past who they can recruit into the company to enhance the team. If you have a situation like that, we've found you can really take the company to the next level with that new CEO.

Brochin: At different stages in...