Last week Facebook Co-founder, Chris Hughes, called for the breakup of Facebook. He made quite a compelling argument for the U.S. Government to do its job and address the many issues that warrant further investigation beyond that which will result in a $5 billion fine that will be levied on the company for past security infractions. However, the line from the article that stood out for me was, “ Facebook’s board works more like an advisory committee than an overseer, because Mark [Zuckerberg] controls around 60 percent of voting shares.” When you consider that he controls three of the larges communications platforms in the world - Facebook, Instagram and What’sApp - that’s a hell of a lot of power in the hands of one person who can make unilateral decisions without fear that the board of directors can do anything.
In an age where hardly a week goes by without learning of another CEO that has misappropriated funds, lied about a product’s status, been accused of sexual harassment, discrimination, or hid a security breach from the public, can we afford to have CEOs and founders with unilateral control over businesses that can influence societies and governments so negatively? This got me thinking about the role of the board of directors in particular at the most nascent stage of company formation.
When I started out in venture capital many years ago I was surprised to find out that there was no formal training for how to be a board member. Making the move from startup executive and officer of a company that I helped to take public I had some idea of how board mechanics worked, but this time the tables would be turned. I was essentially given two pieces of information: 1. Do not try to run the company from the board. If you are then you backed the wrong people; and, 2. Your only jobs are to hire and fire the CEO, make recommendations on key hires, and monitor performance.
The early 1900s ushered in the age of the “robber barons” which allowed a small group of immensely powerful corporate leaders to industrialized America. This was followed by the crash of 1929 leading to the Great Depression and in 1933 and 1934 new Securities Acts designed to prevent such a calamity from happening again.
The corporate world really hit its stride post World War II when European production capacity was all but destroyed. Expansion continued pretty much unabated for four decades and the stock market became somewhat democratized as more retail investors began owning stock. These new stockholders relied on a corporate governance model that centered around the CEO and board members were largely business and country club buddies who rarely “rocked the boat.” Checks and balances on board behavior were governed by state corporate laws, in particular Delaware Corporate Laws which are still followed by most companies today.
I don’t mean to imply that all boards are rigged. It’s just that good behavior and board excellence don’t make great headlines in the news. So we are treated to a steady flow of poor behavior of executives and boards by the media.
In the late 1990’s we witnessed the Dotcom Bubble in which the number of American corporations, startups in particular, exploded. Along with the growth in both startups and investors came an increased focus on stock ownership and in particular stock options with the power to create overnight millionaires and billionaires. One downside was the shift in strategic focus toward short-termism and in some highly publicized cases, creative accounting. In short, many boards failed to execute their fiduciary duties or practice good stewardship because they lacked independence. This resulted in the Dotcom Bust of ‘99-’00.
Once again, new laws were passed, but none addressed board independence or CEO power adequately, which is why we find ourselves in the position we are in today where one individual has the power to topple governments.
Just what are the responsibilities of the board? As stated earlier, the board is in place to select and oversee management. Oversight is determined by state corporate laws and guided by the duties of candor, loyalty, and care. The duty of candor requires the board to ensure that the information that the company provides to shareholders is complete and accurate. The duty of loyalty requires board members to act in good faith and in the best interests of the company and shareholders without the conflict of personal gain. The duty of care requires board members to act deliberately with diligence and competence of a prudent person in a similar position under like circumstance. (Boardroom Excellence. Brountas, Paul P.) These guiding principles should help founders and investors alike find board members who fit the bill. However, startup boards have a tendency get “stacked” in favor of investors, which has probably led to the creation of non-standard voting structures and CEO power that we see with Facebook, Uber, and Lyft to name a few. The pendulum has swung so far in the other direction that it now threatens good corporate governance.
What’s a founder to do? First, begin with the premise that disagreement is a virtue. Park your ego at the door and rather than attempt to lock down power, push harder for true independent board members. Good board members should, at a minimum, fit the following:
Domain or business knowledge
Courage and ability to challenge
Complementary skills and experience
Commitment to the job
Independent and unconflicted
Building your board is as important as building your team. You want diversity of thought, experience, personalities, instincts, and expertise. Most of all, you want independence, honesty and a commitment to work diligently in the interest of the company and shareholders alike. A recycled executive who is beholden to the investor group usually doesn’t meet the criteria. The tradeoff of unilateral power for improved governance and strategic decision making is a tall order. Only confident founders need apply.