Brad McCarty • May 17, 2018

When you’re starting a company, the advice you’ll usually hear is all surrounding the idea and the execution. There are very few words paid toward the leadership, governance, and continued growth of the startup into its eventual goal. As the CEO of The Executives Club, and Director of The CME Group, Ana Dutra has over 30 years of experience in helping companies identify and execute growth strategies. During her talk at AngelMD’s Alpha Conference, she gave some sound advice that is equally as applicable to startups as it is to investors and advisors.

Ana’s direction focused on developing the best potential board of directors for a young company. She walks through tough questions, and points out the challenges that many companies face. As she points out, even the best products can be ruined by having a company whose leadership is unable to predict the traps that will cause them to fail.

First of all, it is an honor to be here. I am extremely humbled because even though I do come from a family of physicians, so I hope that that helps, sisters, brother-in-law, husband, two daughters now in medical school, I come to talk about a different science. Which is a science of governance and leadership. I was lucky enough throughout my career to be able to experience good and bad and different and horrible governance and leadership from a number of different angles, not only by consulting to companies and see them acquiring businesses and divesting them, but also sitting in boards, startups, global public companies, private companies, then also being a CEO myself, and then doing my time as CEO of Korn/Ferry Consulting doing board assessment throughout the world.The one thing that I can tell you, for those of you who are investors or founders or inventors, is that I have seen great products and great companies failing or not having sustainable success because of poor governance and because of poor leadership. In fact, it is the highest factor for failure of companies no matter what size and what stage they are. You can have the best product, you’re going to be successful for a few years, but if you don’t put the right people in the right places at the right time, that is just not sustainable.

The good news is that, in the past and if you think about governance model theories and boards and advisors evolved, that is kind of a hobby, right? Then the regulators started to come in. For example, in 2002 Nasdaq actually said that no company must have dependent directors or executive directors in the nominating committee if they wanted to be listed with Nasdaq so that it’s to institute some independence. Then in 2009, the FCC said well every public company must have a CEO succession plan in a succession for the successors of the CEO to be listed in the public Nasdaq or New York Stock Exchange. Now, you have ISS talking on [inaudible 00:02:38] so there’s more scrutiny around governance around public companies. Then we have the big issues and the big scandals we have for Bane Oxley and then we have all the big scandals that increases scrutiny.

But when it comes down to startups or to private organizations, there’s very little regulation out there. I have to say that it warms my heart that over the last three months, I’ve been asked to speak in VC conferences and startup conferences and incubators three times just in the last couple of months. Which means to me, that eyes are being opened to the fact that if you don’t put in place great governance and great operating structure and great leadership from the beginning, you are dramatically reducing the odds of success for your company.

I have to tell you a story. About 15 years ago, I was asked to speak to a group of physicians and I told my husband I was so excited about it because it was the first time that I was going to talk to a group of physicians and he said, “oh man, nobody is going to pay attention to you.” And I said, “oh why is that?” He said, “I’ll tell you why. Because one is going to be thinking about the next procedure they have to do, they other one is going to be saying this is not real science, what am I doing here and the third one’s going to be thinking, I’m only sitting in this room cause my boss told me so, how long is this going to last?

What I see now is quite the opposite. What I’d like to do in next 15 minutes is to talk about three things. First of all, we start to talk about evolution and maturity of governance model and boards. Then let’s talk a little bit about size, composition – I know there’s many investors in the room and one thing that I’ll tell you you should be looking at is how is this company organized, how is it governed, who is in the advisory committee, board or student committee or whatever you call? And the last thing, let’s talk a little bit about challenges, traps and how to overcome or at least predict and anticipate them. Is that fair game? And then we’ll have some time for questions.

So, boards started very simply because people were investing money in companies and they wanted to know how they were run so there were no legislators, there were we no organisms regulating how boards should work. As I mentioned over the course of the last few years, not only because of the world financial crisis, or Sarnes Banes Oxley or you take World Comm and other big scandals and the scrutiny increase quite a bit. Investors also became savvier, so stock holders are saying hey, we want to have a say on pay of CEO, we want to understand how much equity is being given to employees at the top. Now you have the ISS with institutional investors saying if we are institutional investors, here are some guidelines that we want to impose on you.

So now there’s so much more responsibility over directors, which changes the role of directors as well, as well as investors. What we even think about in the span of investors? Because so many times the interest of the founder, the inventor, the interest of the current operator and the investors might be at odds, so although, at the end the ultimate goal is to increase value of the company. Whether you’re going to sell it or you’re going to continue to grow it, but you have investors and I work a lot with private equity groups, and when you have many private equity partners on the board, that creates already a tension point. With the CEO who is hired sometimes to replace the founder to take the company to the next level but one wants to accelerate to sell fast, the other one is thinking long term growth and sustainability.

So many times having one, and just one for startups, independent director on the board can make a huge difference. The other question is around who that the independent director is going to be. In the health care space, for those of you who followed what happened with Theranos or Outcome Health, just to site two very recent examples. Theranos did not have one scientist on their board. Didn’t have anybody who was there just to ask the right questions. It’s not to probe. It’s not to confront. It’s not to run the company. It’s just to ask the right questions. Outcome Health, I don’t believe that there was any poor-ill intention, in terms of the data, the big data, that they were analyzing and disseminating. But you know what? It was not right. When investors discovered that, they felt they were being deceived. So that’s why having an organization like NGOMD who is bringing all of you together to actually talk about those issues. Thinking about governance and organizational models in your startups and in the companies that you’re thinking to invest in and what are the right questions to ask, can be incredibly helpful.

Let’s talk a little bit about size, composition and agenda. That’s different for startups, for companies who are at the more mature stage, private companies, public companies, family owned companies, founder led companies. I have to tell you the whole issue of having founder and inventor led companies that grow with a block buster product to a certain size and then is not successful, it’s what enabled people like me throughout my career to then spot those companies and buy them, sometimes, pull the person out and then start to grow the company through digitization or through doing things that the founder, who was great inventor, could not see from a business perspective and understanding when is the time to make that shift and having a board of directors around in place to say, this is the right time, there’s nothing wrong with the person, there’s nothing wrong with the idea to that point, but it’s the time to then think about the next step, is extremely important as well.

As I said, public companies, which is not the focus of our conversation, are going to have that mechanism embedded in the way that boards have to do business. You have to have an executive committee, you have to have an audit committee, you have to have a nom and gov committee. Having said that, why should startups be any different? An audit committee, or a compliance committee, at least should be a part of any foundational board of directors or board of advisors. Which is what’s going to prevent many companies from doing things that they don’t even know are non-compliant from a business perspective or from a tax or from a legislation perspective. They’re just doing it because the mindset of the inventor and of the founder is not necessarily focused on those other issues. So think about that as well.

Board Size. For startups, you have investor, you have the operators so the executive directors or the executive advisors. As I said, as least one or two independent directors should be in place. Think about who you serve. Think about the people who are validating your science or the data behind the company. Think about diversity and the … I was just having a conversation right before we started and just look around this room. I cannot believe that the markets that you’re serving are not low diversity as we see in here. So think about adding, not only people who can add value from a content perspective, but who can also represent known diverse segments in your company. They will help you to get more business. They will help you to see things from different perspectives. They will help you to attract capital from other sources as well.

Let’s talk a little bit about the most common causes of disruptions in boards. The first one is misalignment around the mission of the board and the strategy of the company. That misalignment, of course usually in two ways. It’s either amongst board members, as I said if you have investors, those of who are in the room, the founders, the operators and they’re all looking at the business in the long term from a different perspective. We have a problem, Houston, right? The other one is between the board of advisors and the CEO and the person who’s running the company. Again, I couldn’t be more clear, boards are not meant to run companies. They are meant to ask the right questions. They are meant to advise, but if you have an adversary relationship or if you don’t establish roles clearly enough with the CEO operating the day to day business, we will have problems. This should be a partnership relationship not an adversary relationship.

The other type of misalignment that I’ve seen very commonly is around the future of the company. Are we growing to sell? Are we growing to acquire? Are we growing to IPO? What the heck are we doing here? Until you have that type of alignment, you will have serious discussions in the room that are not necessarily going to touch on alignment, but that are caused by the lack of. So we see very clearly when companies are talking about succession. So who is going to succeed the founder or the CEO? You start to see different board members coming up with different competences or profile requirements for the next leader. When you see people in radically different camps in terms of who they think should be leading that company, I can assure you that the misalignment is not around the individual of the role, it is around the strategy of the company. That’s the difficult conversation you need to have – unprepared directors.

One of the reasons why Nasdaq does not allow non-independent directors on the nominating committees, because we don’t want to have family and friends in the board. That’s what people will do. If they don’t do that deliberately, they will tend to recruit to their board people who, one, either think or act like them, have the same style, they feel comfortable with, or people who they trust and they believe are going to be loyal to them. So, I know this person is not going to cause me trouble, cause you know what, we’ve been friends for several years, we know each other and I can justify him being on the board, but that’s not necessarily the best solution. My recommendation is very early in the process, I don’t care if you’ve been a company for 20 years or just for 20 months, start to think about your skills matrix. What kinds of companies, experiences, skills you need in your advisory board, you need in your board room.

And for you in the room who are investors, demand it. Demand to see if we’re going to form an advisory board, what types of skills do we want to have? Do we need people with technology skills? Do we need people who are scientists or who understand big data or do we need people who are going to help us to raise money for the company?

Which takes us to the third point. Which is misalignment around expectations for directors. The first thing I always ask when I’m being asked to sit on a board is, what do you expect from me? Why are you asking me to be a candidate for this board? Is it because of my experience, technical competence, or is it because I can make connections for you or I can help you to raise money or is it because, in the case of some advisory boards, you expect me to be a little bit more hands on? So, for both sides, investors and board candidates as well as operators in the room, founders in the room, that needs to be abundantly clear.

Dysfunctional dynamics. When I left Korn/Ferry, I was asked to write a book. The publisher’s who came to me said, “would you write a book about leadership? You do all those workshops and all that.” And I said, “nay, I don’t think so.” Just type ‘leadership’ on Amazon. You’re going to find more than 10,000 titles just on that subject matter. So, we read about all those great leaders, these phenomenal biographies, best in class, world class leaders and then I said people get to the market place and I’ve seen this day in and day out and all they find is leader-shit. It is, right? People ask me … I was seen Billy talking about simplicity and he goes, “did you just come up with that?” I said no, I always thought about that maybe it’s because I’m not born and raised in the US and you think about words in a different way. I thought, my goodness, I am here talking to people, coaching about leadership and all I see is leader-shit.

Guess what? So I wrote the book. It’s actually Lessons in Leadershit and it’s based on research about all the toxic behaviors you find in companies in the workplace and how to address them if they are your peers, your boss, your direct report. Guess what? It doesn’t stop in boards. You have the tyrant and bully in boards, you have the unaccountable, you have the lend grabber, you have the manipulator, you have the political animal in the board room. However, for a company to function you need to get that out of the way. And so understanding how your people are going to operate in the board room and how do you make decisions in particular for startups where much, much higher percentage of decisions are actually made in the board room, is extremely important. So that you don’t have either one person dominating the conversation or you don’t have, for those who are familiar with the Syndrome Abilene Paradox, where an entire family ends up driving three hours to have an ice cream, when at the end of the day nobody wanted to but I went because I thought that my brother really wanted to so I’m going with them. And somebody else’s two kids wanting to go … not that you could be their father, but I’m just pointing to people around … and say well maybe we should go and then they get to the ice cream place and they say nobody really wanted to be in the car for two hours to get this ice cream.

Guess what? That happens in boards more than you would imagine. That’s how sometimes acquisitions are pursued, diversity are pursued. Hives of key people are pursued because nobody actually speaks up or because only one person speaks up. How do you solve for that? Most important, and I have one minute to give the solutions on that.

First of all, let’s be abundantly clear, on advisors and board members and any players, expectations, time commitments, what do you want from them, what they can expect from you. There’s a big agent turn limit debate which is less relevant to you in this room, but instead of saying that somebody has to step out of the board when he or she reaches a certain age, do board assessments. Even if you ask an external consultant or the HR person to do an assessment. Then you will understand who is actually contributing value to the board or to the business in a meaningful way and who is not.

Minimize the opportunities for conflicts of interest. I always tell this story and by the way, you probably have some of that in the health care industry, when a friend of mine who has run a company very successfully, an HR company said to me, you know I think it’s time now for me to get on a couple of corporate boards, can you help me? And I said, sure Kevin, what kinds of boards do you think you would qualify for? And he said, “well I have done most of my company work with pharmaceutical companies so I think I should qualify for boards of pharmaceutical companies.” I said, “OK, let’s think about it. So are you going to close your business?” He said, “no, no, no, no, no absolutely not.” So let me tell you what. If you get one of those boards of a pharma company, first thing is you cannot do business with them. Second thing is, you cannot do business with any of their current competitors or anybody who could become a competitor. And he looks at me and says, “I don’t think that’s a good idea, then.”

So, help people to think about potential conflicts of interest, right? If they are going to do fundraisers, can they actually be on the board without compromising themselves. Think about diversity inclusion in boards. That’s for me has been a life passion, a career passion is to put more women, people of color, people with global experience in boards that can only enhance perspective.

And finally, and that the most trivial one, is meeting agenda cleanliness and effectiveness. I am sick and tired of going to board meetings where people are discussing irrelevant things when the company is actually on the board of sinking. When there are new trends and technologists coming into the market place that may break their business, but we’re just not talking about that. We’re talking about dress code. Seriously? So, think about what really matters. What should and what should not be in the agenda? What is operator’s role versus board role? I can assure you that you’re companies are going to be successful and last longer and longer. So I’m happy to take questions. I know I’ve past my time a little bit, but it’s been an honor to be here.

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