Note: This article is part of an ongoing series on Board Directors. To learn more about their roles and responsibilities, download this free eBook today Director's Guidebook: How to be an Effective Board Director in Early Stage Companies or purchase our books at Amazon.com.
One day a good friend who had moved away came back to visit over the holidays. It quickly became clear that things were not going well in his career as a very senior executive in charge of engineering and product management for a large technology company. So when there was a lull in the holiday action we decided to go for a walk to talk about things.
As we walked he detailed the many issues he was struggling with: missed deadlines, disappointed customers, angry fellow executives, a disapproving CEO. I listened patiently for a long time without commenting. After a while he had exhausted himself with describing the problem. I said, “Lemme ask you two questions. First, how many direct reports do you have?” He said he had seven. So then I said, “When you think about those seven people on your team, if you are really honest, how many would you say are A+ players?” He thought about it for a while as I just waited quietly. Eventually he said, “Realistically, maybe 2?” At first I said nothing and kept on walking. A minute or so went by. He was confused and kept looking at me to understand where I was going. I didn’t say anything.
The silence became really uncomfortable, so I said, “Two, huh?” and kept walking without saying anything more. Seconds stretched into minutes. He looked at me quizzically. I gave him no guidance. At one point I pursed my lips and shrugged ever so slightly and kept walking. The silence continued. And after about 10 or so minutes of walking in silence, he turned to me and said, “Ah, I get it. I know what I need to do when I get back to work. I need to rebuild my team, don’t I?” I looked at him and said, “Yes, I believe you might.”
Superstar, cult-like CEOs make for great press. How many times have you read an article about Steve Jobs, Elon Musk or Mark Zuckerberg that makes it sound like their companies’ success rested entirely on their shoulders? It makes for a compelling human story, but these are myths. That is not how the world works. Without a great supporting team, these CEOs could never deliver on their promised vision.
As early stage investors, we typically invest when a company’s management team is small and unproven. It’s not unusual for the team to have just a CEO, CTO and maybe one other senior executive.
A small team gets used to wearing lots of hats and doing everything for themselves. They feel the rush of always being frantically busy and juggling many make-or-break decisions at once. That may be an acceptable, even necessary, approach in the earliest days. But it does not scale. It does not provide enough resource to do anything beyond maybe getting an initial minimum viable product to market and making a few sales. This model is inadequate to build an organization that can scale rapidly and meet the needs of demanding customers.
In the early months and quarters of a startup’s life, every new hire is crucial. As a board member, you will need to ensure that the CEO realizes the importance of her role in setting the tone for all new hiring decisions and building a great management team. I don’t think you can emphasize enough to your CEO that hiring is job one.
Q: Christopher, let’s start with a very basic question. When it comes to hiring senior management, what’s the first conversation you have with the CEO?
The first conversation is about building a hiring plan. That is a four step process.
Identify the near term demands being placed on the company.
Take an inventory of the skills and capacities presently available.
Identify the financial resources available for hiring now, in the mid-term and slightly out into the future.
Prioritize those hires to make sure you are using your near-term limited resources to tackle the highest priorities first.
Once you have your list of “now/critical” hires, your “as soon as possible” hires and your “shortly after that” hires, the next part of the discussion is about what are the milestones or key indicators (sales, organizational stresses) you need to see before rolling out the mid and later stages of the hiring plan. Helping the CEO visualize this path, helps her internalize that:
She cannot do it all with founders and needs to bring in people to grow.
She cannot hire indiscriminately, but rather has to look for proofs or indicators from the business to tell her when to add the next increment of investment in the team.
And then finally, before any hires are actually made, it is critical to discuss the importance of having absolutely uncompromising standards for bringing people into the company and how you are going to design an interviewing and hiring process to enforce those standards. As painful as it can be to wait patiently and insist on hiring the best, if you don’t, those short term expediencies can lead to bad outcomes. Your company could be in the situation of my friend with two A+ players out of seven, or worse, it can easily destroy your company's culture and business prospects.
Q: What should board members do to help the CEO recruit senior management?
Once a hiring plan has been agreed upon, boards can help implement it in three very important ways.
First, they can leverage their networks to help find good candidates or at least to find people who can find good candidates. Not only do more hands and more sets of eyes help, but the strength of a network is in part determined by how many remote nodes it has. Bringing the varied experiences and connections of your board to bear can greatly expand your reach in finding the right person.
Second, they can help design and gently guide the operation of the recruitment and hiring process. This is where the perspective of more experience can be invaluable for inexperienced CEOs. Directors can help the CEO think through the company culture and how to communicate company values as a necessary aspect of recruiting A+ players. An experienced director can take on a coaching role and encourage an insecure CEO to have the courage to hire strong people who may be more experienced than he is. And experienced directors can point to helpful resources like Simon Sinek’s TED talk on how great leaders communicate to inspire action, or the excellent book Who by Geoff Smart and Randy Street about how great leaders hire.
Third, directors can pitch in with the interviewing to provide a second set of eyes and a different perspective on candidates. Directors should not micromanage the interviewing, but they can add invaluable insights based on their experiences as managers. Directors can also be very helpful in closing key candidates the company is looking to hire. Having a director reinforce the vision and the values outlined by the CEO can go a long way to making a prospective hire feel like they are joining an organization with some substance.
Q: What are some of the key points you offer a CEO to make sure they do a good job with such critical hires?
As noted above, hiring well is about the following:
Setting up a rigorous process,
Leveraging your full team,
Having a good handle on company culture,
Knowing how to communicate the company’s values and vision, and
Having the courage to hire A+ players, even if they are stronger and more experienced than yourself.
It helps to remind a CEO that they will need to hire slow and fire fast. In other words, you may need to explain that early hires are so critical that they may need to terminate their poor hires quickly. That is painful, embarrassing and disruptive, so it pays to be demanding and uncompromising when bringing in new people.
It reinforces your focus on quality if you point out that B players tend to hire C players. One reason why they are B players is that they don’t know how to hire well. If you point out that early hires in a startup generally go on to be the people building their teams, that means your Bs will have a big impact. If you bring in weak players who have the ability to bring in other weaker players, you can ruin your company overnight.
It is not just a question of having weaker-than-optimal capabilities in one area or another. Tolerating poor performers is totally corrosive to the culture you are trying to build. If a team of super-stars sees someone under-delivering and not being held accountable, that double-standard begins to feel unfair and can de-motivate your A+ players very quickly. They won’t put up with that double-standard for long. They will either turn on leadership or they will just quietly leave.
If understanding these dynamics doesn’t clue a CEO into the importance of doing key hires well, then I would guess nothing would!
Q: Early stage companies go through many phases as they grow from pre-revenue to $100M+. What is the impact on the management team from this growth?
People like Steve Jobs, Anita Roddick, and Bill Gates are freaks of nature. It is incredibly rare to find someone with the skills to thrive as an early stage entrepreneur who also has the skills to run a massive global operation. The skillsets and mindsets are just so different and reflect such different temperaments that they almost never exist in the same person.
Moving a company from $0 to the first $1M takes imagination, vision, willingness to take risk and experiment, tenacity, and the kind of creative mind to lay something out from a blank sheet of paper. Going from $1M to $10M is about starting to standardize. You are growing fast but looking to find repeatability and introduce processes that are going to ensure quality and customer service. Growing from $10M to $100M+ is about management. Getting things done through others. The watch words at this stage are efficiency, consistency, service, controls, processes, oversight, all while scaling as fast as possible. Building teams, instituting systems and measures, and tightening and getting things into grooves are all critical tasks so the whole house of cards does not come crashing down.
The impact of growing quickly over a sustained period can put a huge strain on a founding management team. It is more than just transitioning from doing it yourself to managing others. It is about anticipating what will be needed to perform at a higher level and using that foresight to build the road just seconds before the traffic arrives. That takes incredible self-awareness and realism.
Unfortunately, that kind of rigor is really hard for many founding teams. Most people find they are more comfortable, and more competent, at one stage or another. People have a tendency to want to stay in their comfort zones, and that can cause bad blind spots. Company leadership needs to fight that urge and look critically at the question of whether the company has outgrown its leaders.
As companies grow, it is usually necessary to bring in experienced hands who have “done it before” at the stage the company is going through. It has been observed that the quality of the management team is the main reason companies struggle after passing the $10M mark. If you get to that level, there is clearly a market for what you are doing, so the question quickly becomes "is the team good enough to leverage that market?"
Q: Most large companies develop a succession plan to deal with times when a senior manager leaves the company. At what stage do you think it’s necessary to create a succession plan for an early stage company?
The broader and stronger a team is and the more established its processes are, the more likely it is to survive the removal of a key player. But in the earliest days, a startup team is rarely broad and strong and rarely has well-established processes. Companies just getting started don’t really have many assets or enterprise value to protect, but if the market is real, they will quickly raise money and build a growing concern. So it becomes important fairly quickly to identify someone on the management team who could step up into the CEO’s position on a moment’s notice if necessary. Ideally it would be a member of the founding team, but in some cases it could be an experienced director who could step in and stabilize the company in the short term while new leadership is found or developed.
Beyond the CEO, the next biggest priority is making sure your key technical eggs are not all in one basket. You do not want all your know-how in the exclusive possession of one person. You want to take basic precautions like making sure that code is annotated and technical knowledge is at least documented if not actually distributed across a team. And as the company grows its management capability, you should institute training and invest in direct reports to make sure they develop the management skills necessary to step up on short notice if necessary.
Q: The CEO and the head of HR are responsible for undertaking annual performance reviews of the senior management team. What approach do you use for handling the performance review of the CEO?
People differ in their views about HR process. I’d be the first to acknowledge that some experienced people find formal HR-driven reviews to be a big waste of time. Yet the practice continues to be widespread. The reason for this is that there is real value in giving people a sense of how they are doing. There is also real value in having managers carve out a moment to actually ask themselves how key direct reports are doing. It’s just like the old saying: you manage what you measure.
The same principles apply to the board’s oversight of the CEO. There is tremendous value in carving out the time to do a somewhat formal review each year. It is no substitute for guidance and feedback throughout the year. That is very important too. But the annual review is different. The annual process focuses as much on development as it does on performance.
The template doesn’t matter too much. At a conceptual level, it should it should contain a first section written by the CEO with the following parts:
Description of Main Duties and Responsibilities
Areas for Improvement
Near Term Goals
Long Term Goals
How the Board and/or Management Team Can Help
Then there should be a section for the Board’s Comments:
General Comments on Duties and Strengths
Comments on Development Plan for Weaknesses and Goals
How the Board and/or Management Team Will Help
This process can be driven by the Lead Director, the Board Chair, the Chair of the Compensation Committee or, in some cases, by the CEO’s executive coach if there is one. It should be what I like to call “mild 360.” Input should be sought from all the direct reports as well as the other board members, but only by means of a conversation - formal written feedback is not required.
Once the input has been collected and the report finalized, it should be shared in written detail with the CEO, and in high level summary form with the other directors. Along the way to finalizing the report, it may be appropriate to seek input from individuals on certain paragraphs to make sure the report captures their thoughts accurately.
Note: for the sake of completeness, it should be observed that as the company grows in revenue and size it is a good and valuable practice to also do annual evaluations of each director, overall board effectiveness and committee chair effectiveness. This is overkill for young startups, but a critical practice for scaling companies and their boards!
Q: So let’s say the CEO’s performance isn’t satisfactory and a change needs to be made. What happens next?
This is one of the toughest issues faced by a start up board (or group of investors). Admitting the CEO is not doing well requires admitting you backed the wrong person and now the company is going to have to go through major turmoil before it can get back on track.
So how does this play out? There are two paths this can go down: the first path is a situation where things can be saved. Two conditions are necessary:
First, you have caught it early (before the management team has lost faith in their leader), and,
Second, the CEO has the innate ability to do the job well with some help and redirection.
In these cases, you are in coaching and rehabilitation mode. It takes honesty and directness about the deficits, as well as the reassurance that the board will invest in the CEO to get him or her to where they need to be.
Sometimes a very experienced board member can take on the project of trying to coach the CEO up the growth curve quickly. But often a professional coach is the better way to go. Professional coaches have the training and evaluation skills necessary to get a handle on the problem as well as the proven techniques to help CEOs make the changes they need to make. Dedicated professional coaches also have the time and resources to really engage with the project and put in the necessary oversight. And they are an objective, independent voice of authority with no personal or investment stake in the company.
The second path is much harder and more risky. Going down this path often does not work out well. This is what I sometimes refer to with gallows humor as the CEO-echtomy. Removing and replacing a CEO is never easy, and it is particularly hard when he/she is a critical and founding member of a small team which holds a big chunk of stock in the company (assuming the “founder vesting” or clawback period has mostly expired.)
If you are lucky, you have been honestly working with the CEO to address their limitations through reviews and feedback, and they understand and agree with your assessment of the situation. They are willing to admit they are uncomfortable in the role and understand that there has to be someone out there who is better for the company. Some people refer to this as a CEO who “will drink from the greed bowl rather than the ego bowl.” Noam Wasserman refers to this in The Founder’s Dilemma as “choosing to be rich rather than king.” Regardless of what you call it, in these cases there can be a very orderly transition of power. The board can work with the CEO to outline the criteria for a new CEO, come up with a timeline, and agree on a search process to find the new leader.
In cases where the CEO does not agree to the change, it is the board’s job to communicate that the change is not, in fact, optional. This will obviously result in an angry CEO and therefore be very disruptive. It very likely may involve legal consultation on the part of both the CEO and the board. Fortunately, corporate law is very well-settled on the question of the board’s responsibility to evaluate, and, if necessary replace, an underperforming CEO.
While the underlying law is clear, the tricky part can come in the form of contractual overlays. Here are some examples of things to look out for in this context:
Founder-vesting clauses which have expired, meaning you are going to be unable to claw stock back and are going to be dealing with a dissident shareholder with a big chunk of stock;
Employment agreements with the CEO with “for cause” provisions and/or severance pay;
State and Federal anti-discrimination claims if the CEO is in any one of a number of specially protected classes;
Special provisions under the Investor Rights Agreement or the Voting Agreement that may be pertinent to the situation or require special voting classes or procedures;
Special provisions in the charter outlining rights or procedures which must be observed; and
Special super-voting rights on founders stock as has been used with companies like Google, Facebook and Snap.
Assuming you are not constrained by some contractual overlay, the question becomes one of timing. Do you have an internal successor who can step up as the interim CEO while you look? Does the company have enough money to get it through this period of transition without having to go back to investors while in flux?
Where there is enough cash and some interim coverage from a management team member or a director willing to serve as interim CEO, then the path is to conduct a search and make the change.
If cash is tight or there is no one identified who can serve as an interim, then it might be best to at least find an interim CEO, and maybe test the existing investors’ appetite for a bridge round of some sort to shore up the finances. If the company has no money, cannot raise money, has no interim and does not have time to find a CEO, then the board maybe be facing the heightened duties associated with the zone of insolvency. They may need to cut the burn drastically to save all remaining cash for a wind-down allowing the company to pay its legally required debts. Directors would be well advised to review their duties in this context. Directors may be personally liable for certain debts they fail to have the company pay.
Want to learn more about the roles and responsibilities of Directors? Download this free eBook today Director's Guidebook: How to be an Effective Board Director in Early Stage Companies or purchase our books at Amazon.com.