March 19, 2009

Do's and Dont's for your Board - By Sanjay Anandaram

You’re delighted to have successfully raised capital. You can now execute the plan and grow the business. One of the first things you do is hire senior sales and marketing people. You negotiate their compensation with them and are about to issue an employment contract. Then you remember that you’re supposed to get the approval of the board before hiring certain categories of people. The board does not approve the hiring. You feel humiliated, dejected and angry. The board is upset that you didn’t consult them before taking the decision to hire. Soon, the relationship sours.

You get irritated and annoyed with some board members because of the enormous micro-managing that they do. It seems that every little decision needs to be run past the board leading to frustratingly long decision making. In addition, you feel upset that you are no longer the driver of the company but just enacting someone else’s decisions. Not a conducive environment for a company to blossom in.

First and foremost, it is important to realise that accepting capital from an investor will lead to their taking board seats in your company. Often times, your company might not even have a board! So a board will need to be formed and board formalities and procedures as enshrined in the shareholders’ agreement will need to be followed. Having a board is supposed to serve several purposes. These range from corporate governance (“Is the company compliant with the law?” “Is the largest vendor to the company also the CEO?” “Is the company being run effectively and efficiently?”) to financial discipline (eg. regular reporting of financial data and management analysis thereof) to advice, counseling and develop and leverage relationships.

It is important to understand that there needs to be total transparency and trust in the relationship between the board and the entrepreneur CEO. This implies that information is shared in advance often times going beyond the legal obligations of the agreements. Bad news is to shared before any good news (“we just lost our best sales person” or “we lost two big sales orders this week” to “we will not be able to meet our numbers”) and not camouflaged if trust is to be developed. The guidelines of operation need to be also discussed and understood between the two parties.

Back-seat driving is to be avoided by the board members by constantly advising the CEO about each and every activity. Another no-no is micro-management where, say, the CEO is questioned on the compensation being paid to each and every individual in the company or requiring approvals from the board even to buy office stationery! This is absolutely not good for the company. The CEO needs to be polite but firm in case the board members demonstrate back-seat driving and or micromanagement. It is usually useful to have frequent meetings in the early days to ensure that both parties are comfortable with the protocol being followed.

The entrepreneur needs to therefore be very careful prior to accepting money from an investor. As mentioned before in these columns, it is imperative for the entrepreneur to do QCs (quality checks) on VCs! Not just on the firm but on the individual member of the VC firm who will be dealing with your company. There needs to be due diligence by the entrepreneur as well on the investor as well.

It is a good idea to have a mix of investor, founders and outside independent directors as board members in the company. Having an odd number of members helps break any deadlock. Usually, 3 to 5 members is sufficient for a young company. Independent directors are usually compensated with some stock or cash or both. It is a good idea to have some stock compensation as it aligns the interests of the board member with that of the company. The board should demonstrate maturity, agility and skill set in decision making that’s relevant to the small growing company. Having the right balance in the board is as important as having flexibility as well since many times, things don’t go according to plan. There needs to be an understanding of the business, the entrepreneurial situation and a realization that no business plan is cast in stone. There needs to be flexibility and adaptability by the board to the changing situation inside and outside the company.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

March 07, 2009

Keeping Commitments in a Downturn - By Sanjay Anandaram

The current economic environment is naturally forcing companies to watch every paisa of their cash-flows and pounce on any and every opportunity to either save money, defer payments and/or increase inflows. Often times, such hawkish behaviour can lead to a situation where commitments are reneged. For example sample this question from the CEO of a young company “Should we trim or stop the variable payments to our employees during the current downturn?”

At the time of joining the company, employees had been promised variable payouts based on their performance. Accordingly, all of them were expecting some payouts as no one believed they weren’t deserving of any performance payout! Now, the company was struggling to make ends meet and wanting to make the cash in the bank extend many more months. The employees clearly were aware of the situation not just in the company but outside as well. What should employees do in such circumstances?

In addition, given the environment all around, performances by the employees came in below the previously agreed upon metrics that would have made them eligible for performance payouts; In spite of their very best and sincere efforts. So, wasn’t some money due to them? Especially since a pay hike was extremely unlikely?

It is in times such as this that the character of the company’s leadership is demonstrated. There needs to be a fine balance between keeping commitments by rewarding performance and ensuring longevity of the company’s prospects. It is not uncommon for many companies to use the downturn to stop all variable payouts. After all the employees didn’t meet the performance goals as agreed upon, right? It is less common for companies to take the employees into confidence by sitting down with employees and explaining the scenario faced by the company. And asking the employees for their views and suggestions. Many times, employees themselves would offer ideas and perhaps even forgo some payments. In some cases, the leadership can re-negotiate the payout time period – effectively asking for more time to pay. It is also critical that the employee at the lower rungs of the corporate ladder feel the least pinch. For this, those above have to take a larger share of the pressure. And for them to do so uncomplainingly, they need to feel they have an obligation and a right towards ensuring the company’s future. Creating this culture within the company is again evidence of the calibre of the leadership team. Trust in the company and in its leadership are therefore critical requirements for the creation of this culture. Unfortunately, trust usually becomes the first casualty in times of crisis. Again the quality of the leadership determines this.

Commitments are also made to customers, partners, vendors, and the board. Each of these commitments comes under severe scrutiny during times such as the current one. Being open and taking each of the constituencies into confidence before working out a solution is important. The solution could range for example, from renegotiating terms for the current period and agreeing to make good the loss when the times improve to extending the period of the relationship thereby ensuring that the partner or customer gets additional periods of value at lower unit spends to many more innovative actions. After all, necessity is the mother of invention!

Reneging on commitments is a moment’s job while repairing reputations can take a lifetime, if at all. Commitment to commitments is noticed and people will pay attention to you and to the company. As someone said, the only way to convince everyone that you are ready to improvise, innovate and find a solution in a fair and honest manner is actually do it. Character, value systems, ethics and fair play are what are at stake in such circumstances. Great companies are built by great leaders who demonstrate these attributes every day. Company cultures are built each day at a time. Humility, confidence and will power are what will be called into play at such times when short cuts seem all too obvious a recourse.

So what do you think should be done to deal with employee performance payouts?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.