The cultural transformation of the Board from an Unlisted Board to a Listable Board is one of the more painful phase shifts a successful founder has to undergo. The successful founder will have hand-crafted a Board that, yes, does the Corporate Control Thing, but one which is rooted in the vital Corporate Creativity mentality. As we saw Prometheus and the Muses are essential to inspire and to create something that never existed before – an extraordinary metaphysical achievement possible only for Gods and Man. This commercial value-add-centric Board vibe will, in all likelihood, suffer the fate of a Canadian seal pup and be bludgeoned to death. So much so that, as we shall discuss another day, many Listed Companies set up Advisory Boards to get back to some highest-level, commercial value-add, some Corporate Creativity.
Next week we will look at some ways to manage this phases shift and to minimise both the damage and the wars, but first let’s look at when two tribes go to war…
[Extract from Chapter 4 of Realpolitik “The Board”]
“I have just joined the ranks of a FTSE250 Board. I’m getting to grips with the various worthy souls who tell Boards what to think about governance, diversity, remuneration, etc. etc. The institutional shareholders don’t think these thoughts for themselves, they pay people like ISS to do that and tell them how to vote. Given that the unquoted company often needs to IPO to extract founder value, being structured acceptably to these pseudo-shareholders ensures a wider number of potential real shareholders, so whatever one might think about the accepted norms (and I’m thinking about your delightfully controversial views [re Corporate Governance not exactly being mankind’s greatest invention]), there is a cost to being different.” [NED]
The IPO-ready world is kind of the end of innocence, the end of many paths up the mountain. From now on, you, sadly, have to prepare to enter the world of listed Corporate Governance and The One True Way Of Doing Things Which Must Be Obeyed At All Times. Thus your Board, whatever unique or idiosyncratic path it followed up to now, starts to look like all the others, the Conquest of Abundance. Not just that but it may be a shock to see how quickly the value-add that you so carefully crafted to accelerate your journey drops away:
“The whole [public company] Board had never been to the company’s premises. The NEDs don’t add a jot of value at all.”
The triumph of process over content enters the equation. This isn’t to say that you can’t retain some of your Corporate Creativity vibe but it certainly will be ever-more crowded out by the box-ticking. So much so that, as we shall see in the next section some FTSEs have taken to setting up Advisory Boards in order to have a senior forum where they are not filling in the State’s dot-to-dot but rather can focus on those oldskool “creativity” and “growth” topics.
I spoke to some CEOs who created their IPO-ready Board somewhat in advance of IPO-ing. This can be helpful as long as you don’t do it too far in advance (and IPO timings are very subject to market timings and windows). If you do it too far in advance you end up with tight shoes long before you were required to wear them. Often IPO-readiness Board evolution is left quite late in the day (to avoid the tight shoes but also as it never quite made the top of the priorities list):
“All too many build pre-IPO Boards about ten minutes before the IPO.”
“Most [Techs] do their IPO Board at the last minute.”
If it’s a rare founder that creates a NewCo and CEOs it all the way to IPO then it’s an even rarer founder who continues long after the IPO. The two worlds are so different and it’s not just a question of skillset and experience but of desire, interest and preference. Why would someone who dances with the Muses and dines with Prometheus want to spend a large chunk of his time with Fire Prevention Officers?
“Going public is like a new dimension.”
The whole Board changes from a V2 Company Board [19thC Company Law Company] to a V3 Company Board [21stC Corporate Governanced Company] which are very different beasties:
“You see phase changes and cultural changes in issues around motivation and compensation, around ‘skin in the game’ vs ‘independent’.”
“NEDs need some skin in the game and for cash-constrained SmallCos options are a great way of squaring the circle. But there is increasingly a regulatory challenge especially re floating.”
Making your Board IPO-ready can easily be the start of two tribes going to war. The two tribes are the more SmallCo-orientated Corporate Creativity types: “we’ll survive despite all the mistakes we make (we always have)” and the more BigCo-orientated Corporate Governance types: “we have a huge rule book we have to follow and our reputations to protect”.
To be clear I am not in the slightest taking aim at BigCo NEDs – all the ones I spoke to share and informed my concerns about the direction of travel of BigCo Boards. They are the ones that suffer, not me, and most likely not you either. However, the realpolitik is that in a world of politicians calling for “heads to roll”, “Directors to be held more accountable” and there being no legal distinction between an Executive Director (who will know a hell of a lot about what’s going on across the company) and a NED (who will not), NEDs have to cover their derrières. In the Corporate Governanced Company the NED is the panacea so if things go wrong select committees know where to aim their missiles:
“In these circumstances a NED who hasn’t got half an eye on generating an audit trail in case things go wrong is potentially risking his whole career when things go wrong.”
“Two Tribes” is a war that, even if the SmallCo Directors win some battles in the short term, will only ever go one way as post-IPO there is Only One Way To Do The Board.
I was told (separately) remarkably similar stories by two CEOs with IPO-ready Boards. I’ll condense the two case studies into one as they are so similar and to maximise the preservation of anonymity. The condensed story goes like this:
“In pre-IPO companies with the Two Tribes on the Board (the SmallCo Corporate Creativity tribe and the BigCo Corporate Governance tribe) there is a crisis. The sheisse hits the fan. The Corporate Governance types shoot first. Their instinctive reaction is to point fingers, get a lawyer to cover their (& the Board’s) derrières and find a donkey to pin the tail (blame) on. The business builders on the other hand say, ‘look, things have always been going wrong, they will always go wrong, and they go wrong far less often’. ‘We will do what we always have done, work out what the problem was, how to avoid it happening again and no-one will be sacked’. ‘Let’s fix it, and act in the interests of customers’.”
Having abstracted and merged these stories and, having left out the juicy bits for the sake of confidentiality, the resultant tale doesn’t sound too surprising. However, back to Boards and emotions, one thing that has been abstracted away is the horror of the founder/CEOs. It is perhaps akin to the difference between being told about an adventure park ride and being on it. In the queue you are like “OK, sure, yeh scary, I get it.” But it is very different when you are on the ride and it plunges in freefall and your stomach loops the loop. You might laugh about it with hindsight but at the time it feels like the bottom has dropped out of your world – “what have I let myself in for?”