While dot-coms do not lack for media attention, one perspective that the print and electronic media rarely examine is that of the dot-com director. A close examination reveals that there are several important questions. For example, what does the term New Economy imply for current and prospective directors on dot-com boards? Do the commonly held beliefs about being an effective board member hold in this environment? Or, are the challenges and personal requirements for being an effective director different on a dot-com board?
We discussed these and other issues with ten directors of dot-com boards, as part of our continuing investigation of the dynamics of life inside the corporate boardroom. While our panel of directors have extensive experience on traditional boards, all of them serve on one or more dot-com boards as well. With feet in both camps, they are uniquely qualified to observe and comment on the differences between the two. We were interested, of course, in the extent to which the TSE guidelines for improved corporate governance in Canada informed those who establish dot-com boards. But we were also curious about how serving on a dot-com board differs from being a director of a traditional company. We were startled to discover the incredible stresses, psychological pressures and time demands which seem to be the-almost inescapable hazards of being a dot-com director. The issues of who you need to be and what you need to be able to do describe an individual who is very different from our conventional notion of the typical corporate director.
THE TRADITIONAL DIRECTOR
Most directors on traditional boards are uncommonly talented individuals, people of ability, accomplishment, energy, and sound judgment. And the larger and more prestigious the company, the more prestigious the candidates selected. Mavericks, free-thinkers and boat rockers are usually avoided for being too controversial; board nominating committees want people with a reputation for being non-controversial and sympathetic to the system. Thus, the boards of many companies consist of top executives of corporations and leaders in financial institutions or law firms.
In most cases, directors are modestly compensated, relative to their other sources of income. Compensation generally consists of a fixed sum plus a fee based on the number of meetings attended, with an additional fee for members who chair a board committee. In some cases, directors may be compensated with shares or options, but investment in the company, though encouraged, is seldom a requirement for board service. In general, directors serve to learn something of value from being exposed to other companies’ operations, and for the prestige that accrues from being associated with other notable companies and directors. Seldom does a director serve simply for the money.
The performance of directors on traditional boards is deeply rooted in the desire to preserve and enhance their personal reputation among their fellow directors. Peer recognition and regular association with leaders in your field liberates the time and energy required to perform well. By the same token, accomplished individuals often have a powerful need to contribute, and hence may eagerly delve into the issues with which the board and its committees must come to grips. At the same time however, the dynamics of group responsibility, i.e., little individual responsibility, can engender “social loafing” in some, and a resulting disinclination to raise issues. Directors may reason “If no one else has raised this issue, then maybe it is already being dealt with,” or “Maybe this issue isn’t quite as important as I think it is.” For an extensive discussion of the factors affecting the performance of individual directors, see “What Motivates the Corporate Director?” in the next issue of the Ivey Business Journal.
THE DOT-COM DIRECTOR
The traditional director shares the traits of uncommon talent, ability, and accomplishment in full measure with the dot-com director. Without exception, the dot-com directors we interviewed are people of substance; some are self-made millionaires. But dot-com directors may be distinguished more by their individual entrepreneurial achievements than by their position at the top of a corporate ladder. There are two reasons for this. First, dot-com companies are, almost by definition, start-up ventures which thereby lack the stature of long-established firms. Thus, dot-com presidents are seldom able to canvas the ranks of their more prominent colleagues to fill a board vacancy. Secondly, significant investment in a dot-com company is frequently the price of admission to the board, and those with an entrepreneurial spirit are more naturally predisposed to join in such risky ventures. Though there are exceptions to this latter point, dot-com directors have nevertheless often invested substantial personal funds in the company.
We had expected that most of the directors on our panel would bring at least some knowledge of the competitive Web environment to their dot-com boards. Failing this, we had assumed most dot-com directors would understand the general challenges of doing business on the Web. Instead, responses related to personal Web sophistication prior to board service ran the gamut. Though some had an excellent background in the IT industry, many claimed not to be particularly knowledgeable about the Web from a business or technical perspective. One director revealed that as a group, he and his fellow directors “felt like infants in a new world” and acknowledged that the whole experience was a way of “going to school and educating ourselves about the New Economy.” In the almost universal absence of any form of new member orientation, “not even a whisper” according to one, many new dot-com directors are learning the ropes by trial and error.
For board members with little Web knowledge, keeping up with the fast-changing Web environment is a major challenge. Directors whose own businesses are in a Web arena feel they are able to stay on top of things because they spend their working hours in a Web environment, reading about industry developments and talking to colleagues. The others must invest significant time after work reading industry publications, exchanging information with colleagues, and attending business seminars or meetings with a dot-com connection. Whereas a director on a traditional board is frequently able to add immediate value by drawing on extensive relevant business experience, the dot-com director faces a major learning curve not because the basic principles of business no longer apply, but because the context of the application is foreign and rapidly changing.
Aside from “keeping up,” dot-com directors must also find the time to meet far more frequently than do other directors. On a traditional board, directors may expect to meet quarterly or bimonthly. Dot-com directors find themselves meeting face-to-face at least once a month, and even more frequently by conference call. One director complained about having to deal with numerous telephone calls and “a constant bombardment of e-mails” containing weekly updates of corporate developments. In two other cases, directors reported meeting face-to-face weekly despite plans to meet only monthly. “It has to be that way because the pace of play in the technology industry is so fast,” commented one director. Frequent meetings in turn necessitate greater preparation. One director commented that “board service is a real job now. You don’t just go once a quarter and rubber stamp things. You have to participate. Your help is required to steer the ship.”
When asked if the level of compensation for board service is commensurate with their time demands, directors said “No,” at least not in the short term. In fact, the majority of directors on our panel receive no cash compensation, and are paid in shares or options instead. This reflects the fact that few dot-coms have any cash flow in their early stages and thus have only equity to offer. Some directors acknowledge that compensation in the form of equity may be of dubious value. However, most subscribe to the attitude of one board member who stated that “this is the correct way to compensate directors because it links board performance to increases in share value.” At the same time, many of these directors are attracted by the investment potential, learning experience, and business challenge rather than the compensation.
The bottom line, however, is that dot-com directors generally face a far heavier demand on their time than directors on traditional boards. Directors must also have substantial personal energy, and a commitment to constant learning and updating, all in the absence of reinforcement in the form of a cheque for services rendered.
Depend upon it, Sir. When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully. – Samuel Johnson.
While directors on traditional boards experience tense moments from time to time, we found that dot-com directors often deal with intense stress and pressure from unusual sources. Perhaps the most persistent of these is the focus on survival, including the constant search for the next round of financing. While management is traditionally responsible for attracting investors, the personal connections and network of dot-com directors become a principal source of new funding possibilities. As an extreme example of this, one director spoke of being told “we can’t close financing so we’re putting payroll on your Visa!” He complained that the company was literally living and dying on a daily basis because of their “burn rate.” Burn rate describes the monthly cost of staying in business, and when the bank balance is divided by the burn rate, the grim result is the number of months the company can survive without additional cash infusions. Much like astronauts on the aging space station Mir, some directors and managers work with the daily threat of sudden collapse of the enterprise. The ability to cope with this kind of stress on a prolonged basis is often a prerequisite for the prospective dot-com director.
Survival for a dot-com, however, turns out to mean more than securing additional financing and relentlessly executing the business plan. Directors must also deal with the constantly changing larger picture. The great idea of today may be completely eclipsed tomorrow by the emergence of an innovative competitor or new technology. As one director confided, “It’s frightening. Things are moving so fast, there is little time to do an analysis to see if a move is right or not, which is stressful because a wrong move could be devastating.” As Mark Breier noted in his book The 10 Second Internet Manager, a dot-com has to move fast to survive, and for the dot-com to move fast, the board has to move fast.
Another director spoke of the new hazards that each week threaten to put the business under. He felt that the big difference between traditional companies and dot-coms is that the dot-com business plan doesn’t remain stable and becomes difficult to execute as a result. He argued that a dot-com “must be prepared to reinvent itself every six months.” He spoke from experience, as the dot-com he serves had thrown out many months of work and several million dollars in favor of a new business model. Such conditions demand an unusual degree of flexibility and nerve on the part of the board. The willingness to abandon initial enthusiasms, and sometimes sizable chunks of your own capital, are common survival traits for the dot-com director.
Perhaps the most wrenching stress stems from the tightly knit interpersonal relationships common to the dot-com board. On a traditional board, especially those of larger companies, board members and management may know each other professionally. Close personal relationships are not the norm. By contrast, dot-com boards often consist of members of the founder’s family, close family friends, business mentors, and friends of friends. This happens because dot-coms in their early stages are seldom able to attract venture capitalists and must instead use personal relationships for start-up funding. And investors, not unreasonably, often prefer to serve on the board to keep an eye on their investments. Thus, in some respects, the board becomes something like an extended family.
But several directors pointed out that this situation can create nightmares when the board has to deal with personnel issues. Consider your feelings as an individual director when faced with the need to replace the founder/CEO, perhaps the son or daughter of a best friend or long-term business partner. The founder may well have been the magic ingredient in the early stages but may later turn out to be not at all the right person to attract new investors, develop and implement long range plans, hire staff, and grow the business. Even worse, the entire initial management cohort, quite possibly a tight-knit group of friends, might well have to be dismissed if the company’s survival depends on switching to a quite different business model with challenges which require a different management skill set. As one director described it “When the company is small and everyone knows everyone, personnel decisions become the most difficult personal issues. But if you don’t make them, you could lose the business.” Directors on traditional boards seldom have to endure experiences as poignant and painful in the course of their service.
When the company does not do well, dot-com directors on tightly knit boards also tend to suffer more than do those on traditional boards. Coping with adversity can build character when success is the outcome. But one director spoke of a “personal sense of failure” when no amount of effort could turn a situation around. He said that when the people involved became good friends, and subsequently lost a substantial amount of money, everyone had bad feelings. He felt particularly unhappy because the managers had relied on his advice to help them succeed. He felt a greater sense of personal responsibility for his dot-com colleagues than he had experienced on other boards.
IT’S NOT EASY BEING GREEN
Kermit the frog understands dot-com management and how inexperienced managers can pose problems for the board. Directors who have served on traditional boards, and are accustomed to dealing with highly competent professional managers, often find dot-com executives relatively “green.” Part of the reason for this is that founders are often technical people, not business people. Consequently, dot-com managers may lack critical skills in finance and marketing.
By the same token, since dot-com founders are generally a youthful lot, they are usually unsophisticated from a corporate governance point of view. Issues such as diversity, proportion of unrelated directors, new member orientation, accountability, and board compensation among others are given little attention. One director revealed that “the board is such a green group that guys like me who have sat on other boards are training the chairman” (who was also the founder of the company). He described the effort of the board to informally groom the chairman for the role he will be required to play when the company becomes publicly traded.
Experienced directors also find it hard to deal with young entrepreneurs who sometimes become too aggressive. One dot-com director decried those entrepreneurs whose priority is “to make a big splash and create a high-profile company when what they really need to do is create is a sustainable, viable business.” This same individual mused however, that if he, as a young businessman, had listened to the people preaching caution to him, he would not be where he is today. Finding the fine line between being too aggressive and overly cautious is another challenge for the dot-com director.
The need for a formal plan to deal with the sudden loss of key personnel is apparently of little concern to either dot-com management or their boards. Our panel pointed out that due to the somewhat brief existence of most dot coms, and perhaps the relative youth of most founders, succession planning is not seen as an issue. But at the same time, several directors said that if something happened to their founders, their company would be “devastated,” because of the very short life of the company thus far and the high burn rate. As one director bravely observed, “in such a case, our board would likely call it quits and write off the investment.” At the same time however, loss of a key person is not seen as nearly so detrimental after the first year or two of operations because more people would be involved at that point. Such companies would survive because directors would step in and work with management until suitable replacements were found. One director admitted that succession is commonly overlooked in a dotcom and that “key person” insurance is often rejected as an option in an attempt to preserve cash.
WHY DO DOT-COM DIRECTORS SERVE?
If serving on a dot-com board can be so time-consuming, energy sapping, under-compensated and pressure-ridden, why serve? The reasons are for both monetary and non-monetary rewards.
Several directors were disarmingly candid about their monetary motivation. Those who made a significant investment in the company tend to be motivated by the chance to make significant amounts of money in a relatively short period of time. If the choice was available, these directors also preferred equity as compensation for their services both in an attempt to preserve cash and to increase their share value. One director described his motivation in terms of his “selfish drive of getting the share price higher and higher”.
Directors who are personally connected to the principals in some way are often motivated to serve for non-monetary reasons. “I like to hear about young entrepreneurs’ dreams and support them,” commented one director. He said he saw his younger self in the young entrepreneurs he was working with, and nostalgically recalled his own early challenges. Many of the directors said they most enjoyed the energy that comes from working with a young company. One director said he feels a personal sense of success when the company does well. Others said they appreciate the interesting, exciting, challenging space, enjoy learning about new technologies, and love the thrill of “building something.” Finally, to illustrate that one person’s pressure is another’s adrenaline rush, one director said “I live for the sport, and love the thrill of live-or-die on a daily basis”.
THE MANY HATS OF THE DOT-COM DIRECTOR
We observed that being an effective dot-com director involves playing many roles and wearing many hats. Generally, few directors will wear every hat. But as the fledgling firm comes together, some may find themselves wearing different hats at the same time. Each role presents a different challenge and requires different skills, as described below.
At the “birthing” stage, before a board of directors has even been formed, the new offspring is frequently nurtured by a group of advisors. Over the months, advisors may come and go as needs be, but “advising” is a constant and continues through the life of the firm. The challenge of being a good advisor is to generate trust and confidence, to be able to quickly assess key aspects of a situation, and pass along sound judgment in the face of sometimes great uncertainty.
Investing in a dot-com is an act of faith, a recognition of promise, and a vote of confidence. As explained earlier, many investors are attracted to dotcoms by the possibility of substantial returns in a short time. But those willing to take the risk may also be called upon later to provide additional infusions of capital to keep the ship afloat. Like any gambler, the dot-com investor needs to have both the nerve and the good sense to know when to up the ante or quit betting.
Mentor, from Greek mythology, was the loyal friend and advisor of Odysseus, and the teacher of his son. So too must particular dot-com directors act as mentors for the founders. Being a good mentor involves more than simply possessing and passing along some useful facts. The mentor must establish a certain chemistry with the person being mentored in which personality, trust, and good judgment are the essential elements. We observed that in several cases, those playing the mentoring role were mature business people, “grey hairs” as one called them, and often became a mentor because of close personal relationships over the years with senior members of the founder’s family.
The dot-com world, though in its infancy, is already complex and full of business models different from those found in the traditional business world. The director whose understanding of this new landscape is meager and lacks sophistication faces a steep learning curve. To be effective, the director must be a quick learner and commit substantial time to study and understand this new environment.
Rare is the business idea so perfect that it springs into being unchanged from its earliest form. A dotcom director must be able to recognize the essential kernel of value in an idea but have the talent to spin it into new forms or new directions to ensure survival. This takes vision and great tact, as the original visionary may need to be convinced that change is required. Furthermore, a new vision may need to be created hastily when a sudden innovation or new business model appears in the marketplace, making your own strategy obsolete.
It is almost a cliche that the most valuable asset of any company is its human capital. But the talent involved in a dot-com is truly a critical success factor. For that reason, a director must be much like a professional talent scout, constantly alert to individuals with the skills and abilities required for the dot-com to thrive. Given the personal network and connections of many dotcom directors, this is not a difficult hat to wear. Indeed, directors often become “champions” for the dot-com they serve and pursue new talent with enthusiasm.
One director described strategy as “figuring out how we’re going to get from here to there.” This is one hat which every director is expected to wear and was cited as one of the most interesting and enjoyable aspects of directorship, because strategy is often the focus of the value added by directors, both individually and collectively. A well thought out strategy is clear evidence of director participation and can most easily be pointed to as the reason for success or failure.
Yes, the word is “executioner,” not something benign such as executive or executor. As described earlier, the role of shutting down a new enterprise or perhaps removing the CEO is the most uncomfortable hat to wear. Making such a decision in the first instance, and then having to inform those being dismissed, inflicts pain on everyone involved. Mutual friends or relatives outside the board may be offended, or fail to understand or agree with the course of action. Exchanging the hat of mentor for the hat of executioner can be profoundly distasteful. However, failing to do so may in some cases simply postpone the inevitable, resulting in greater pain and damage in the long run.
Clearly, the director on a traditional board may also have to play one or more of these roles at different times – those of Advisor and Strategist come most readily to mind. But on a traditional board, the director is usually a member of a larger group, and as such, enjoys the comfort of consensus and relative anonymity. On a dot-com board, in contrast, an individual director may easily be identified as the sole advocate of a particular idea or a new direction. Working under the spotlight creates extra pressure.
THE DOT-COM DIFFERENCE
In our interviews, we captured the insights of directors who have experience on both traditional and dot-com boards. They describe life on a dot-com board, relative to the traditional board, as being fast-paced and ever-changing. A strong willingness to get up to speed quickly on the intricacies of electronic commerce and entirely new business models is a necessity. Significantly more time is demanded of dot-com directors because of frequent meetings, telephone calls, and electronic mail. But the ability to deal with pressure and stress from a variety of sources is critical. Most noteworthy in this regard are the stresses from existing interpersonal relationships or those that develop on the board, and between the board and management. The most effective dot-com director is the one who is willing and able to wear different hats, serving and assisting in various ways to bring about success.