We’re Just Talking

with . . . Sam Gerace

Conversations with top-notch board directors

Sam Gerace is a serially successful and very accomplished Cleveland-based entrepreneur. Last year, he founded Convey, a business-connections company, and before that he co-founded and led Veritix, a professional sports ticketing platform that merged with AXS in 2015. In the 1990s, he founded BeFree, a Boston-based internet marketing information services company that he took public. It provided internet retailers with target marketing services and programs. At the beginning of his career, he founded PCXIS, a public utilities software company that he led from 1985 to 1995. The theme connecting these successful tech and tech-enabled companies is that Sam saw an opportunity, convened a great team to exploit it, and led with his scientific mindset and deep interest in organizational behavior.

Here’s my conversation with Sam about board governance.

Joe: Sam, what do you think of the high growth, venture-backed company board culture and leadership you see these days?

Sam: It’s a little distressing that we look to boards for duty — the word ‘duty’ is associated with boards, as in the term ‘fiduciary duty’ — and we’re not seeing boards distinguish themselves as the leaders we hoped they’d be on behalf of conscious investors in companies and the communities the companies represent. The only reason corporations exist is because communities give them standing; corporations have a duty back to community. I think we are getting plenty of abdications on the part of boards regarding their duty back to the community in the form of creating safe, inclusive and successful work environments.

Joe: Many of the founders of companies that have abdicated their duties are still there as CEOs and significant shareholders, and they are calling the shots. My sense is that the rest of the board is not paying much attention. What do you think?

Sam: Any board where you have a dominant shareholder can be a board in name only. I’ve seen this in a few cases as an advisor to an entrepreneur or as a board observer. In situations of early board formation where a dominant majority shareholder exists, it is often made clear, directly or indirectly, in the first meeting that he or she has the authority to dismiss most of the board members. Therefore, what he or she says holds. You as a prospective board member need to ask yourself if this is the type of board you wish to serve on.

Joe: If you’re running an Uber or Tesla, you are high visibility and under so much scrutiny, right? Shouldn’t those leaders take obvious steps to fill in governance gaps?

Sam: I can’t speak specifically to Uber or Tesla, but, yes, a board is no different from any other organization — it can be functional or dysfunctional. I think culture, process, and leadership are critical to board efficacy. Otherwise, you get half-baked boards that cannot carry out their function. If there is not clearly defined responsibility for the board, an agreed-on playbook by which they will conduct their processes, and a leader of the board who is competent and engaged, then I think you get those examples and others like them.

This is about organizational behavior. There is no magic. Just because we say “governance,” doesn’t mean we get it.

When we sold my most recent company, my employees gave me a piece of calligraphy. They told me it was the phrase they had heard most often from me. That phrase was: “Words matter!”

Joe: Say more!

Sam: We think symbolically. Words evoke symbols. If we use the wrong words, the wrong symbols are evoked, and the resulting thought process fails to achieve the desired result. What’s interesting to me is that the words ‘board’ and ‘governance’ do not evoke the same clear, strong symbol in all people. Right?

If you are elected to the board, and all the chair says is, “We’re a board, and we are going to engage in appropriate governance,” some people think that means oversight, which is: We are supposed to be guardrails–oversight. We only want to make sure that the car doesn’t go off the road. The CEO can dent a few fenders while driving, but we’re here to make sure your investment doesn’t run off the road.

Others think: We are supposed to be here for strategy. We are supposed to add value through context, experience, or our networks.

The “strategy people” might not understand that they should have an oversight role, and the “oversight people” might not understand they are supposed to have a strategy role. For good board governance, you need two things — first, to define who you are supposed to be as a board, and second, to articulate your board culture. Then, you need to top off this definition of board governance with strong board leadership. In the absence of those two understandings about a board, and a good board leader, you’ve got a bunch of people who, even if experienced, cannot function cohesively.

The roles of the board evolve as well depending on company stage. One thing remains consistent, however — the board is there to help ensure the capital in the business is properly deployed to create value.

Joe: Have the boards you’ve been on had the right composition? And what do you think is the right composition?

Sam: Although I don’t love sports analogies, the idea of a “depth chart” [a football analogy] works for me. I try to lay out the competencies and experience necessary for appropriate oversight and strategic input. I like to check every box, and that’s how I have constructed my boards.

I know of companies that construct boards only to serve the purpose of fiduciary duty and oversight. I also unfortunately have seen entrepreneurs who want good, strategic value, and they assemble a lot of people with great market context, but they are blind to simple things like controls. The company ends up being a victim of malfeasance or inadvertent error, which can damage shareholder value.

The boards of companies I’ve led have added immense strategic value. They still did their fiduciary duty, performed diligent oversight, and were in the room predominantly on behalf of the investors, but they also contributed immense strategic value for the company. I believe we are wasting resources if we do not construct and operate a board to also give strategic value.

Joe: Agreed. I find boards often have financial wizards who have extraordinary conviction and strong opinions but no operational experience. How have you, as a highly experienced entrepreneur, balanced that governance challenge?

Sam: My father, a retired attorney, said to me early on, “Any question that you don’t ask will never be answered,” which continues to inspire me in the form of my willingness to represent myself as an entrepreneur and CEO through questions. By asking these board members authentic and probing questions, I’ve been able to get VCs to accept not having control of the board; this helps moderate the impact if they lack operating experience.

Some VCs are worried that an experienced or inexperienced entrepreneur could squander resources, or take advantage of them. The way I have handled this is that in the first round of funding I have said, “I don’t need a board majority, and you don’t, either. Here is the depth chart for this company. I want a board that has a majority of independent board members. You can be involved in influencing, and I can be involved in influencing; we will work together.”

With that approach, I have always succeeded in having a majority of independent members. What that does is not let anyone have a voice that is inappropriately loud. By the way, nobody has ever turned me down . . . and, they have all kind of scratched their heads and said, “Oh, that’s fine.” I suspect many people have never even asked the question.

Joe: That’s remarkable but true.

Sam: In short, we should consciously fill out a depth chart with people and ask, “Are we adding shareholder value, or at a minimum, are we missing opportunities whereby we’re damaging shareholder value?”

Joe: Let’s talk about board diversity, an important topic. If you look at the number of women VCs in the valley these days, it’s pathetic. On Fortune-500 company boards, the number of women board members is in the low double-digits on a percentage basis, and the numbers are worse on venture boards. Yet data show that women can affect superior results in certain areas, such as, for example, organizational behavior. You’re in Cleveland — is it even more conservative as it pertains to board diversity?

Sam: Unintentional cronyism is common everywhere. It shocks me every time I come onto a new board and I see that it has happened. You can call it the Old Boys’ Club, but whatever you call it, it exists even if it’s not intentional in many cases.

Organizations that do not have diversity are unhealthy. I was very lucky my mother was a professional. She had a career; she is a leader; she is the best consensus builder I’ve ever met. I’m very thankful that she helped me become a consensus builder, and so I grew up without any sort of obvious bias. But, we all have institutionalized and systematized bias. For example, when we do searches for board members, we are often picking from the executive ranks. We know those executive ranks have suffered for years from systematic bias, and so there are fewer women than there should be in the pool. And yet, in many cases, we don’t alter our search to say, “We need to look specifically beyond the executive role, because it’s got built-in gender bias, and we need to look instead for certain competencies regardless of role, to avoid that bias.”

Anybody who believes that a non-diverse organization or board is healthy has not looked at the data, period. Explicit attention to inclusion is essential, and I think the data suggest that this rises to the level of fiduciary duty. If the board and its committee on governance have not explicitly attended to diversity and inclusion, then I believe that they have abdicated fiduciary duty.

Joe: What companies do you think are terrific when it comes to governance and boards?

Sam: I have an immense amount of respect for boards that, on a suggestion that misogyny or discrimination may be systemic in a company or by a CEO, immediately take action and say, “We will launch an independent investigation, create a safe environment for people inside the company, and take the appropriate action not to allow this behavior to persist.” When that happens, that’s an indication to me of a high-functioning board that understands the public and community aspect of its duty. By the way, that also is protecting shareholder value, because the market is now saying it’s really not acceptable.

The boards that shock me are the ones that get two or three reports and say, “We’ll have a casual discussion with the CEO and forego a formal investigation.” They’re not doing their duty to the public or to shareholders, and they are not creating a safe environment for the employees and other board members.

Joe: What are some best and worst board practices you’ve seen or been part of?

Sam: I would argue that organizationally the chairperson should not be the CEO, simply because organizations move in the direction of the questions that they ask. If you have a chairman and a CEO, one and the same, there are questions that might not get asked. He or she could create an atmosphere in the room that is hostile to certain questions being asked, and in that case the organization suffers.

In America we celebrate the ideal of the rugged individualist to a fault, and so it’s part of our ethos. It’s the story we tell our kids, and as a result, we’ve created this myth of a superstar CEO. It’s all about that CEO. We think people should aggregate power; our own cultural mythology that we celebrate centralizes power. However, it is the wrong thing to do for corporate functioning. You do not impair corporate functions by having a separate chair and a CEO. Rather, you are doing better for the shareholders and for all involved.

Joe: There’s no logic to the CEO as chairperson. What incremental value do you get out of that person if they are one and the same?

Sam: That’s right. Joe, in the very earliest stages of a company being formed, I have combined the CEO and chairperson roles, but I’m talking about the nursery school stage, when there may be nobody else to do it. The company may be so small that I can’t attract an experienced chairperson, and it would probably be a waste of their time. But when I take material outside investments, my statement to the investors is that our goal together is to find an experienced, outside chair.

I also think that gives comfort to the investors about my being serious about wanting a majority of independent board members. It reiterates that I’m not centralizing power.

By the way, I think many people think having a controlling number of seats gives control. In reality, no board wants a split vote on any matter, regardless of who has legal control, especially considering that minority shareholders have important rights. And for the most part, contentious or split votes, votes in which control becomes the overriding factor, are generally the result of a failure to appropriately inform the board.

Not that this is a palatable example, but I’ll offer it. Do you recall that in the early days of the internet that adult material was almost 30 percent of internet commerce? Well, we were on the runway to go public, and we were approached by a quote-unquote reputable provider of adult material. It was a sizable opportunity for us, and they basically said to us, “You are the high-quality vendor. We want to go with you. But be assured, if we don’t go with you, we will go with your competitor.”

The board split down the middle as to whether to take them on. One side said “This will impair our value and our reputation,” while the other side — most of them, by the way, VCs — said, “Every dollar of revenue is many times that dollar in value.”

My science roots taught me the importance of real data in decision making. We went to institutional investors on Wall Street and asked “If our revenue is 30–40 percent greater, but that comes from adult material, are we more or less likely to get your IPO investment?”

To a person, eleven out of eleven institutional investors said, “With today’s shareholder activism, it would be much better for you NOT to have that revenue.”

Presented with this information, the board voted unanimously to turn down the client. That client went to our competitor. We went public; our competitor didn’t.

The point: it didn’t matter who had control.

Joe: As a chief executive, you did what you thought was best for your company. You supported it with market data, and you got to the right conclusion. That story could’ve been very different, and it’s a great lesson for CEOs.

Sam: Exactly. I assert that reasonable people in possession of the same information will come to the same approximate conclusion. If you’ve assembled a board of reasonable people, and you don’t get to the right conclusion, you haven’t given them the right information — they are relying on anecdotal knowledge or opinion. But, a CEO getting a board to a decision is not an easy job, and much of the work in my experience is about informing the board.

I was on a public company board when the environment was less rigorous than it is today. I was recently talking to a member of two public company boards. On average, his pre-reads are 1,500 pages.

Joe: Whoa — that’s crazy, what do you suggest?

Sam: I thankfully have never had a 1,500 page pre-read, except for our IPO, but I will say that very detailed pre-reads at least a week in advance of the board meeting are essential for good board function. I explicitly ask board member candidates whether they do pre-reads and how far in advance, because if they don’t have a habit of doing the pre-read, I don’t want them on my board.

Joe: Good point — asking board members to weigh in on issues for which there has been no prep whatsoever is dangerous. Can you tell me about your board style? What do you bring to the practice of governance, the culture, and the composition, that most impacts the boards you’re on?

Sam: We have an articulated culture in every company I create. The first value in our culture is one of the things I hope I bring to the board which is: it’s about what’s right, not who’s right. I try to be the voice in the room that brings things back to factual information. What is really going on in the market? What real data do we have here? And, oh by the way, we don’t have any data? Okay, then do we actually have anything that would support making a decision? If we don’t, there’s no decision to be made right now. Let’s go get better information.

I hope I am a person who brings objectivity as opposed to personality-dominated decision making. I should note that I don’t need to be the board chair to do that. I’m the one often asking the question, “Do we have data behind that? Could you give me an example of that?”

What I hope I’m doing is allowing everybody to bring the best of themselves but also to make decisions on the basis of information. My style is to ask questions even if they’re the hard questions.

Also, as the board chair, or even as a board member, I try to have a board meeting before the board meeting. In other words, if I’m the board chair, I’ve had a conversation with each board member about what’s coming up, and about what they think is necessary to make a decision about it. I try todo that as a CEO even when I’m not the chair. And if I’m a non-chair board member, I try to have a call with the chair before a board meeting. I ask, “Can we talk about what information I think is necessary if we’re actually going to consider this issue?” Because they otherwise can walk into the room, discover an information deficiency, don’t make the decision, and then you’ve wasted everybody’s time.

Joe: Did you have a mentor who helped you with your understanding of boards?

Sam: I had so many mentors, but not specifically for board-related things. It’s funny to say when it comes to board mentorship, but my father, my mother, and my father-in-law were all business people . . . they were simple and direct communicators, and they had experience at organizations large and small, and from them, I received a fair amount of mentoring anecdotally.

Joe: If you had one piece of advice to give to a founder-CEO who is a board member or chair of a high growth company, what would that be?

Sam: You have permission to consciously construct the board! Find a way to do that! The world will give you that permission. I don’t care what the VCs, or any one person says: go consciously construct the board! Also, ask a lot of questions.

Joe: If you had it to do over again as a founder/CEO, what would you do differently?

Sam: Many things, but I guess one thing that comes to mind is to realize earlier the importance of culture. I discovered this through a spectacular hiring miss at my first company. The company was scaling up and getting its first real growth. I had previously been able to hire people informally. But for this hire, we did a nationwide search, and after interviewing 30 people, we found our person. We on-boarded him.

After spending three weeks at the organization, he came to me and said, “I convinced my old boss to give me my job back.”

Of course, at this point our number two and three candidates had already taken other jobs, and so I had to start again at ground zero.

“What just happened?” I asked myself.

We had hired a good search firm and gone through what I thought was best hiring practices. As a scientist, I went to the data. I found the answer buried in social psychology and labor relations, in what was then called collaborative (or group) psychology. It said:

“The best indicator of an individual’s longevity with an organization is cultural alignment. The best indicator of the hyper-performance of an organization is cultural alignment. The best indicator of [you name it] is cultural alignment.”

By culture, I don’t mean something squishy. Peter Drucker, whom people revere for his strategy, is also known for his quote, “Culture eats strategy for breakfast.”

Culture to me means we have intentionally integrated our common values, acceptable and encouraged behaviors, and the environment, towards the support of the organization. I had articulated cultures ever since, Joe, and my articulation has gotten better over the years, but in that very first company, I didn’t.

I had to go to the science to learn, “Oh, this is what we’re not doing.” I knew what the culture I meant in my head was, but I didn’t articulate it. Since then, we have articulated it; we’ve introduced people to it; we use it in hiring and evaluating and celebrating people.

Joe: Great. Thanks, Sam.

Sam: Thank you! I regret that you asked all the questions because I prefer to be asking and learning. I hope that we can sit down over coffee when you’re in Cleveland.

Joe: You bet!

Sam is a student of organizational behavior, and in my opinion, a master of it. You can listen to an excerpt of our conversation here.

Thanks to Sam for his time.