The Love of Linux Chapter 13: The Attack of the “BORG/Board”
You will be assimilated or destroyed. While digesting the elephant of the SCO, much of our attention was turned internally, partly because of the enormity of the task and partly because of the influence of Tarantella on our board. To purchase the asset, we had given up nearly a 1/3 of the company to Tarantella. That gave Tarantella the right to participate on the board with two seats. Tarantella saw Caldera an on going source of cash and thus the work to turn the company around was further complicated. Every change we made that would negatively impact the employees would make its way across the street in Santa Cruz to the Tarantella buildings from disgruntled employees. The irony of this situation was that the board, driven primarily by Tarantella interests, was actually putting the constraints on the Caldera management team to make some of the changes. However, this created a tension on the board which made it hard to function. We had hoped to avoid that situation, by recommending that Tarantella appoint Alok Mahon to the board rather than Doug Michaels to avoid the emotional tie. Doug and his father started the SCO business, and we felt that Doug would be emotionally tied and slow down some of the tougher decisions. The idea that Alok would be less hampered proved to be short sighted. Alok was controlled a lot more by Doug than we had at first anticipated. In hindsight, it may have been better to have Doug participate directly then he could have been part of the decisions.
It would have been a little more difficult to reach a decision, but it may have been more effective. My experience with SCO and their representatives on Caldera’s board is that they lost any ability to create value with the passing of Doug Michels’ father. Negotiating anything with them became a tar baby. The only thing they know is win/loose negotiation. The only time we were able to have a reasonable negotiation, was when they were desperate for cash. We successfully negotiated the pay off of the remaining 8 million dollar note for 5 million dollars cash. When we renegotiated the original deal, we paid out 25 million more in cash than we had wanted to. We also had a note for 8 million to be paid in installments of two million a quarter beginning 12 months from the close of the transaction. Having two members of our board from Tarantella proved to be a serious mistake. It enabled them to double team and wrestle control of the company away from the management and original investors by dominating the agenda and leveraging their ownership in Caldera. They took control of our board by threatening or casually referencing the majority share holders with minority share holder suits. Unfortunately, their only real interest in Caldera appeared to be to provide cash flow for the asset they did not sell to Caldera. They were so entrenched in the Innovator’s Dilemma mindset; they could not begin to understand the value of Linux and a completely different economic model that was emerging. My last official act as CEO and President of Caldera, which gave me great satisfaction, was to sign the agreement that repurchased the outstanding shares from Tarantella and removed their representatives from the board.
The challenge with a board of directors lies in the fact that they are there to protect the shareholders of the business. Because of all of the legal suites that occur, the board members take more seriously, however, their own legal liabilities and exposure. Therefore, men who understand how to push the right buttons, can manipulate others who are concerned about potential liability or rationalize that after all, they are their to protect the share holders and if the share holder represented on the board wants something, they should support them. Unfortunately, what an individual shareholder wants is very seldom in the best interest of the entire body of shareholders.
Back to the board, our board is composed of two representatives from Canopy, one from MTI, one from the company (me), two from Tarantella and three independents board seats. They are called independent because they were not investors. Unfortunately, we had only two. The challenge for the independents is that they are there to protect the shareholders interests, thus they look to the other shareholders on the board to take the lead. Canopy, the largest shareholder, felt the most vulnerable. By being the largest shareholder, they were at the greatest risk of being sued. I believe the minority shareholders who were astute investors and sat on other boards with them point out to them or maybe even threaten suit if they took the lead on several issues. Consequently, Canopy would sit back and let the discussion happen without giving it much guidance. If Ray Noorda had been able to participate in the board meetings, this would have never happened because he would have called their bluff.
The chairman of a board is vital. They should be independent in their thinking and should provide the necessary leadership. Most of the work of a board should be done outside the board meeting. The chairman should call all of the board members and brief them on the issues and get their open candid feedback before the meeting ever takes place. If this is not done, the different agendas of individual board members are facilitated because, in the public forum of the actual board meetings where notes are required, all that has to happen is for a minority shareholder to threaten some lack of fiduciary responsibility. Without a functioning chairman, the management team is put in direct conflict with the board members and a board ceases to be of much value.
In an environment of “fiduciary fear,” the board no longer seeks to understand truth. They would rather hide the truth and look for a scapegoat. Since they lack the knowledge of the business, (they very seldom if ever read the information provided them in the board packets) they are very busy in their day today businesses. Therefore, they kind of go with the flow, often offering “seat of the pants advice” or even worse, many have left active participation in the management of a business many years ago and they want to give advice about how they did it then.
My purpose is not to criticize. Steve Cakebread was a tremendous asset. Steve also headed up the Audit Committee and he did an absolutely wonderful job. Ed Iaccabucci has also been very valuable. Much of the problem with the independents are simply they must rely upon the input from the shareholders and if your shareholders will not give their input or their input does not even make sense, they can and will make poor judgments. Ideally, I believe your board should be made up of mainly independents if at all possible. What you would like on a board is independent, strong advice from people who have experience in the industry. When your board is made up of investors, they tend to give advice that helps their portfolio or the company that they have the biggest personal stake in rather than what is best for the company on whose board they sit. Worse still, they may manage for themselves personally rather than for the companies they should represent.
One of my main issues with our board was that when Alok Mahon came onto the board, he immediately pushed through a raise for the board. At a time when our management team was taking major cuts in salary and stock instead of cash bonuses, our board, under the influence of Alok gave themselves a big raise. When I tried to protest, I was immediately put in my place by the other Tarantella board member, Duff Thompson with the statement that the board has significantly more risk than the management team and therefore they should never be compared. The truth is that there is no one more at risk than the CEO and CFO of a corporation, but for our board there was a double standard. When Ray Noorda’s health would not allow him to actively participate on our board, I also tried in vain to reduce the board. Instead of having two representatives from Tarantella and two from Canopy, I suggested that each reduce by one. Canopy was very willing, but Alok insisted on having two members. Consequently, Darcy Mott was added to our board, bringing the number to 9.
The other area which I felt needed to be addressed was the office of chairman. When a board gets so large, and even on smaller boards, the chairman must spend quite a bit of time working with each member of the board outside the board meetings. Ralph Yarro was participating on so many boards, that it was difficult for him to spend the time on any one company. While I did not want the additional worry of being chairman, I felt that the company needed to have that added direction and influence of an active chairman. I suggested that to Ralph who was willing to move forward. However, there were others that did not want that to happen.
The biggest constraint to a successful board and in business in general, is self interest. Clearly, a free enterprise system is driven in a large part by ethical self interest but some people are so self consumed, they cannot and will not do what is fair and just, but rather justify their actions by creating attacking those they have abused or taken advantage of. Those who engage in politics to harm another, do so feeling totally justified in their actions because they have built an internal case against that person by not being true or honest with themselves. They may temporarily harm the person they attack with their politics, but they can never run away from themselves and eventually it will catch up with them.
Many have rumored that I had a falling out with the board. The reality was that I had more worn out the board. Over the four quarters that I was managing the greater Caldera/SCO union, the economy literally feel apart and the stock market went toppling. To keep my people engaged and invested in the business, I was constantly going back to the board for more options only to find that they were of little value within 6 months. This was no reflection on the management team or the board. They were unprecedented times that no one foresaw or had any experience at. In addition, we would make revenue forecasts that were based on the best information that we had. With the expert help of Bob Bench, our CFO and Ed Donakey, our Chief of Staff, we tenaciously met all of our expense cutting targets without fail, but we did not reach our revenues. Again, not trying to make any excesses but no one else was making their revenue targets either. The reality is that we were all living through some very difficult times. The team did an incredible job of managing the ship and frankly, I believe that the merger was a great success. The entire company was working together toward the common goal. However, these events are extremely stressful to a board that has a fiduciary responsibility. While they did not have any better ideas, some felt it their responsibility to criticize. It is amazing how easy it is to tear down and so hard to build something up, especially when it means that you might have to take some heat for it. Having two vocal board members whose entire mind set was to fight rather than support Linux, made it virtually impossible to move forward. When nothing else works, “let’s do something new,” becomes the path of least resistance so that at least we can represent to investors that we have tried.
Every board meeting became an absolute battle. We could not accomplish anything in the board meeting. Alok would attack everything that management wanted to accomplish and suggest to the board that all Caldera had going for it was UNIX. There was truth in what Alok said but it was very deceptive. As a management team and board, we had intentionally let our retail business die which is where we sold most of our Linux products in favor of the VAR channel. UnitedLinux would have opened up the application and hardware platform market to us as the ISVs and IHVs would rally and support just two Linux platforms. With the applications and support of the hardware OEMS, we could have pushed Linux back into the VAR channel where we felt it had the highest chance of success. Even though we were successful in managing costs, something Alok and the SCO management team could not do, and we successfully negotiated a relationship with four highly competitive Linux companies, it was apparent that I would have little more effect on the board to bring about the vision we had put in place.
Ralph Yarro, who was the Chairman of the board, refused to step in and control Alok and Duff Thompson. They apparently felt SCO would spear head a minority share holder suit if they support showed any support for the Linux strategy. Canopy was in a tenuous position. Ray Noorda had stepped out of the day to day business a year or two earlier. Ray had set up Canopy to be independent. He did not want his children to know or be involved in the management of the funds allocated to Canopy as I understand it. Ralph and Darcy Mott were making business decisions without any guidance from the Noordas. The Noorda family was growing increasingly uneasy. Also, Darcy had wanted to be appointed to the SCO board with Ray’s resignation. I had not wanted that to happen for two reasons: 1) we already had the necessary accounting experience on the board with Steve Cakebread. Darcy already attended all board meetings and had full input through Ralph. The Caldera board desperately needed more independent marketing and business expertise that another accountant who represented the principal investor. 2) Darcy and I had butted heads a few times. He viewed the world as a true accountant and struggled to see anything but numbers. With the contention already on the board with Alok, our management team could not afford to have yet another antagonist.
Because I apposed his appointment, which by the way, Alok had made quite lucrative, I believe Darcy wanted to get rid of me. I was quite naïve and was only focused on how to get our vision implemented. Our vision and commitment to Linux had seen the company through the dark days of the dissolution of Caldera Inc. and I was hoping that Ralph would stand up for their investment again. When Ralph did not step forward in defense of the Linux vision and management, I realized that I had absolutely no support from Canopy and thus the board. Consequently, I determined to do two things: 1) Find a replacement that could build on what we had started and 2) Do everything in my power to get the SCO board members off the Caldera board so the new CEO would be free from their influence and able to move forward on the vision.
I heard that Darl McBride was looking for a job. Darl had been instrumental years before in getting Caldera started inside Novell. When Bryan Sparks, Rob Hicks and I met to discuss the possibility of starting a company based on Linux. Rob Hicks had met with Darl who was a Vice President over Novell’s embedded technologies and told him of our efforts. Darl had mentioned our ideas to Ray Noorda. Ray called Rob Hicks in and started a skunk works project inside of Novell. Darl had since been involved with several channel companies and had even done a successful channel roll up, buying up of individual Value Added Resellers to form on large global business.
To get SCO off the board, we had to buy out Tarantella’s remaining interest in Caldera. To do so would use up the remaining cash reserves. Bob Bench and I had begun a program to reach out to new investors and position Caldera properly. We had stopped the hemorrhaging and were cash flow break even and were well positioned to get new capital. When I met with Darl, he felt he could bring a number of key investors to Caldera who had helped him in the past with his channel roll up. I spoke with the board and suggested that they consider Darl as a replacement. They were quite interested so Alok volunteered to interview him in California. It was arrange for Darl to fly out to Santa Cruz and meet with Alok.
I was not present at the interview, but Darl came back and began to grow very interested in the pedigree of UNIX. The board agreed to make Darl an offer. I was also successful at negotiating a buy out amount with Tarantella. Also, I was trying to work with the board to figure out an exit package for myself. I had requested that the board give me the shares in the company that I had to leave behind from Caldera, Inc. At the time Caldera Systems was formed, I could not afford to pay the taxes when Caldera Inc.’s Linux debt was converted to equity. The equity investment of 16 million, raised the value of Caldera System’s stock price. I had founder’s stock I had to let go because I could not afford to pay the taxes. Serendipitously, I found the agreement the officers of the company signed when we purchased SCO. It made reference to the fact that if a significant change in board structure occurred, it would trigger the severance package for the company officers. The resignation of Ray Noorda, Alok Mahon and Duff Thompson placed Caldera in that position. So when I pushed that point after signing Alok’s and Duff’s resignations, the Board quickly reinstated Duff to stay on the board as an independent. Duff was good friend with Darcy Mott and local to Utah and the board did not want to be in a position that the rest of my staff could claim a severance package.
I did not show up at the announcement of Darl’s appointment because the board would not respond to my request. Shortly after the announcement, I came into the office when the board finally agreed to a very reasonable but conservative package. I was going to stay on for a couple of months, months paid out of my severance package, and see if I could move over and help manage the UnitedLinux effort. During that time, Darl came into my office and asked me several questions relating to the UNIX source code. In one conversation, he asked about the IBCS II libraries that enabled some OpenLinux applications to run on Linux. He wondered if Caldera could sue the open source community on intellectual property infringement. I told him he was going down the wrong path. This was one area we had hoped to publish actual libraries and have them included in UnitedLinux but they were not that valuable because many ISVs were porting their applications directly to Linux and the libraries were becoming less important. On another occasion, Darl suggested that they could threaten suit to IBM and see who would come to the table first to invest, either Microsoft or IBM. He felt either IBM would invest or buy Caldera or Microsoft would support the effort against IBM. At that time, I suggested that if he wanted to use the legal route, he should sue IBM in regard to the Monterey project and their lack of support on the ISV and IHV front as that was clearly an area that IBM had misrepresented and hurt Caldera’s business.
Knowing that I would be stepping down as CEO, I approached members of the UnitedLinux consortium to see if they would like me to move that imitative forward. All the presidents of the companies seemed very supportive of the move, but the SuSE board came back and would not support my being appointed as the Presdient/CEO of UnitedLinux for fear that I would be bias toward Caldera’s interests. I stopped going into work at Caldera International since I was basically paying myself out of my severance.
Within months, they changed the name of Caldera to SCO. I remember distinctly a conversation with Doug Michaels on the Santa Cruz board walk when he asked me what I intended to do with the SCO name. I said we would probably try to have it coexist with Caldera until we could phase it out. He suggested that it was probably better known than Caldera in many parts of the world. I agreed with him but could not see where using the name would help convey the new Linux direction of Caldera. I would guess that when Darl went out to visit with Alok and very likely Doug Michaels, they suggested the SCO name change and UNIX focus since I had been battling them for months on the same issues.
There are several very critical lessons that I learned from my interaction with the board. First, to be a CEO without any real ownership or stake in the company makes it difficult to manage the politics of a board made up of investors. Letting go of ownership is a critical flaw if want to have the ability to successfully implement strategy. When we started Caldera, Inc., the Noorda Family Trust (NFT) which later became Canopy, demanded 80% of the company leaving only 20% to the founders. The absolute most we should have given up was 40%. Bryan Sparks came to me and told me he felt he needed to hold on to at least 10% as CEO. The rest of the founders took approximately 2%. At the time I questioned the need, but I believe Bryan was wise to hold onto a greater percentage. I watched as he was able to negotiate successfully with NFT/Canopy as his company evolved, primarily because he was a legitimate minority share holder. As things evolved, I ended up with no real ownership in Caldera, International, so when I began to lock horns with Alok, we had no leverage. Our critical flaw, and frankly the downfall of Caldera, was to give up so much ownership to NFT. Having Canopy own so much of the company was also somewhat difficult when we tried to take the company public. The investment bankers really wanted to see much more ownership by the employees and management.
To grow a company, you will likely have to bring on some investors. But to have the unity at the board level, the constitution of the board is a critical factor. A major challenge in the constitution of the board is the need to raise capital. In raising capital, it is critical not to loose control of the board. If a company can grow organically, it is by far the best but that is not always possible. Sometimes there are clear market windows and opportunities that will pass if you do not move forward and raise the necessary capital to do so. Getting the best set of advisors for the business should be the key objective. Ideally, it is best to have board members who have strengths in each of the key business disciplines like Sales/Marketing, Finance, etc. Also, depending on the nature of the business, it is helpful to have someone with channel experience or even a major customer to get the right perspective. The natural evolution of most boards however is to either have a lot of investors or board members with financial backgrounds. This is due in a large part because of needed capital. Also, a public company requires that a financial specialist to head up the audit committee. Investors and board members with financial backgrounds tend to be heavily adverse to risk and tend to lack understanding and patience when it comes to developing a business or following a strategy.
Having the CEO also act as the Chairman of the Board is also critical in many ways. Nearly all of the board members are very busy and have little time to review board materials. The business of a board should be nearly decided before the board meets in a one on one meeting between the Chairman and individual board members. The CEO is closest to the strategy and the company. Ensuring that the CEO has time to spend with the board outside of board meetings can be extremely beneficial to the company. When the Chairman is consumed with his own company or interests, he is not able to represent the interests of the management or company well. Hire a Chief Operating Officer to handle the operations of the company if necessary and allow the CEO to act as the Chairman of the Board and spend time working with board members if you want to be successful.
Going public is not the ideal way to either provide an incentive for employees or liquidity for the investors. Initial Public Offerings (IPOs) are not the answer for every company. In fact, if there is any other way to raise the capital without going public, I would recommend it. The cost, overhead and loss of flexibility are far more than you can comprehend. Liquidity for both the shareholders and employees can be achieved other ways that enable the company to successfully pursue a strategy and control its own destiny.
Public traded stock does provide a currency that can facilitate some strategic plans for growth and acquisitions, but you must be aware of the costs and where ever possible maintain control and constitution of the board to ensure ultimate success.