Effective Boards Make Tough Decisions Quickly
A Case Study
Venture-backed boards too often ignore serious governance issues and delay taking action to correct the issues. Uber and Theranos are two examples, but the innovation landscape is littered with innovator-led, investor-stacked boards that ignore problems and delay solutions. Directors of venture-backed companies need to make hard decisions sooner.
Tech company boards are consumed with the urgency of crossing the chasm and going viral but have a lesser sense of urgency about governance. Steve Blank, a serial entrepreneur and adjunct professor at Stanford University, wrote an incisive article in the Nov-Dec issue of Harvard Business Review citing the reasons for this situation. I wholeheartedly support his analysis and recommendations. As a longtime practitioner of disciplined board governance, I want to offer here a case study of how one board I sat on almost delayed difficult decisions too long. It was years ago, but its governance lessons resonate as strongly today as they did then.
I am sure you have friends using Invisalign, the clear-teeth-straightening system that replaces braces. The product is a success, and the company that makes it, Align Technologies, has become winner as well. In 2016, the company shipped more than a billion dollars of product and employed more than 6,000 people; its p/e ratio is above 60.
But it wasn’t always that way−Align could have failed. Helping Align take the path to success required difficult governance decisions and actions that the board had opportunity to make and take sooner. The delays could have been a tragic mistake for stakeholders.
In the beginning
After I presented to an entrepreneurship class at Stanford Graduate School of Business years ago, two students asked what I thought of their idea. They wanted to change the way orthodontia is practiced by creating a less painful, more attractive way of straightening teeth without using metal. I had led life sciences companies, and in one of those experiences I had helped acquire, lead, and sell an orthodontia appliance company. I knew braces had experienced little innovation.
I found the students to be smart, passionate and determined. But, they had never built a medical device company, and they had never developed a complex product, operationalized a company or convinced practitioners to change their ways. So, when they asked me if I’d join their team as an advisor, investor and board member, I knew I could help.
My governance mission
The Align co-founders wanted to spend time developing and marketing their product, but I found they were under-investing in the principles of sound governance. I needed to guide them in those principles so they could cross the chasm from being inventor-founders to being entrepreneurial leaders. In this mission, I often had difficult and uncomfortable conversations. Let me make plain that the two co-founders, especially the co-founder CEO, disagreed with and disliked many of the actions that followed. In particular, from the co-founder CEO’s perspective, good governance principles were forced upon him.
I identified sources of capital for the company’s first major financing round, which I knew would force governance practices on Align. I introduced Align to an investor and operator from Domain Associates, and once he agreed to invest, the partner from Kleiner Perkins, who had made a seed investment, also agreed to participate in the financing round. With the investment closed, the governance infrastructure included two venture-round investors, the co-founders, and me. The company later added an operations and technology management expert who was an independent director.
Eventually, the board became concerned about the co-founder-CEO’s ability to grow Align to the next level, a leap that involved designing a commercialization strategy, solving production challenges, and recruiting team members. We felt the company had reached the point where it needed a more experienced CEO. After many discussions, we determined we’d ask the co-founders to consider and lead this change. In executive sessions, we agreed we’d enable the co-founder-CEO to re-define his role as that of chairman; there’d be no hit to his compensation; and he’d retain his equity.
When the board delays
The board charged me with delivering the message, which the co-founder-CEO didn’t receive well. Meanwhile, the Align board determined we had the opportunity to take the company public. The time and resources required for the road show meant we ceased discussions on the long-term leadership matter.
The company raised $130 million dollars in a successful public offering, after which issues related to leading and managing a growing, public, medical device company arose. The Align stock price drifted steadily downwards, and conditions forced the board to act. The company recruited a deeply experienced candidate, Tom Prescott, as CEO. The executive co-founder angrily left the company and formed a competitive company. Align subsequently took legal action to protect its rights.
Bringing in an experienced CEO had exactly the impact the board wanted. With Prescott leading the company, Align surged in top-line growth and market value. The board also brought on a successful entrepreneur and company builder as non-executive chair. When Prescott eventually retired, the board hired a GE Healthcare executive, Joe Hogan, to replace him.
The non-executive co-founder of Align, Kelsey Wirth, remained a member of Align’s board of directors for years after the IPO, and she financially benefited from the company’s growth. I don’t know what the co-founder and former CEO chose to do with his stock after his departure, but he may well have benefited. Regardless, founders who allow or endorse the creation of a great management team including an experienced CEO do better than those who don’t. Noam Wasserman, professor of clinical entrepreneurship at the University of Southern California, and author of The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls that can Sink a Startup, wrote in a 2012 article for The Financial Times that “. . . founders who remain king tend to end up with stakes only 52 per cent as valuable as those held by founders who yield to successors.”¹(By “king,” Wasserman means CEO).
Here’s the thing−this story could have had a terrible ending. The board could have acted sooner, and over my 30-year career I’ve seen that excessive delay is a mistake many boards make. If the Align board had consistently followed good governance practices and forced change earlier, the company would likely have spent less money and reached success sooner. Conversely, if the board had waited much longer than it did, we could have had on our hands a defunct company; who knows whether the world would have Invisalign products today or whether shareholders would have seen any return on investment?
Difficult stories abound
I’m not sharing this story of board delays, law suits, and forced actions because I think it positions me as a governance guru. I’m sharing it because it’s important that innovators know what governance looks like in the trenches. Boards and founders try to make decisions for the good of the company, and the process can be messy and disagreeable. In his Harvard Business Review article, Blank calls the rise of founder-CEO power in the boardroom “founder’s revenge.” He then cites the history and facts of the modern tech industry that have led to founder’s revenge, and he summarizes that the rising power of founder-CEOs in the boardroom has “resulted in a power imbalance that can negatively affect employees, customers, and investors.”
Look at Uber and Theranos, where boards allowed the founder-CEOs to hold on for too long, partly I’m sure because forcing good governance in the form of leadership change is difficult. It doesn’t make a director friends. Entrepreneurs and the people who support the companies they start are often misaligned in their views about what it takes to accelerate growth and what constitutes good governance. Difficult stories abound on the path to innovation success and failure, and difficult decisions are often delayed as a form of avoidance. But more boards need to make big, difficult governance decisions and take big, difficult, governance actions sooner in order to give innovative companies their best chance at success.
¹From “The Case Study: When Founders Step Aside,” in The Financial Times, by Noam Wasserman, October 22, 2012.
