Hypo: you are CEO at a venture backed company and you receive a term sheet from a potential investor that has unacceptable terms. Do you share the term sheet with your board or do you try to negotiate it first and then disclose? Not always an easy decision.
This is just one hypo out of many that address the same question, namely, when, as CEO, should you share a given piece of information with your board of directors (and let’s assume your company is venture backed and you have VCs and independent directors on your board)?
Let’s set the basics on two issues. First, board members owe fiduciary duties to shareholders (and critically to common shareholders). In order to exercise those duties (in particular the duty of care and duty of loyalty), board members must be fully informed. For example, if the company is moving down a path with one party (for example, a strategic partnership) and then another alternative presents itself (a competing strategic option), the board will need to understand both alternatives in order to properly make decisions.
Second, the board is the ultimate decision maker at company on strategic issues and non “day to day” issues. The board hires and fires the CEO. The board hires and fires other officers (think VPs) after recommendations from the CEO. The board approves financing and sale terms. The board approves approves “important” agreements with third parties. The board approves overall strategy and spending to execute. The board approves “significant” deviations from budget. These are just some examples.
But, what is “important” and what is “significant”? In other words, what should the CEO necessarily present to the board members? Unfortunately there is no bright line test, and answer falls into the same category as the infamous US Supreme Court text about pornography – “you know it when you see it”. That is not always helpful to a CEO because different directors have different senses of sight. And different CEOs will have different views of appropriate level of board member engagement. Some will engage often on most issues and some will inform later on most issues. And some will be in between.
If I were a CEO of a venture backed company, here is a disclosure test that I would try: if i were a board member (and not CEO) would I like to know the given information from the CEO? Just put yourself in the non-CEO board members’ shoes. Keep in mind that disclosure can be painful for the CEO because disclosure will lead to questions and answering questions can be a time sink. Yet this can be curtailed by qualifying the disclosure. For example “here is a competing term sheet with some unacceptable terms as follows [X, Y and Z]. I am going to try to negotiate and see where it gets us. It would be more productive to discuss after that happens, but if you have any input in the meantime, feel free to give it”. Here the CEO has basically told the directors to stand down, but has also fully informed them. To me that is a win-win. This is important as I have seen situations where directors have wet noodled a CEO for not disclosing early enough. The disclosure essentially protects the CEO from criticism and allows the directors to do their job.
So, not surprisingly as I am a board member for many companies, I think that disclosing early and often is safer and the more prudent course. People will differ for sure on this point, but over communication to your board is rarely a bad idea.
This topic is complex, and I bet there will be more disclosure on it.
Great post Zach!
Slightly off topic, but check out Basil Peter’s website http://www.angelblog.net. His focus is on exits and he has some great advice for how CEOs and boards manage the exit process.