VC Boarding School: Semester II

Earlier this year, we discussed a white paper aimed at defining the responsibility of directors at VC-backed companies. The authoring group has since expanded and produced an updated version (download here: SimpleGuide_2.pdf), so let’s revisit. To begin, pardon some liberal plagiarism from my original column:

“The paper’s basic premise is that VC-backed boards are particularly prone to dysfunction, due to: (1) Conflicting interests; (2) The regular addition of new board members following financing rounds; and (3) The likely presence of inexperienced members like first-time entrepreneurs, junior VCs or independent directors with strong domain knowledge but no background on VC-backed boards…

The general guidelines are as follows: First, the board should designate a member responsible for educating new and existing directors about their responsibilities and for implementing the guidelines. This can be a VC or someone else. Those general responsibilities are detailed in the whitepaper (basics like attendance, confidentiality, not using PDAs, etc.), and should be distributed to new directors before their initial board meeting.

The next two strokes… involve evaluation. The first evaluation is a self-review, where board members should annually fill out answers to a set of questions set out in the white paper… A review of the prior year’s self-review also is recommended. Next, the board is encouraged to engage in a thorough peer review process, which also is laid out in the whitepaper. The idea here is to generate feedback and to possibly provide a safe forum for the airing of grievances.”

Ok, back to October. I spoke yesterday with venture capitalist Pascal Levensohn about the revised version, and he identified three key edits. They are:

  1. The written self-reviews of board members raised certain liability concerns, so the revised white paper suggests that such self-reviews be conducted orally. The company’s outside counsel can serve as a data aggregator, and report the results to the entire board.
  2. Conduct regular reviews of company CEOs. “This not only helps CEOs understand what the board wants of them, but also can help flesh out differences of opinion among the board members themselves,” Levensohn says.
  3. New auditing regulations will eventually mean that auditors can no longer just presume that a company has high standards of control. Instead, they’ll actually have to test it, which could increase costs by 30 percent. Formal adoption of this white paper’s guidelines could help a company meet the standard.

My original analysis of the white paper was that it provides a useful structure to formalize a process that is otherwise scattershot. My only complaint was that it could wind up siting on the scrap pile of other voluntary guidelines, like those much-publicized valuation ones. This nag remains, as Levensohn and other firms are still willing to back, and reinvest in, companies that decline to vote on – let alone adopt – the guidelines.

But my complaint’s severity has significantly waned, for two reasons: (1) All participating firms to ask that all of their portfolio company managers read the guidelines, and often ask potential portfolio companies to do so. (2) The number of participating firms has grown exponentially since January, which corresponds to increased guideline exposure. For example, new co-authors include partners from such firms as Battery Ventures, Blueprint Ventures, Kodiak Venture Partners, IDG Ventures Boston, Gemini Ventures Israel, Scale Venture Partners and Technology Partners. It also includes some new academics, attorneys and accountants.

Levensohn says that the group’s next step is to publicize its findings, and that future efforts could include an online information resource center for VC-backed companies (like a more academic version of AskTheVC.com). It may also aggregate some of the peer review data, to discover emerging trends. A worthy endeavor, and one we’ll keep following…