Take the Armchair Board Member Test
It’s only been a week since I wrote about Sam Altman being fired and hypothetical reasons why the board could have been justified. Altman is back and some board members have been replaced. But as I said before, this is just the opening move in an inevitable governance shakeup. Because no matter how much power the CEO has the governance structure remains a charity controlling a for profit company.
The IRS requires that a 501(c)(3) meets a community benefit standard; the organization is required to serve a public, rather than a private, interest. A nonprofit that strays substantially from its mission and purposes will be required to modify its governing documents and notify the IRS of the changes in its exempt status.
Yoav Schlesinger, Architect, Responsible AI & Tech, Salesforce
It’s clear from all the heated commentary about OpenAI that governance is an under-explored topic in startups.
I’ve created four case studies each highlighting a hypothetical board room scenario.
Cast your vote then read the discussion points.
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Case Study One: Early Exit
You are a VC sitting on the board of StartupX. The company has done so-so but still has potential. They need to raise more capital if they want to survive and grow. You are at the end of your fund’s lifecycle and are not raising a new fund. Your LPs are pressuring you to find liquidity.
An industry partner makes a good offer to buy the company for cash. The founders want to raise money and keep going.
Voting No and agreeing with the founders means voting against your interests. You can’t invest in the next round since you aren’t raising a fund. You are turning down guaranteed liquidity for your LPs for an uncertain future.
From the founders’ perspective you are an ideal board member. But how will your vote be judged if the company eventually goes under? Were you truly doing your duty to build shareholder value for all shareholders, not just the founders?
Voting Yes puts you at odds with the founders and other investors who want to reinvest (and are able to).
Selling now may actually be the more reasonable option for StartupX. But how do you balance your fiduciary responsibility to the startup with your fiduciary responsibility to your fund and its LPs?
Case Study Two: A Conscientious Objector?
You are a renowned climatologist asked to join the board of OpenVolt, an energy startup. The CEO wanted to ensure there was an independent voice to represent society’s concerns about climate change. As a condition to joining you were granted a special right: at any time you could trigger an external review of a decision you felt would caused significant harm to the planet.
OpenVolt has become a worldwide leader. A new discovery promises to accelerate its growth even more. However, a senior engineer reaches out to you with a concern that this new technology has negative climate impacts that are not being considered. You raise the issue with the CEO but they dismiss it.
This is your chance to play OpenAI board member.
I made it easier to vote Yes by not making it a vote to fire the CEO. But there would still be consequences. An external review would halt progress just when the company was taking off. It would destroy your relationship with the CEO. And if the review was negative you would be the director who cried wolf. How could you stay on the board?
Voting your conscience, and doing your fiduciary duty as a director, is not an easy choice.
Voting No is the easier choice. It’s one engineer’s word against the CEO’s. You were brought in to be independent but you still have a duty to protect the interests of all stakeholders, including shareholders and the CEO.
But even if the risk ended up being untrue, it begs the question: under what circumstances would you trigger the review? What would be your red line and how important would it be that others agreed with you?
Case Study Three: Rich or King?
You are the founder/CEO of a Raymond’s List, a marketplace startup. You’ve raised some money but you and your co-founder still have 2 of 3 board seats.
With new funding the board will grow to 5 and you have the right to appoint 3.
If you appoint an ally, i.e. someone you trust and can control, you protect against votes going against you, including being fired. You could instead select an industry expert who would add a ton of value, but they might not vote the way you want.
If you’re a founder, how you voted probably says a lot about your preferences for being Rich vs being King/Queen. The data is fairly clear: giving up control results in a higher payoff for the founder.
But seeing Sam Altman get fired taps into that part of the founder brain that has nightmares about being fired from the company they founded. Most founders I know would vote for the “ally” and retain control. They would probably point to founders like Mark Zuckerberg who have retained control.
This is an interesting dilemma. When you’re forced to accept a board member from an investor it’s easier to see the glass as half full: that person could add value, be a mentor and push you to be your best.
But would you make the decision to lose control of the board voluntarily?
Case Study Four: The Insider
The founder of Raymond’s List (Case Study 3) asks you to be an independent director. You’re excited because you are looking for more board experience and his startup is hot, with name-brand VCs.
At the first board meeting the CEO announces incredible results. This is taking off like a rocketship.
To keep the velocity high he proposes outsourcing a significant amount of work to another company, Olameda Research, that he wholly owns. This will allow the company to achieve the highest velocity growth. Since the CEO controls the company there is less risk of overpaying or fighting with a vendor.
But he needs to do the deal now and wants a quick vote to approve.
To armchair board members, voting No seems obvious. And yet a large number of boards do just that and agree with side deals that clearly benefit one party. We find out about it when things collapse, like they did with FTX.
Why do they do that? In this example it could be that in the heat of the moment there would be incredible pressure to solve for the issue at hand (growth opportunities) over potential future issues (conflicts of interest).
There are definitely valid reasons for voting Yes. For example, the CEO could agree to accept market rates, or recuse himself from the negotiations. Dealing at non-arm’s length may not necessarily be a conflict if it is transparent.
That leads to a reasonable third option: slow down and insist on due process. But this too has problems. As a board member voting not to approve an easy solution you will feel pressure to deliver your own solution. Isn’t a board member’s job to build shareholder value? Decelerating growth does not seem to do that.
Many people reduce board governance to a simple statement like “to create shareholder value.” But that is an over-simplification. It’s not always obvious how to do that, especially for startups.
I’m very interested to see how people vote. If you feel you need to add explanations, leave a comment. No matter how you voted it should be evident that not all decisions are obviously right or obviously wrong.