The two high profile startup “unicorn” dramas of the last few months that have captured the emerging downsides of the pursuit of rapid (and very well funded) growth are clearly Theranos and now Zenefits. Both are very different situations yet each as a startling similarity at the core namely, as seen by many outside observers, a profound failure of corporate governance.
In “When the Tide Goes Out – Bad Stuff Version” I noted last October that:
“…extended periods of loose money and exuberant investment are typically associated with some high profile incidents not just of mis-valuation but misrepresentation, or worse.”
Based on my personal experiences and observations from the last tech bubble I noted that some of the tell tale signs from that period of potential “bad stuff” were:
1. A very controlling CEO and likely CFO too
2. A CEO with massive ego (and paranoia)
3. Sycophantic media coverage
4. Opaque “trust us” business models that “just work”
5. Vanity Board
My last point was about governance. But what is a “Vanity Board” of directors? I said that, in my view, it is Board populated with “very important people” … but who lack any domain expertise in the area of activity of the company and hence can’t provide effective oversight, and likely don’t have the time to commit either. Arguably that is a component of the Thernaos saga, but one that mirrors the failings of the lastbubble fifteen years or so ago. In that era the troubled companies like ENRON (with a vanity Board and, it that case, all the other danger signs!) were public not private. Corporate governance might have been in reality a “vanity” fig leaf in some cases but having a qualified and functioning Board was a regulatory requirement and expected and monitored by investors.
Zenefits is frankly shocking to me from a governance standpoint because it essentially had no Board worthy of that name. It creates another item for my check list – but this one is very much a creature of this bubble and was not seen in the last. Yes, Zenefits had a Board that met minimum legal requirements. But in my view not one that in any way could provide oversight of and guidance for the business in the interests of all stakeholders … not least all the outside shareholders who had committed close to $600mn to fund the company.
In a compelling and disturbing dissection of the troubles at ZenefitsFarhad Manjoo of the New York Times notes that the Board has four members. (Which is a bad start, any well structured Board has an odd number of members of obvious decision making reasons.) Further, that the four comprise three company executives and an investor representative. Regardless of who those people are, I am sure any experienced Board member or corporate governance expert, would agreed that simply doesn’t make sense. (Manjoo argues that here it speaks to the aversion of the original co-founder and CEO to expanding the Board.)
Corporate governance exists for a reason and even in startupland fulfills a valuable function. For example Brad Feld’s excellent book on the subject (“Startup Boards: Getting the most out of your Board of Directors“) sets out how a well run, strong and functioning Board helps and supports founders as opposed to slowing them down or otherwise hindering them. Sadly the Zenefits team does not appear to have read it. Neither, it appears, do the investors who had the right to require a proper Board structure as a condition of their participation.
So, unexpectedly, it seems I need to add a contemporary item #6 to by bad stuff check list namely:
6. Board in name only i.e. The company has a Board dominated by founders/executives where investors have applied their blinders and chosen to limit their role and oversight.
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