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Rules of Engagement for Early-Stage Boards By Deborah Midanek Before an investor accepts the role of representing his or her class of shareholders on a board of directors, what considerations should they have in mind? Due diligence—You need to take a look at the technical issues, the financial systems, and whether it’s a reasonable business concept. Depending on how early-stage the company is, you may start to see a pattern in these areas. Liability—Who are the other investors? What does the debt structure look like? Are there regulatory, environmental or other hurdles? Is there any litigation pending and what is the potential for it? Typically, the corporate counsel can give you a run-through on these details. People—By far, the hardest piece of this is assessing the people. Can they do what they say they can do? Take notice of whether the CEO is uncomfortable with prospective board members talking to others in the company. Does everyone have the same line on the company? If all information has to go through the CEO, that’s a big red flag. Other Board Members or Prospective Members—Talk to your potential colleagues on the board. What are their views? Can you all work together? What are the most common mistakes an investor can make in terms of involvement on the board of an early-stage company? Too little involvement? Not enough? Involvement outside their area of expertise? It’s easy for investors to think of adequate capital as the determinant for success when in fact, the most critical issue for early-stage companies is the customer and why they buy. A director can also mistakenly believe that, ‘If it’s important enough, someone will tell me about it.’ That’s not always the case. You have to be asking questions. You have to be skeptical and supportive at the same time and that’s an art. On the one hand, you have to remain detached for objectivity; on the other hand, you need to be very actively involved in an early-stage company. One of the common mistakes that I see with larger investors in early-stage companies is that they fall in love with the idea and then lose their objectivity. It can blind them from good decision making.
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In this issue, we hear from Deborah Midanek, a principal at Glass & Associates in New York. Deborah has served as a CEO and a board member of several early stage and well-established companies. She began her work with boards of directors in perhaps an unconventional way. While working in the mortgage-backed securities division of Drexel Burnham Lambert in the 1980s including the period when it filed for bankruptcy, she led a grassroots effort to organize the company’s shareholders into an equity committee to replace the management-controlled board and to develop a post-crisis strategy aimed at reorganizing rather than liquidating the firm. Deborah became a board member with no experience but quickly established a style of operating through active engagement that has carried through today. In this article, she shares lessons learned in corporate governance and her views on the balancing act of risk and responsibility that corporate directors face today. In addition to this Q and A, we have included the full reprint of an article Deborah wrote for Corporate Governance: A Guide to Corporate Accountability in 2003.
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