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Corporate governance decisions that can’t wait

July 6th, 2016
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I was reminded of how important corporate governance is for start-up founders and small business owners after listening to a friend’s woes about the conflict between him and his grown siblings over their deceased parent’s estate.

They were the picture perfect family that you could imagine being invited to the U.S. White House for tea with the President and the First Family. All of the children were great students, superb athletes and had supportive parents who ran a very successful family business and were deeply involved in local community affairs. The parents and children were devoted to each other and had a large circle of friends.

The crack in the foundation was the lack of an updated will and estate plan that would provide a governance structure for the children to follow after the deaths of their parents. Their parent’s will had been drawn up when they were children and didn’t reflect any changes in their family’s asset. To further complicate matters, the parents didn’t speak with them about the will and estate planning before they died. The siblings assumed that their parents had updated both documents. This perfect family had a perfect mess on their hands.

A business, like a family, needs a governing system that is transparent and involves all key stakeholders in order to manage assets, plan, and make decisions as well as manage day-to-day operations. A 2013 PwC survey of business owners showed that smaller and medium sized businesses were less likely than larger businesses to address corporate governance issues. The examples of two companies that failed to address corporate governance issues detailed below should give anyone who thinks these issues can be put off a moment of pause.

Succession Planning Gone Awry

The highly public and bitter board level dispute for control of media magnate Sumner Redstone’s majority holdings in Viacom and CBS demonstrates the perils facing a company that procrastinates on succession planning. Mr. Redstone and his daughter Shari, who is vice chair of both companies, have gone to court to oust long-time Viacom CEO, Philippe Dauman and a Viacom board member from a seven-member trust that will have control of Redstone’s holdings after he dies or becomes incapacitated for health reasons.

Charges and counter charges are flying back and forth. The key issue that could decide the dispute is whether 93 year-old Sumner Redstone was mentally competent when he made the decision to sack his CEO and a Viacom board member from the trust. The dispute has divided the Redstone family, who are also senior shareholders. In the meantime, Viacom is a paying a big price for this board level conflict. Its share price has been dropping and long-time key executives that have been instrumental in making Viacom a media giant are leaving.

The lack of a succession plan for when Sumner Redstone steps down or is forced out by health issues or death is at the heart of this destructive dispute. Redstone himself has been the single most important barrier. He has had on-and-off relationships with members of the family who were seen as heirs apparent, including daughter Shari and son Brent who left after major disagreements with his father. Redstone was a mentor and personally close to Viacom CEO Dauman until he recently changed his mind and aligned with Shari to force Dauman out. Redstone’s stubborn resistance to stepping back from a leadership role is not new. In 1986, Redstone told the Boston Magazine that he planned to run the company until the day he dies. Thirty years later Redstone still appears to have this goal. Whether the courts or mortality will intervene first to support or spoil Redstone’s plans will be seen. In the meantime, Viacom has a divided and distracted leadership. Not a good combination to have in the highly competitive media business.

Group Think in the Board Room Results in Bad Decisions

Big companies are not the only candidates for corporate governance failures. Smaller and medium size companies are just as susceptible. One of the most memorable in recent years is Fab.com, the once fast growing online retail site that offered limited numbers of highly sought after items at low prices, that encouraged impulse buying, or flash sales. The problem for Fab.com was not a lack of succession planning, but a board decision-making process that allowed group think to prevail without fully vetting a dissenting board member’s views on a major business decision on whether to expand globally. That mistake, according to Goldberg, ultimately led to the demise of the company.

Before this, Fab.com was on a roll. Sales were exploding, investment capital poured in and the company began a hiring spree and several acquisitions. The high water mark was when Fab.com’s valuation reached the $1 billion. But there was trouble ahead. Fab.com was still operating at a loss. Staying profitable in the online retail sector is extremely challenging with competitors like Amazon and new entrants popping up in the marketplace.

The bright outlook for Fab.com started to dim. Sales estimates were not being met while the costs for staff, warehouses and logistics to finance its expansion burnt through enormous amounts of cash. Investor started putting in less money over concerns about profitability and strategy. Key staff started to leave. A corporate restructuring and big lay-offs were not able to stem the flow of red ink. The one-time Unicorn was eventually sold off for $15 million.

The experiences of Fab.com and the ongoing drama at Viacom provides lessons learned on the importance of corporate governance to SMEs to becoming successful and sustainable businesses. These include:

Have independent voices on your board of directors or advisory board – Whether a publicly or privately held company, it is essential to have directors or advisors that have no commercial relationship with your company (related party transactions). Independent directors are less likely to be influenced on major decisions by self-interest or dissuaded from taking a dissenting view on board decisions. The Founder should not appoint clones of himself/herself that would hesitate to question proposals introduced by executive management, but appoint individuals that would thoroughly address all sides of a major decision, avoid group think and put the best interests of the company first (Founders/CEOs should use the same practice for hiring executive managers). Independent voices, and even those of the often annoying contrarians, are important to maintaining the integrity of the board decision-making process. Effective leadership teams in the boardroom or in the C suite are built on the basis of trust. Founders and CEOs have a responsibility for building an atmosphere of trust between them and their boards and executive management team. Without it, the path to success and sustainability is long if not impossible to achieve.

Refresh and diversify your board of directors or advisory board – Having intelligent, qualified and committed people who can offer fresh ideas is a critical asset for any company to manage risk and grow. Diversity is also important. Appointing women, ethnic minorities, and younger and older adults can offer a range of valuable perspectives. The criticism that more white males and fewer women and ethnic minorities are appointed to boards is undoubtedly valid. However, the qualifications for board membership should not be based solely on demographics, but on a person’s ability to think critically, be creative and possess the requisite financial and business skills. A perfectly diverse board of directors or advisory board that fails to challenge executive management and rubber stamps all of its proposals is a step backward.

Plan for the future – address leadership succession now – The time to start succession planning is when your company has a viable product, intellectual property, staff and investors, and growing sales. Your company has become more than a one or two-person operation and has a prospective future that must be protected against potential risks. The proverbial dilemma poised if a founder or controlling shareholder dies or is incapacitated must be planned for. Letting this possible scenario go unaddressed could result in an unwanted disruption and undermine confidence in the company held by investors and employees.

Hiring CEOs and pay compensation – Having a CEO that can effectively lead the company is essential to managing risk and being successful. Do you hire an external candidate or someone from the founder’s group? The answer is that it depends. The argument for an external candidate is that he/she would be more objective than a founder and focus on the best interests of the shareholders. Still, there are a number of founders that hold CEO positions and have superb leadership and management skills. Compensating a CEO and other key staff adequately and incentivizing them is another challenge. Finding the right candidate with a combination of skills, passion for the company and its products and strategic vision is perhaps a company’s most important corporate governance decision.

The last time I checked, my friend and his siblings were still battling in the courts. So are the disputants in the Viacom case. Fab.com is not the online powerhouse it once was. I am sure that today the main actors in those dramas are kicking themselves for not addressing the governance issues that could have prevented these unnecessary problems.

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