NW200: The board game, 4/26/99

Venturing a board

In the high-tech industry, outside directors --board members who don't work for the company -- come from two groups: venture capitalists and successful CEOs, current and former.

Compaq's board of directors is the stuff of acclaim

While it's possible that a profitable company can spring from a dysfunctional board of directors, more often great boards make great companies - take Compaq. It has taken actions few would have thought possible for a PC company - including acquiring one of the oldest and largest names in the technology business, Digital. And more recently Compaq declared that it would become the electronic commerce market share leader within two years.

Gutsy moves stem from a confident board and Compaq's board has been a trailblazer in numerous areas. For instance, the board takes a militant stance when it comes to leadership, sacking two consecutive CEOs.

"We removed Rod Canion and replaced him with Eckhard Pfeiffer because we thought [Canion] was missing the boat," recounts Kenneth Roman, a Compaq board member since 1991 and former chairman of advertising firm Ogilvy & Mather Worldwide, New York.

Likewise earlier this month it sent Pfeiffer packing for similar reasons. [See story]

But canning CEOs isn't the Compaq board's only hard line. It is equally tough on its directors. In 1996, Compaq published an aggressive set of standards for its board, one of which dictated that except for the CEO, the board would consist entirely of outside directors. In contrast, technology companies average giving one-third of their seats to insiders, according to Spencer Stuart's Global High Technology practice, an executive recruiting firm headquartered in San Francisco that specializes in director placements.

Compaq also limits the number of directorships a board member may participate in to five, including Compaq. It also has declared 70 as a mandatory age of retirement for board members, which ensures that board members are active participants, not figureheads. These standards, which are updated annually, also cover the selection of directors, board meetings, compensation and retirement.

The standards are also the reason that the Compaq board has earned a string of awards. The board was named one of corporate America's best boards by Business Week in 1996 and 1997. Later in 1997, Compaq also won the coveted Wharton School of Business/Spencer Stuart "Board of the Year" award. The latter was chosen by a jury of nine business leaders including Ann McLaughlin, former U.S. Secretary of Labor, and the CEOs of American Airlines and General Motors.

"It's a unique board," says Roman. "I'm not sure it has received as much recognition as it should. Most boards that get recognition are ones that have gotten their company out of trouble. I think of General Motors and IBM. Because we didn't - well, virtue isn't news."

The results of such vigorous self-governance are in the rankings. In the past three years, Compaq has shown the most improvement among the top ten NW 200 companies, moving from the No. 10 position in 1996 to No. 5 this year.

-- Julie Bort

The image of venture capitalist as start-up superhero isn't far from the truth; in fact, a venture capitalist's influence goes even further. Because many venture capitalists stick with companies for the long haul, perhaps no other group is so predominant on public technology company boards.

"We almost always take board seats when we make investments, and we stay with the company as it moves along," says Jeff McCarthy, general partner of North Bridge Venture Partners in Waltham, Mass., and former CEO of New Oak Communications, a start-up acquired early last year by Bay Networks, which itself was bought later in the year by Nortel Networks.

All but the oldest, most-established NW200 companies have at least one venture capitalist director. And some, such as Microsoft, have several.

When it comes to the rest of the board, venture capitalists are to start-ups what the president is to a vacant Supreme Court: They help the company staff its board, influencing the company's success for years to come.

"Generally speaking, we get people for board positions who come out of the IT industry or people who are technically savvy from other industries -- for example, a chief information officer of a finance company," says Dagres, who sits on the boards of Akamai Technologies (see "10 Companies to Watch"), Convergent Networks, InformationView Solutions, Inventa, Qtera Technologies and Redstone Communications.

While any good venture capitalist may wield significant influence in IT, a few stand as elite board material. They include John Doerr, partner of Kleiner Perkins, and Dick Kramlich, partner of New Enterprise Associates. Doerr sits on the boards of Netscape, Amazon. com, @Home, Sun and others. Kramlich directs Ascend, Macromedia, Silicon Graphics and others.

Certainly Arthur Rock, principal of Arthur Rock & Co., also deserves mention. Some call him the father of venture capitalism. Now 71, Rock has been a director of Intel since it was founded in 1968, and he helped seed Apple. He's a trustee of the California Institute of Technology and still sits on a handful of boards, including those of AirTouch Communications and Echelon.

An offshoot of venture capitalists are angel investors -- people who plow their own money into private companies. Like the venture capitalists, angels usually assume a board seat and often hold a half-dozen board positions at a time. One well-known angel in the IT community is Jim Dow, founder and former CEO of MicroCom (since acquired by Compaq) in Norwood, Mass. Dow sits on the boards of Omnia Communications, Nexabit Networks, MapleTree Networks and Process Software -- all companies in which he has invested.

Another premiere angel investor is Gary Bowen, a former executive of Bay Networks. Bowen has been in particular demand. He holds directorships at five private companies via investments: Epicon, Apogee Networks, Castle Networks (at least as of March, when it was acquired by Siemens), Quantum Bridge Communications and Kaon Interactive. He also sits on the boards of public companies Xircom and GeoTel Communications, just acquired by Cisco.

As an angel, Bowen has successfully guided four companies to the acquisition finish line: Cadia Networks, acquired by FORE in January; Arris Networks, snapped up by Cascade Communications in April 1996 (Cascade was acquired by Ascend the following year); Prominet, bought by Lucent in December 1998; and New Oak Communications, purchased by Bay Networks in January 1998.

An angel may choose to continue on the board through an initial public offering and beyond. For instance, Dow, who favors data network companies, typically guides his companies to the sale. "But in the case where they go public, my intention is to serve on the board as long as I am needed," he says.

Bigger and better

When a company is born, having a board that knows how to raise operating capital is imperative. But as the company begins to generate revenue, it looks for different qualities in its board, often adding seats, says Rick Gostyla, director of the high-tech practice for Spencer Stuart, an executive recruiting firm that specializes in board-member placements worldwide.

"A company, before it goes public, tends to have investor professional board members. When a company goes public, it starts staffing the board with outside directors," Gostyla explains.

The quality most in demand from outside board members is real-world experience. "Whether it's something as simple as relocating or as complex as developing a strategy, it helps to turn to people who have been there and done it," Dow says.

Not surprisingly, the hottest network companies make prime raiding ground for folks with such hands-on experience. The créme de la créme include Richard McGinn, chairman and CEO of Lucent; George Fisher, chairman and CEO of Eastman Kodak; and perhaps the hottest property of all, Judith Estrin, senior vice president and chief technology officer (CTO) of Cisco.

Estrin has the coveted combination of management know-how and technology savvy. And having women directors has become a major goal for companies tracked in the Spencer Stuart Board Index (SSBI), an annual compilation of board statistics from 500 top corporations worldwide, says Julie Hembrock Daum, co-managing director of U.S. board services for the San Francisco firm.

Estrin agrees, adding that companies with women directors tend to better recognize, promote and recruit women. Still, it's a goal that's meeting only moderate success in the IT industry. Only 54% of Spencer Stuart's HT 100, an index of 100 leading high-tech corporations, have a woman director, compared with 98% of the 500 mixed-industry SSBI firms. The problem? It's a Catch-22. Because most women in the industry don't have CEO experience, they don't get board seats. And because they don't have a voice on the board, companies continue to overlook women for CEO positions.

While that's been the prevailing trend, Estrin says it's starting to change. "Clearly, companies today are interested in diversity and adding a woman to the board," she says.

Yet few women -- or men for that matter -- have the kind of experience Estrin does. With her husband, William Carrico, she's founded three IT companies: Bridge Communications, Network Computing Devices and Precept Software. The last, acquired by Cisco in March 1995, landed her the job as Cisco CTO.

That acquisition demonstrates one of the pitfalls the multiboard member faces: conflict of interest. It's an issue that boards take seriously, particularly at public companies, in which directors have legal and fiduciary responsibilities to shareholders. For Estrin, working for Cisco while being a board member of Sun is a balancing act.

"When Cisco acquired Precept, I went to [Cisco CEO and President] John Chambers and [Sun CEO] Scott McNeally and asked if they had any issues with my being on Sun's board. We decided that it would benefit both companies, and if any issues came up we would re-evaluate," she says.

That's the typical reaction when conflict-of-interest issues arise, agrees Winsten Chen, who held a board position for Intel long before retiring four years ago as CEO of custom integrated circuit manufacturer Solectron in Milpitas, Calif. Board members will leave the room or abstain from a board meeting if a major decision involving two companies they direct comes to a vote, Chen says.

"We do have to be careful because we have a very good monitoring system -- the Securities and Exchange Commission -- and insider trading laws," he says.

Some executives who hold multiple directorships at top IT corporations include:

Chen, who retains a seat for Solectron and is a director of Intel, Edison International, and is on the boards of Santa Clara University and Stanford University. Chen is an angel investor of the more heavenly kind. He created and chairs the Paramitas Foundation, an organization that dispenses some $40 million annually in grants to worthy causes.
Richard Hackborn, the colorful former Hewlett-Packard executive, directs Microsoft and HP. Legend has it that Hackborn turned down the top executive position at HP to live quietly in Des Moines, Iowa.
Alex Mandl, former chief operating officer of AT&T, is currently the president of Teligent, the happening provider of broadband local wireless services. Mandl is a director for Dell, Warner-Lambert Co., Forstmann Little & Co., General Instrument, the Walter A. Haas School of Business at the University of California at Berkeley and Willamette University.

Good council

Why do these obviously busy people choose to serve on multiple boards? Most say they learn as much as they teach.

"Being on those boards, learning their issues, understanding and contributing to their successes, is a broadening experience," Mandl says. "Teligent's background is the telecom perspective. But sitting in a board meeting at Dell gives enormous insight on the PC business, what's driving technologies in that industry and how the marketplace is impacting that business."

Despite the benefits, the multiboard member is a rarity. People tend to serve on fewer boards in the high-tech industry than they do in other industries. Some top high-tech companies, such as Compaq, even restrict the number of boards on which their members may sit.

Moreover, technology companies lead the trend of having smaller boards. As of 1997, Spencer Stuart's top 100 technology companies averaged four fewer directors than those in the broader SSBI index, which averaged 13 directors.

High-tech companies have learned that a smaller, more manageable board makes for a nimble, fast-acting company, says Kenneth Roman, board member for Compaq and former chairman of advertising firm Ogilvy & Mather Worldwide in New York. Likewise, fewer people per board means each seat carries more responsibility and thus, more work. So companies prefer that their board members not stretch themselves too thin.

Meanwhile, other industries have begun raiding high-tech CEOs for their boards. That's how Estrin found herself on the boards of Federal Express and Disney -- companies pressing ever-further into technology. For these corporations, Estrin's role is to be a sounding board for technology initiatives, such as Year 2000 fixes.

"IS issues have historically not been high-level board issues. That's changing," Estrin says.

A board's true work is usually subtle. Members are tasked with making sure corporate management works well. That means offering advice when it's needed but staying out of day-to-day operations if all is well.

"If things are not going well, the board's role is to see what can be done to put things back on the proper course, including the question of leadership," Mandl says.

Likewise, good boards are watchdogs for all the company's constituents, Chen says.

"A board has the function of overseeing the whole company's business and to really watch out and make sure the company is properly serving its shareholders, employees, the community, its customers and suppliers," he says. To do that, boards must ensure that the company has a good long-term strategy, operating plan and a management team that will meet or exceed goals.

Conversely, external signs that a board isn't at peak performance include its composition, its compensation and its attitude.

A board that is composed of too many finance executives, investors and venture capitalists doesn't offer the necessary balance, Dow says. Financial people may have great ideas but lack the management expertise to know if their ideas are executable.

Also, boards that have too many "insiders" -- people who also have management positions in the company -- are at risk. Company managers can turn into yes-people to the corporate president, rather than watchdogs, Roman says.

Boards that don't tie the director compensation to the performance of the company generally tend not to perform as well as those that do. That's why most boards pay members in stock options, Spencer Stuart's Daum says.

Good directors, therefore, view their role as integral but hands-off.

"I jokingly compare it to being a grandparent," Estrin grins. "You get to vicariously share in the success of the company, but you can't tell the CEO how to run it."