Is the board entitled to micro-manage?

May 2007

"Every quarter, we give our board a full rundown of what's happening with the business--product development, finances, sales pipeline, HR, the works. The point was to give them helpful information, but lately a couple of board members (investors, unfortunately) have begun to treat our presentations more like proposals that need their approval. How can I politely put a stop to this kind of micro-management?"

Mike: The real question you have to ask is whether this micro-management reflects a lack of trust in how you're running the company. Investors generally have the right to pre-approve annual operating budgets, as well as any large purchases (say, above $50,000) and hiring decisions for anyone who reports to the CEO. If your board members feel you're screwing up, it's really their job to step in and protect the business. And you should welcome their help.

Of course, some board members will meddle even if things are going well. You might start by asking your *other* directors--the ones who aren't micro-managing--if they feel there's a problem. Chances are, they already feel the behavior of their fellow directors is embarrassing, and they might help you get the situation under control.

Are payments in stock taxable as revenue?

March 2007

"We pay our advisory board members $5,000 each quarter in company stock. Even though they can't sell the stock, are they expected to pay taxes on it as current income? If so, what's the point of working for stock?"

Mike: Yes, the $5,000 in stock is definitely taxable revenue--and taxable in the year when it's received. To help minimize the tax impact of these grants, you should talk to your accountant about offering options or restricted stock. But don't expect to find a loophole that will avoid a tax bill for board services.

So why do board members often prefer stock instead of cash? The short answer is that they believe the stock will grow substantially in value. The board's job is to increase the company's valuation, so a successful board will accumulate stock at today's prices and will eventually be able to sell it at a much higher price.

How can I eliminate a useless board?

February 2007

"Last year, I set up a board of directors for my company, which my wife and I own completely. Two of my so-called directors have never come to a single meeting, and the other guys now act like they own the place (and give stupid advice, too). How do I shut down this monster without looking like a jerk?"

Mike: First, invite your current directors to an informal dinner meeting--no presentations, no minutes--and tell them why you're disappointed with their contribution. Insist that they either respect the job or you'll ask them to resign. In case they're unclear about your authority, explain that board members are elected by the company's shareholders. That's you and your wife.

Of course, anyone who doesn't show up at this dinner meeting should be removed on the spot.

When you fill future slots on your board, you might want to be more explicit about what you expect from your directors (time commitment, homework on strategic issues, regularly scheduled meetings) and what they can expect from you (compensation, potential for long-term upside). And never make board appointments open-ended. You might give your new members a one- year term, and after they prove themselves consider additional terms or multi-year appointments.

Is there a penalty for having a weak audit committee?

December 2006

"I know the new accounting rules say we're supposed to have a financially savvy board member in charge of our audit committee. Trouble is, no one on our current board qualifies. I suppose we could hire someone, but first I'd like to know what the penalty is if we simply ignore this rule."

Mike: You don't get the equivalent of a parking ticket for violating most accounting rules, and I've never heard of anyone getting nailed for having unqualified audit committee members. The real risk you face--and this could be a serious "penalty"--is that your board members will overlook an important mistake in how your company operates financially. Your board has a fiduciary obligation to protect the shareholders they represent, so their failure to follow good accounting practices could be grounds for a shareholder lawsuit. I've seen it happen.

The real question is why your board members have allowed this situation to continue. If they're worth their salt, they should be lobbying you to find some way to bring a competent financial person on board. If they don't seem to care, perhaps you need a new board.

How do I lure top-quality directors onto my board?

November 2006

"Why can't I recruit good people to join my board of directors? One candidate says he turned us down because we don't offer ‘D & O’ insurance, which is incredibly expensive. How do other companies get around this problem?"

Mike: The short answer is that top-quality directors generally *don't* work for under-insured, under-financed companies. And you can't conceal your shortcomings, because any good director will do basic due diligence on your company before signing on. They'll review your financial statements, speak with your counsel, and make sure that adequate directors and officers liability insurance is in place in case something goes wrong.

You may be able to find a few people who are willing to risk exposure to personal liability by becoming directors. But even these courageous souls will probably exit the board at the first hint of legal or financial trouble--just when you need strong board leadership the most.

How do I break bad news?

September 2006

We sent our board members a preliminary version of next year's budget, and now I'm in the awkward position of telling the board that we no longer feel we can make these numbers. I feel like a total jerk. What can I tell them?"

Mike: Delivering bad news is not easy. One of my greatest compliments--I think--was when an investor told me I do a great job of delivering bad news.

The first question your board members are going to ask is likely to be, "Are you really sure about the new numbers?" Resist the temptation to be optimistic: If you're wrong this time, you'll blow your credibility completely. So be sure you've got the facts right and you have management buy-in on the message. Some of your board members will probably do a little digging on their own, and you don't want the forecast to turn into a political football.

You should also move quickly to get the word out. Call each director and explain what went wrong and how the change affects your projected cash position (that's what they really care about). Then follow up with a more detailed e-mail or fax that provides supporting information.