The Director’s Dilemma – March 2023 Edition
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The Director’s Dilemma - March 2023
This month we consider what to do when a founding CEO is wedded to a plan that seems to be failing financially and, instead of changing the plan, changes the CFO. In a break with tradition, we have an answer from a pair of directors working together. Board governance is a team sport!
Ava is a young director on the board of a recently founded company that operates a service platform using a ‘freemium’ model.
She was selected to join the board for her understanding of the software and technology infrastructure that the business uses. Since joining, she has undertaken a short course in directorship to round out her technical skills with some financial and legal nous. The course highlighted that directors should stay out of operations and allow the CEO to run the business, but Ava has concerns about financial performance and feels she is getting deflected when she asks questions.
The free platform is very popular and has had massive growth in users. Very few of these have converted to the paid service and even when offered free trial periods it seems hard to entice people to use more than the free version.
A few months ago, the CFO resigned. A new CFO, with three prior experiences in building profitable start-ups, was recruited. Ava was glad because he seemed to share her concern and talked about developing a more compelling ‘upgrade to paid’ offer.
After one week he too resigned and now the Founding CEO has said that he will take on both the CEO and CFO roles to reduce costs.
Ava suspects the CEO is more focused on growth in users than a path to profitability.
What should Ava do?
Nathalie & Vincent’s Answer
More than just a supervisory body, the Board is a partner of the Executive Management, with whom it shares strategic direction and may challenge some management decisions. As a Director of the Board, Ava has the right and the legitimacy to express and support an opinion that she has formed, and also to exercise her duty to be alert.
In the present case, we see several options Ava should consider:
With the Chairman’s approval and the Audit Committee support, Ava should ask the CEO to present relevant risk scenarios to the Board. Assuming that this “upgrade to paid” offer and the related business plan have been presented to the Board and duly advocated; nevertheless the corresponding risk assessment should be updated regularly since it appears that this plan is crucial for the company. Ava is fully right to alert about financial performance of this plan. Risk assessment goes with the risk management plan the CEO is responsible for and which the Board has to challenge first and then to agree with.
Ava is concerned about the financial monitoring of the company; if Bylaws do not provide for, she may suggest the Chairman to request that the Board be involved with the recruitment of the CFO - and later on of any CCO, both being Key people for the development/recovery of the company.
Moreover, Ava may alert on the risk relating to the excess of duty of the CEO combining CFO responsibilities, and ask for a precise schedule of the CFO recruitment.
Last but not least, with full transparency vis-à-vis the Chairman, Ava should offer to intervene as a “technical” advisor to the CEO, bringing her experience in software and technology infrastructure to support (the definition and )the execution of the plan that has been decided previously.
It is one thing to understand the operation of a software platform. It is another to understand how the operation differs in a start-up compared to in an established self-sustaining business.
As a director, Ava needs to understand the business model and strategy. She is right to be concerned about the finances, which should be viewed in the context of the agreed strategy. What were the predicted rates for upgrade from free to paid use of the platform? Have any milestones been missed? Is the company on or off track? Is the company well run with few surprises or is it lurching from one event to the next with little predictability?
Ava should then consider the length of the runway (time that the company can keep operating before it becomes self-sustaining or needs more capital) and any options available for increasing runway. She should consider current and expected market conditions and the likely cost of capital, dilution, etc.
Finally, Ava should consider the CEO. Does the CEO have credibility with the investors as a CFO or only as founder? Does he or she have time to tackle both roles without omitting something important? Is the CEO coachable and well supported by expertise on the board? Is it logical to cut costs and combine the roles or does it look like turf-protection?
After doing her thinking, Ava should raise the issues with her chair and then with the rest of the board. It is the job of the whole board to lead the company and oversee the CEO. Ava is right to be concerned and needs to gain support for action or comfort with inaction.