Thursday, October 29, 2015

Theranos: How Not To Design a Board of Directors

The Theranos object lesson is the gift that keeps on giving.  We now have the news that they have restructured their board.  The elderly former government officials (e.g. Kissinger – age 91, Schulz – age 95, Perry – age 87, Nunn – age 76) are exiting the board and becoming “counselors.” The board size is going from 12 to 5, and high-profile attorney David Boies is joining.  They also have announced the creation of a board of medical advisors, which includes some impressive people, although none who are directly in the diagnostic testing space.

Oh, and by the way, they made all these decisions back in July and just happen to be announcing the changes after the wave of bad news initiated by the Wall Street Journal’s recent articles.  It’s amazing that any company that has raised more than $400 million (and maybe as much as $752 million) was allowed by its investors to have such a sprawling board that was redundant in some respects (so many politicians!) while lacking in others.   

So, let’s rewind and consider the role of a BOD, and how to construct one.  Steve Blank did a great blog post on this topic several years ago.  A few points to emphasize:

Don’t set up Board of Directors if all you need is advice and introductions.  A board of directors plays a fiduciary oversight role, and may be necessary because of the legal form of the business (C-Corp) or it is expected by investors. Being a fiduciary is a big deal because board members are legally obligated to operate in the best interest of shareholders.  

Remember that the Board of Directors is the boss.  They decide who leads the company and how they will be paid, and they decide overall strategy.  Board members may also be extremely helpful as advisors and connectors, but that’s ancillary to their fiduciary duties.  Here’s a short guide to setting up a BOD.

Set up a Board of Advisors if you want advice and connections.  There are no legal obligations here, and no standard format.  You identify the people whose expertise or contacts or insights would be helpful to you.  You seek out their input in whatever forum makes sense – maybe informal one-on-one phone calls, maybe more formal quarterly meetings or video conferences.  Here’s a short guide to setting up a BOA.

It’s a good idea to have both a board of directors and a board of advisors.  You can even have multiple advisory boards with different roles, as Theranos is now doing.  The BOD should be the small group playing the governance and strategic role.  BOAs can be larger groups with deep knowledge and wide connections that you can turn to for advice and introductions.  Each type of board has its own role and its own value to a young venture.