HP’s recent $14.5 million settlement with the State of California over claims of privacy invasion and identity theft by actions of its board clearly shows that regulators, institutional investors, and the courts are demanding greater oversight and sensitivity to governance requirements by corporate directors. The most important aspect of this settlement is the establishment of a $13.5 million fund to enable California state prosecutors to investigate violations of privacy rights and intellectual property rights.

Improving director education about basic governance responsibilities and the limits of board authority is essential to avoid future similar embarrassments—and this need does not apply only to public company boards. Asking the right questions and pushing for answers in advance of making decisions seems like standard operating procedure, but often times it does not happen.

Take, for example, a VC director accepting a board position. The extensive, collaborative research on corporate governance that I have done for over seven years reveals that, more often than not, VC-company directors don’t ask the right questions before they join the board. They just say yes.

It is very important for a VC-company director to know what may seem obvious.
For example, do the non-executive board members and the CEO mutually understand and agree upon what they expect of each other? Trouble often arises when some directors, especially those who are former CEOs themselves, forget that they are not running the company. While they may say, in private, “Hey, I can do this job better than the current CEO”, that feeling may express itself as second guessing and excessive micro-management of the CEO in the boardroom. Poor expectations management may allow directors to cross the line and undermine the CEO’s credibility.

Too many fundamental legal and business rules of the road are learned ad hoc on VC boards. Like many VC directors, I have learned about this the hard way. What do you do when a key employee who is a director decides to hold up the company’s pending acquisition until he or she negotiates special revisions to sweeten a personal compensation package at the last-minute? I’ve seen this self-interested behavior more than once by directors who are not familiar with the implications of the fiduciary duty of loyalty to all of the company’s shareholders. In a case such as a delicate acquisition negotiation, this duty requires directors to put the best interests of all the shareholders ahead of their personal best interests or those of the shareholder class that they represent directly. If the director is not aware of these legal obligations at the inception of his or her board service, avoiding the natural tendency to promote one’s self-interest above others is much more difficult later in the game.

In the VC industry, if we don’t regulate ourselves, it’s likely that lawmakers or the courts will impose regulation on us from the outside without the deep knowledge of the nuances of our business.

In May of 2006 I established and now chair the Working Group on Director Accountability and Board Effectiveness, which currently consists of 22 VC industry experts who have collaborated to produce an education document—”A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors“. It outlines basic legal and minimum business requirements generally associated with venture company board service and recommends annual director self evaluations as well as director peer reviews to promote director accountability. We will release the paper in early 2007 and it will be available on the Levensohn Venture Partners website at www.levp.com. Two prior white papers on venture board best practices and managing CEO transition are posted and freely available on our site.