As Seen in CFO Studio Magazine Q3 2015 Issue
A discussion of the good, the bad, and the ugly in dealing with corporate governance
Navigating the relationships between members of the board and the company’s executives is an important skill for a CFO to master. In order to successfully fulfill their leadership roles within their organizations, finance executives have to refine their approach to corporate governance.
Recently, CFO Studio hosted its Executive Dinner at Al Dente in Piscataway, NJ, where guests gathered over food and drink to discuss their experiences working with and serving on boards. The dinner meeting was one of a series of gatherings of CFOs, which was underwritten by BDO, an assurance, tax, financial advisory, and consulting firm; and hosted by Real Estate Strategies Corporation, a corporate real estate advisory and consulting firm.
Michael Mardy, executive vice president and CFO of Tumi Holdings Inc., a wholesaler and retailer of a range of travel and business products, led a discussion entitled “Corporate Governance: The Good, the Bad, and the Ugly.” Mr. Mardy has served on several boards throughout his career, including Green Mountain Coffee Roasters, Inc. and ModusLink Global Solutions, Inc.
“Once they hit a certain point in their lives, a lot of people want to become board members,” said Mr. Mardy. “But, it’s probably vastly overrated as a gig you can have in retirement. Generally, it is a lot of work, it exposes you to legal liability, and it exposes you to working with other people who might be problematic.”
“When you manage a board, you realize the world of corporate governance is imperfect, at best,” said Mr. Mardy. “It can be dysfunctional. It can be contentious. It can be counterproductive to managing the business.”
Private Equity vs Venture Capital
The executives discussed governance under private equity (PE) and venture capital (VC) structures, with guests agreeing that the goal of both types of firms is to improve the company’s financials and move on, leaving the company stronger than when the investors entered.
“Venture capital firms tend to have a very long-term horizon, whereas the PEs manage year-to-year and quarter-to-quarter,” said Andrew Savadelis, CFO of Angion Biomedica, a biotech company.
“Private equity firms are not interested in just betting on a venture,” said Mr. Mardy. “They’re interested in betting on a business. They’re not only dealing with the leverage, but they develop a strategy, and actively manage that strategy to get the company into the right kind of business model. In approximately five years, they have liquidity, and take their money to the bank, before they raise their next fund. VCs are completely different.”
Michael Van Patten, vice president at Smart Tuition, a software company for managing tuition and school enrollment, has worked with PE-owned companies, VC-owned companies, and public companies. “I’ve got a lot of experience with different corporate governance bodies,” said Mr. Van Patten.
He added that PEs tend to be more interested in managing the business, but this can create the danger that they will be micromanagers. “They want to control the company, and would leverage the company to the hilt. They don’t have as much invested,” said Mr. Van Patten. “The VCs would put more money in and not worry about the leverage, so they don’t have to have control of the company.”
Leveraging the Strength Of the Board
“The CFO’s ability to manage a board is critically important to the success of the organization, both on the private equity side, as well as the public company side,” said Mark Giamo, partner at BDO. “You can’t underestimate the ability of the executives to manage the board. Managing the board means taking as much from the board as you can, finding their strengths and leveraging them to run your business, for governance purposes, or whatever it may be. Get everything you can out of your board. But managing also means managing their expectations.”
Lisa Van Patten, principal consultant at NetSuite, an integrated cloud business software provider, offered a different perspective. “To me, it’s the other way around,” she said. “It’s not that I want to manage my board. I want my board to manage us. As a CFO, your biggest fear is that you’re going to have a rogue CEO and a board with absolutely no oversight. You want to know they are really watching our backs. You want to know that they’re making sure, ‘Have you covered yourself here, because there’s a risk?’ That is what corporate governance is supposed to be. As a CFO, I could be personally liable for what the CEO does.”
“The biggest leverage that you have is the 404,” said Bob Dennerlein, executive vice president and CFO of Dialogic, service providers and application developers, referring to a section of the Sarbanes-Oxley Act that deals with internal controls. “You’re partnering with the CEO at that point. It’s a great defense mechanism against any kind of pressure that you might feel. If you had a strong audit committee chairman, you’ve got an advocate on the board, and that makes it easier.”
Ray Cardonne, CFO of DLB Associates, a privately held engineering consulting firm, has past experience in finance roles at public companies. He explained that when he and the CEO at a public company would disagree about a strategy, the board’s audit committee served as a neutral advisor.
“The audit committee meeting was typically the day before the full board meetings,” said Mr. Cardonne. “The general counsel and I would attend the audit committee meetings and it was a way to work things out without having to go in front of the full board. After the audit committee, the GC and I would have a telephone call with the CEO to explain the outcome and say, ‘This is what the outcome is, just so you know what to expect going into the board meeting the next morning.’”
Mention of a pre-board meeting preparation sparked more dinner conversation about how decisions involving the board are really made — before the actual meeting. “I think many CFOs need to gain a better sense of how to be more politically savvy,” said Lalit Ahluwalia, CFO of biotech company Ferring Pharmaceuticals. “You have to be able to build a network with the board members, so that you build your own credibility with them.”
Brian Giambagno, CFO of Action Environmental Group, a provider of waste collection services, agreed. “More big decisions are made at the bar before or after the board meeting than during the board meeting,” he said. “Everybody knows everybody.”
Is the Board’s Decision Final?
The group also acknowledged that there are many times when the CFO cannot press the board on what he or she truly believes is the right decision. In fact, many times, a CFO has to back down.
“You can say you will do the right thing [for the company’s financial health] even if you have to lose your job, but at the end of the day, it’s much easier said than done,” said Walter Cirillo, treasurer of AeroGroup International, a privately held company.
“It’s all about the personalities, and, I hate to say it, but in many ways, it’s survival. The bottom line is, unless you’re being asked to do something illegal, most of the time, you’re just going to go along with the CEO, or with the board, because that’s part of the job.”
Baldeep Dua, CFO of Kirusa Inc., an international software company, agreed with Mr. Cirillo. “Unless it’s illegal, you’re made to go along with the CEO or the board,” she said. “As a CFO, you’re a strong voice in the boardroom. All you can say is you have an opinion. If there are five or 10 people who agree on a strategy, and you disagree, your voice is important, but may not be the loudest. Ultimately you have to do what the team says. You should have a strong opinion, but you cannot override, no matter what your reservations may be.”
Andrew Zezas, publisher of CFO Studio and CEO of Real Estate Strategies Corporation, summed up the consensus of the group. “However the decisions are ultimately made, it is important to fight when necessary to do what you believe is right for the business,” he said. “Ultimately, the board may know about financial engineering, but you know how to run your business.”