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Advocating accountability

Authoring a white paper on the delicate art of replacing CEOs at venture-backed firms was a natural step given Levensohn's longstanding interest in the role of boards on company performance. In a recent interview, Levensohn explained to PEM the relevance of his research.

How did the topic of board effectiveness become of interest to you?
For seven years in the early days of my career, all I did was scrutinize board decisions because I was working in the merger/arbitrage business at First Boston. It was very interesting to me because I learned that directors can really make a difference in influencing the outcome of a decision. Later, when I went into VC, what I found was that there's a wide variance in the application of best practices to boards, and it can have a very significant difference in the outcome of an investment.

How much value does a board really add?
Relative to the positive contribution that a CEO can make, a board can contribute far less. However, a bad board can take away all of the positive things that a CEO does very, very quickly. Just because VCs buy their board seats, that does not absolve them from the responsibility of being accountable as directors. And according to a recent survey by the National Venture Capital Association, approximately 80 percent of venture-backed companies lack any metrics for board accountability.

What was your aim in writing about board effectiveness and directors' role in replacing CEOs?
It's about sitting down and addressing some serious issues that we all face and being constructive about it. It's not about pointing fingers and saying ?so-and-so did a bad job.? We're saying that there are some challenges that we face as an industry because of what we do, and our jobs are made so much easier and we can make more money for our investors if we head off issues right at the beginning.

Have board effectiveness and CEO change always been issues in the VC world?
Yes, and in VC, what magnifies these issues is we're running on a very short timeframe to execution, in super competitive markets with new technologies threatening to make your product obsolete. With VC companies, there's no safety net, no room for error. Also, in VC, you have some very clear inflection points in the evolution of a company where the skill sets of the founding team become challenged in terms of adapting to the change in the nature of the job, particularly when the company is raising new financing and switching from R&D to commercialization. Typically what makes a great technological visionary are many of those things that tend to make it difficult for those people to be good managers.

How do you recommend managing the liabilities that might arise from replacing a CEO?
We recognize that CEOs in venture-backed companies are working in resource-constrained environments, and that a large portion of their compensation comes from equity. Therefore, we always focus on fair separation agreements, and we try to do what's in the best interest of the company. Rich severance packages from a cash standpoint are virtually unheard of. CEO transitions don't necessarily lead to a total separation from the company. The best outcome for founding CEOs tends to be a transition to a different role in the company, where they can continue to make a contribution and continue to receive compensation.

How have you seen LPs reacting to the issue of CEO changes?
A few years ago, we would talk about CEO changes, and LPs would think it was a bad thing – that the change signalled a bad investment. However, statistics show the large majority of venture-backed companies experience two CEO transitions in their lifetime. The issue has to do with how quickly and with how little pain one can accomplish the transition. A big part for me was educating and demystifying this process.

Going forward, what are your future plans in this area?
I've just started a new working group on director accountability and board effectiveness, and the objective of the group is to deliver a template for measuring venture-backed company board effectiveness. We have about 15 people on board so far and are thinking of adapting the public company board selfevaluation and customizing it for the venture industry