QUESTIONS TO ASK WHEN CONSIDERING ACCEPTING A BOARD ROLE
You've just been approached about serving on the Board of Directors of a
pre- IPO start-up company. Is this a great opportunity or the Assignment
Naturally, you will try to do your due diligence. The problem is that it
is often difficult to find good information about private companies. One
has to rely on such "soft" issues as "reputation."
When "soft" information can make the difference between an a
terrible decision and an outstanding decision, consider using the
"Networking" is a well-known technique for finding
opportunities before they become generally known in the marketplace.
Investment manager Philip A. Fisher has a technique he calls "Scuttlebutt."
It is a combination of old fashioned networking and a social science
technique called a Sociogram. Says Fisher:
"Most people love to talk about their competitors. Go to key
managers in five different companies in an industry and ask each of them
questions about the other four. You will emerge with a detailed and
accurate picture of all five companies!"
Target company competitors are only one source of informed opinion.
Other sources include vendors, customers, professors, trade association
executives, former target company employees, etc.
Embedding the Target Company
Instead of asking respondents directly about your Target Company, you
might say to respondents, "I think that I might consider some private
investment in a company like Company A, Company B, Target Company, and
Company C. I know you work for Company D, and I wanted to know if I could
ask you some questions about these four organizations?
Asking direct questions about the Target Company might seem like the
most direct approach to take. Keep in mind that such direct questions put
respondents in the uncomfortable position of having to make absolute
evaluations. Most of your contacts will be uncomfortable about this. There
is the ethical issue that people don't like to make absolute evaluations
about single companies they may not know very well. The result is that
most respondents will retreat behind the bland statement of, "Target
Company is a fine company." You may interpret that blandness as a
On the other hand, the technique we advocate asks respondents to make a
relative evaluations of Target Company against its competitors. You may
get more valid information using this approach.
Scuttlebutt Questions to Ask
Fisher used scuttlebutt as a method of making investment decisions. His
approach is equally valid if you are contemplating a sweat equity
investment. We have adapted questions from his classic investment guide,
Common Stocks and Uncommon Profits (New York: Harper & brothers,
Do these companies have products with market potential to increase sales
for at least several years? The purpose of this question is to identify
companies who are harvesting profits currently but lack long term
How effective is R&D in relation to its size? Looking at the
financial ratio between total R&D expenditure and total sales is a
crude way of thinking about R&D commitment. Such ratios can also be
misleading. In some technology job shops, for example, what is called R&D
may actually be costs associated with customer projects that were
completed but not yet paid for.
In asking about a company's R&D efforts, market research is as valid
as technology research. New England has its share of horror stories about
management spending vast sums on R&D to perfect products for
unprofitable markets. We cite Polaroid's Polarvision as only one example.
Describe the sales organization of these companies. In some professional
service arenas, this question might read "Describe the client
development capabilities of these firms." Few organizations have such
a competitive edge that the world beats a path to its door without the
intervention of an effective sales team.
Information about the sales operation is seldom discussed in financial
reports of public companies. Fortunately, this information is easily
obtained using "scuttlebutt" techniques. Of all phases of a
company's activity, none is so well known to sources outside the company
than its sales organization.
How would you compare these companies' profit margins? Sales are only of
value when they lead to profits. You want to find out if the target
company is doing to maintain or to improve profit margins for the future.
Perhaps some "scuttlebutt" can give you a glimpse into future
actions being planned by the company.
How would you describe the way these companies treat employees? Within
an industry, it is generally known that there are "decent"
companies. And it is generally known that there are companies who "burn
up and discard" people. Senior management is often blind to its own
How would you compare depth of management? A small company can do
extremely well under an able autocrat. What would happen if that key
person was no longer available?
How would you compare the company's cost analysis and accounting
controls? It is not difficult to churn out reams of information. The tough
issue is how valid and useful is this information? How seriously does
management act on the basis of information? The "scuttlebutt"
method is helpful here in revealing significant problems that won't
necessarily appear in the balance sheets.
How would you compare the integrity of management? Without breaking
laws, there are ways in which senior managers can benefit themselves at
the expense of customers, employees, and stockholders. Such people are
generally known within their professional communities. The only real
protection against being abused by such managers is to refuse to get
involved with them.
Scuttlebutt requires that respondents trust you to keep their identities
confidential. Confidentiality should go beyond promising not to name
respondents. As a matter of business ethics, you should not reveal
information if divulging that information might allow a listener to figure
out the source.
Don't get alarmed or relieved on the basis of one individual feedback.
If 60% of your sample of five talk about the same issue, you have
discovered a piece of serious information that may be valid.
Serious information could be invalid information. The company may have
already taken steps to correct the problem. In the marketplace, however,
perception tends to have a reality of its own. Even a false perception can
negatively impact the company's future.....and your own.
Laurence J. Stybel and Maryanne Peabody are co-founders of
Stybel Peabody Lincolnshire of Boston, a corporate-sponsored,
international consulting firm that focuses on career effectiveness of
senior executives. There are twenty eight Lincolnshire International
offices in three countries. Maryanne and Larry are members of the New
England Chapter of The National Association of Corporate Directors and
Larry serves on its Board of Directors. You can contact Maryanne or Larry