“Chief executive Charles Anderson said the level of qualification among the SovNet force varied from nothing more than high school exams through to a handful with university degrees.”

Maria Slade, NZHerald

That’s the CE from Sovereign, an insurance company, and he was referring to the need for their 4o0 financial advisers to become certified within the next few months. This begs the question:

Why would you take financial advice from a group that where almost everyone does not even have an undergraduate university degree?

A degree confers two benefits. Firstly it demonstrates to employers that a potential employee has a certain level of intelligence and discipline, and more importantly has the ability to keep learning. Secondly it allows the graduating student employee to send a signal to potential employers that they are serious enough about their working career to take 3 to 4 years out to prepare for it.

While there are plenty of cases where people demonstrate that a degree is an unnecessary requirement for a successful career, it’s astonishing that only a handful out of 400 financial product sales people have a degree.

Insurance is a complex product. To decide whether to buy insurance or not you need to be able to correctly assess your own risk of loss, your ability to mitigate that risk, the cost of the premium, the likelihood of the insurer to pay and the alternative use for money used for premiums. You also need to be able to parse the complex documents that the insurers provide as it is the individual clauses that determine the value of each contract.

Advisers need to take all of this into account, and genuinely help clients assess the options. However insurance agents are usually guilty of instead emphasizing the low probability risks and selling on emotion – and why not, as it clearly works.

But Sovereign and other firms don’t just sell insurance these days. The Sovereign website offers a range of financial products, including investments and homeloans. That means the advisers need to really understand the financial goals, constraints and requirements for their clients. They are dealing in an area that has enormous levels of impact for their clients, and it requires a very high level of trust and competency.

There is plenty of evidence of a lack of honesty and competency in the industry – starting with the horrific advice given to investors in the collapsed finance companies. All in all the new law is necessary.

While I would not expect an adviser to know about Black Scholes or the efficient market frontier, I would expect them to be recommending a well diversified portfolio of assets across asset classes, industry sectors and geographies. I would also expect them to know that churning a portfolio is almost certainly going to result in lower returns, and indeed that funds almost always under-perform the market in the long term.

I believe that the large insurance companies and banks will actually do well out of this new law, at least in the short term. They have the ability and wherewithall to make sure that all of their staff attend the necessary courses and sit the exams in time. AXA has already trained 180 advisers in their own academy, and are tracking to finish before the law takes effect. While some staff will not make the cut in the larger companies, those companies will keep the majority of their advisers, while many other advisers attached to smaller companies or self-trading will fail to do the study.

Meanwhile only 17% (14,500) of the mySky HDi subscribers have paid $10 a month for access to the HD channels – so clearly the HD channel proposition is not very strong.

Despite this, and somewhat surprisingly during a recession, Sky’s churn rate decreased from 14.9 to 14% for the year.

Or maybe that’s not surprising. My Sky bill is on some sort of manual paper process and as I completely fail at this sort of thing I’ve been receiving a series of calls from Sky credit people. The calls go something like

“Hi it’s so and so from Sky – we’d just like to remind you that your bill is overdue”

“Uhh – thanks”

and that’s it. No – “pay it now or we will disconnect” or “would you like to pay it now using your credit card” or even “when are you going to pay it?“. They just call, tell me I am late and then go away. This went on for some months (I’ve since paid the bills)

It’s like Sky have decided not to churn anybody – especially those with a mySky box.

They do show in their annual report that bad debt went up from $3.3m to $5.2m, but it seems that their definition of bad debt is pretty lax. A note to their annual report states:

A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.

That means if I’m not asked the question “when can you pay?” then no “objective evidence” of my ability to pay is collected – and Sky doesn’t have to write down my debt. Of course I’m just a single data point, but there is some evidence from the accounts. Does this easy credit translate into the higher receivables (up $6m) and lower cash (down $4m)? If so it means higher profits as less debt is written off.

On the other hand are Sky being very smart here – recognising that times could be tough for their clients, and thinking in the long term? By being soft on credit now Sky customers will more likely keep their system through the tough times and get back on track when times are good. That’s clever thinking.

We were trying to answer the question of how to make sure to make money from your business, and so we started with the bigger question:

Why do we start businesses?

It took a little while before my favorite answer came back – which is “to change the world“. My next favorites were variations on to “fix a frustration” or “solve a problem” and I was also really pleased to hear “to have fun”, which has to be included in any business.

It was a trick question of course, given the title of the session, and naturally we heard pretty early on that we start businesses “to make money”, or “to get financial freedom”. That may be so, but unless we want to fix a problem, change the world or create something cool then the money will be a distant dream.

Final kudos for the most honest answer, which was “because we can’t find a job”, or, as I put it, “because we are unemployable.”

The next question was What are the things you need to make sure you make money?

The answer was to make sure your company makes money, and to make sure you make money out of your company. We didn’t really get to the second part of that, but the first part created some good discussion.

The first answer from the group was a goodie – “Don’t spend money”. That’s directionally correct but first of all you do need to actually earn some. Indeed the answer to this question is simple – “earn more than you spend“

Above all you want to earn excess money – so called economic rent, whereby you have an ‘unfair’ advantage over competitors. You do this in a number of ways, but I like thinking of Microsoft and Apple as exemplars of the art of being able to charge more than a ‘market’ price. Microsoft does it through it’s market domination – the network effect, owning standards, first mover advantage with Word, cutting the right deal with IBM and so on – the list is legion. Apple does many of the same things, but adds a product development process and company that keeps delivering stunning products well before their competitors.

But back to costs. While you do need to invest, I’ve always felt that the golden rule is to treat any money the company has as you would your own. That doesn’t mean you should spend it all on taxis, beer and dinners, but to watch every penny.

That means no fancy office or chairs – but use your kitchen table or a succession of cafes. It means no high salaries, but working full time while you develop at nights and in weekends.

It means being stingy about everything that isn’t core to the success of the business – and pay with equity wherever you can.

Once you are full time then you will need to pay yourself, but make sure the business can support it and pay yourself the bare minimum to live. As the company becomes more solid start paying others and gradually move the salaries up to a fair wage for each role. Don’t overpay yourself as there are other shareholders that have a right to the profit stream.

It is important that you bring the right people with you. You’ll need  mix of skills and experience to succeed – and you probably don’t have all of those yourself. Even if you do, as you grow you’ll need help. So bring others in early, give them shares in the company and then each person can do the things they enjoy, that they are good at and that they are willing to do for fun and equity rather than cash.

Ultimately it’s much more fun making money with a group than on your own, and you can each own a fair share of the business and enjoy the success. The share should reflect the value of each person’s input into the business, be it in time, expertise, money or access to things that can make a difference.

You do need to protect your shareholding though the investment rounds. This means messing with contracts and clauses one you get investment, but get it right and keep it simple. Make sure there is approximate balance between inputs and shareholdings – and don’t be afraid to tweak early to avoid conflict later.

Avoid investments that come with too many strings, and especially avoid investments that ask you to pay the investors high fees for things like office space, advice, directors fees and so on before you can really afford them.

When it is time to exit you want to sell to the company or person that has the most to gain by buying you. You could be encroaching upon their space, or they may have a distribution network that can massively increase your sales and so your company value. You should always know who these potential purchasers are, and get to know them well before time.

Once you have had a serious offer then you are ‘in play’, and you want to try to create an auction situation where purchasers are bidding against each other. Hopefully you have a decent board and are getting good advice.

Finally at each stage, and you are investing by stage right, don’t be afraid to decide to stop. Not everyone creates Microsoft every time, and so it’s vital to recognise when the effort isn’t matching the potential reward and to exit gracefully. There are plenty more opportunities out there.

It’s really good to receive them, and I enjoy helping out and even starting some businesses. However last week I’ve been a bit slow to reply to some of those messages – and I apologize for that. Some of them I’ve been checking out, others I’ve been thinking through and still others I have just left. I will get back to everyone eventually though.

But there is one problematic category of ideas, and it’s one where I want to give some very strong advice. The note or call I receive will go something like this:

I’ve got a great idea, I’m not going to tell you what it is (at least not without an NDA), but I am going to invest or have already invested a bunch of money into it.

I’ve seen everything from $5000 to close to half a million invested in or required for companies and products that you have never heard of or are not even described. I’m always willing to help people in these situations but they need to be more honest with themselves about the value of the idea. Holding it too close to your chest means the idea won’t be as good, the speed of execution will be much slower and the amount of money invested will be much higher.

Instead here is my take on what to do once you have that wonderful idea for the next big thing.

Before you start

• Check the competition – If it is a great idea then it may well be done already. Get online and search for the product – and be very persistent. Check different channels to make sure it isn’t being sold already, and make sure also that there isn’t a close substitute. Be very thorough in this and, importantly, keep doing it forever.
• Share and improve the idea – Shop it around your friends and family, talk to potential customers, experts in the field and determine that it is a good idea. Along the way you’ll hopefully find some people that you respect and that are energised by the concept. Ask them to help. Your idea may be good, but with the assistance of others you can make it great.
  Be flexible with the idea and tweak it as you learn new things. Write it down in a structured manner – and have very crisp and consistent descriptions for the product or business, why it is better and will sell and your path to develop it.
• Estimate the size of the opportunity, and be tough. This means numbers – how many widgets will you sell, at what price and what margin. It’s important to test your projections against the real world – what does 1000 sales per day really mean per sales outlet, will people actually pay the retail price, what are the wholesale margins in the channel you are using and and so on. Track your business against these numbers.

Starting up

• Focus on the few. What few things do you need to believe, what do you need to do and and what results do you need to see before you can truly prove that the business will succeed. Write them down. Then spend your time focusing on those things, trying to get to them in the cheapest, fastest way. If you cannot prove something then you may need a leap of faith, but if you disprove something then change tack or move to the next idea.
• Pay with equity – have some partners and pay them with equity. It’s the best way to save on start-up costs, it means better results as people have genuine interest in seeing the business succeed and it’s a heck of a lot more fun. Stay well away from large suppliers that deal mainly with corporate customers – their fees are far too high and you are a low priority for them. If you are struggling to find the right partners that will work for equity then perhaps there is a hint there, and your idea isn’t The One. Note that you generally need to pay for actual purchases (like raw materials) but work performed in the early stages should be for equity.
• Don’t spend anything material until you know you will get a return. Great entrepreneurship has very little financial risk, so be miserly until you know it will succeed. Put very little money down at the start, investing only in the critical raw materials or services that you need, and focus on investing your and your partners’ time. Wait for revenues – if the idea and execution is good then there will be plenty of money later.

Growing

• Be prepared to stop, and stop fast if at any stage it is clear the business will not succeed. You are passionate about your idea, but you also need to be dispassionate enough to exit before you waste too much money. An informal or formal board can help a lot here. If you have already sunk money into a business that isn’t proven, then treat it as such – sunk money that is gone forever. Don’t fool yourself into thinking your new venture is valued at the amount of total investment – look instead at what the profits are and will be.
• Go full time – a full time CEO is the only way to really drive a business forward. Once you know the idea has legs then quit your other pursuits and focus on growing this business. Or perhaps you are not the right person to be the CEO, so find someone who is and cut them in. Don’t be distracted by the next business idea – that’s pointless until you’ve either made this one work or killed it.
• Spend as little as possible – don’t pay your self (or anybody for that matter) any more than you need to live – and live frugally. Wait until the business is sustainably making money and then start increasing the salaries of the contributors, eventually to market rates.

Here’s why:

1: The shareholders are not maximising their return after the company was in play.

The Board, in my opinion, should seriously engage potential buyers of the Company, unlike it did with Skechers USA, Inc. last year, in order to maximize the Company’s value for its stockholders.  I do not see the Company achieving this as a stand alone company.  Unfortunately, it appears that the majority of the Board charted a different course, giving scant attention to the offers from Skechers and other third party prospective buyers, and instead pursued an untimely and expensive restructuring of the Company by installing management having no actual experience in the shoe industry.

..My feeling is that CSW is not considering offers for the acquisition of the Company in a manner consistent with Delaware law.  I understand that CSW has its own internal issues with its stockholders; however, that should not cloud its fiduciary duties to the Company.  Any intentions regarding the Company in connection with any stock buy-back or plans to take the Company private should be disclosed to the Company’s stockholders as required by federal securities laws.

2: The board was not being consulted for important decisions

As a Board member, I have often not been consulted in advance of significant management decisions.

3: The board was given insufficient information and time to make decisions

I often did not receive sufficient information to properly prepare for meaningful participation in Board meetings to properly evaluate the information in connection with addressing critical matters affecting the Company.

Similarly, the recent Board meeting held on May 12th upset me greatly, but provides a good example of the short shrift treatment of the Board members when each director was given only two (2) minutes to speak on the significant issue of the strategic direction of the Company.  This was most unfair to me personally, as well as any other director who shared a very different point of view from the majority of the Board.

I’ve written about this before – and I’ll reiterate that if you find yourself in any of these situations then get out.

First here’s an excerpt from Seth Klarman’s wildly expensive “Margin of Safety” book – talking about liquidation value. I’m not so sure that it is entirely obeying copyright rules, so read it while you can.

Next have a read of some early Baupost Group letters (recently uploaded by Noise Free Investing and found through  Valueplays) to great insight to how Baupost operates. The letters refer to a smaller fund that is run alongside the main fund for friends and family of the main fund investors. It is remarkable to see the foresight in the commentary leading up to and through the dot com boom and bust and to see the letter series end in mid 2001 with the fund holding 48.6% cash. That no doubt set them up well for the post September 11 crash, and so I guess they continued to do well. I would dearly like to see the rest of the series of letters – in particular the returns over the last two years would be fascinating.

As it happens another letter has leaked out from the main fund from September last year. The comments are pretty telling, again showing Baupost’s foresight* and providing vindication for their cautious approach to investing. (I first miss-typed that as “goresight” which I thought was appropriate)

Market Folly has a good summary of Baupost’s recent behaviour – mentioning that Baupost has $14 billion in assets, which was mostly 50% cash in recent years and that over 25 years the compound annual return was 20%. It seems that Baupost is starting to spend that cash now as they see bargains that meet their rigourous requirements. It takes real discipline to sit on a hoard of cash and not invest it, and while you may miss out on the next dot com or housing boom by doing so, you’ll also miss out on the potential to lose everything when those bubbles burst.

A more recent interview with HBS on Market Folly and via Valueplays again lets us know that Klarman started with just $27m in the fund in 1982, and was paid a salary of a princely $35,000. The new news is that the writer also mentions that Baupost had cut their cash hoard in half – to about 25% – by December last year.

Compare that 25% cash figure to April 20  last year when  Baupost had 45% cash, 20% equities, 17% distressed debt, 11% real estate and an amazing 6% in South Korean equities.

45% cash in April 2008 was an astonishingly smart move – and Seth Klarman even mentioned that they would have gone to 100% cash if it made sense. That let them go on the gradually accelerating shopping spree.

The Korean move was interesting, as the market there hasn’t fared too well since then in USD terms – down 44%. However the Korean Won is also down 25%, so overall the market was down only 18% in Korean Won terms, and I imagine there was a currency hedge. That’s much better than the S&P500′s 35% loss in the same period, but still tough given Baupost’s “Rule 1: don’t lose money” philosophy. Baupost would have picked decent securities in the Korean market and probably had some interesting hedges against the high volatility events that happened.

The Korean market in US Dollar terms

The Korean Won versus the USD

The Korean Market in Korean Won terms

On the other hand Baupost may have simply closed out their Korean positions early.

It’s basically about why we don’t behave as rational consumers when faced with economic choices.

If you don’t want to wait, then there’s an excerpt from the book – the first chapter, which you can read over at Yale MBA’s Financial Crisis website.

Here are the five animal spirits – emotive things that often dictate our economic behaviour.

• The cornerstone of our theory is confidence and the feedback mech­anisms between it and the economy that amplify disturbances.
  
• The setting of wages and prices depends largely on concerns about fairness.
• We acknowledge the temptation toward corrupt and antisocial behavior and their role in the economy.
• Money illusion is another cornerstone of our theory. The public is confused by inflation or deflation and does not reason through its effects.
• Finally, our sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays an important role in the economy.

Just those five statements make for interesting pondering – so here is my quick take.

Confidence is everything – it is the difference between buying something (on credit even) and choosing to hunker down and not spend. When a depressed or optimistic feeling rolls out to entire populations then it causes and exacerbates busts and booms.

It’s true that we care most about parity and fairness when setting wages and paying prices. This is particularly evident in New Zealand where we tend to look down at those with unhealthily large incomes and spending habits and where we have a nationally loved TV program called Fair Go that goes after companies that rip people off. Interestingly the feeling of fairness to members was the overriding thing that governed our thinking in the days when I was involved in setting prices at Trade Me.

We also score pretty well as a country on corrupt and anti-social behaviour – scoring at of near the top of the list in the annual Transparency International surveys as a result. On the other hand we are a little divergent on our strong norms about what is anti-social behaviour – though we tend not to shoot each other and mostly we don’t rip each other off.

It’s true that we all tend to compare our income now to our income years ago, and fail to understand that $1m now is worth a whole lot more than $1m at retirement. This is the money illusion – where we look at the dollar figures and not at the real worth, the nominal not the real. Having grown up through inflationary times it did improve my own approach to this versus, say, my grandparents generation who often didn’t change the dollar value of their Christmas presents to grandkids (mine were a bit different). The trick is to constantly reset the current value of everything.

Finally I am guessing “stories” refers to the formal and informal coverage of things like bubbles and busts. Everyone was talking up dot coms in 2000, real estate in 2007/8 and stocks in 1929.  Fast forward a couple of years and the picture was (and will be) diametrically opposed – the media coming down hard on what were correctly seen in hindsight as speculative investments. I try to be contraian, using taxi drivers and ultimately my mother as the unfailing barometer – if Mum says buy, then I go ahead and sell.

They use these five animal spirits in the rest of the book to answer eight questions – such as why do economies fall into depression and why do real estate markets go through cycles?

Interesting stuff to be sure – I recommend just reading the first chapter and having a ponder – the answers may not be that difficult to work out, and if we can be internally aware of those “animal spirits” then perhaps we will make better decisions.

Now I need to decide where to buy it from. Fishpond don’t have it but Amazon who do. However I am really annoyed with them as most of the things I want (electronics, accessories) are not shipped to New Zealand.

While I still believe that Xero’s IPO was expensive, I also believe in the business opportunity and how Xero is going about pursuing it.

While the latest round of share issues at $0.90 is dillutive to the original $1.00 IPO,  it is an excellent price nonetheless:

1. The IPO was expensive – and that was proven as the price languished well below the initial price of $1 for most of Xero’s listing period. As an early stage deal the offer should have been for a larger share of the company per share as the information available (actual results and plans) was sketchy.
2. Times have changed, and changed for the worse in for the economy and particularly for the money raising game. Getting any money at all is hard these days, and finding over $23 million is an excellent acheivement.
3. The source of the funds is telling – one of the founders of MYOB, a lumbering giant that owns the top end of the market that Xero is intent on stealing. They must be feeling pretty desperate right now. MYOB have proven, and will no doubt continue to prove, that they are  culturally incapable of  replying to the threat from Xero.

Xero has managed to execute well on their business plan, with features coming out at a steady rate and after a slow start, pleasing customer growth. They have also cracked their approach to selling – convert the accountants and they will bring along their clients. That’s not exactly viral for now, but it’s a path to sustainability.

Well done to the entire team at Xero.

The money eases pressure for Xero, and means they can focus on the three tasks at hand:

• Keep the feature improvements coming, becoming clearly superior in feature volume and usability than the competition. Also have some fun and offer features that the MYOB’s have no answer to.

• Sell sell sell – expand within Australiasia and in particular the UK, and make a beachhead into the USA.
• Become sustainable – in theory this should be the last capital round required for sustainablity, although the option remains for a much larger further round to really launch hard into the big Kahuna – the USA.

A great story.

There is a piece on the February housing statistics, which rose dramatically versus January, although the median price stayed down, and the number of days to sell was a record 62. Alex also looked at the REINZ commentaries over the last year, and to their credit REINZ has pretty much got it right each time.

So let’s look at the total year on year dollar transactions for the real estate market over the last year and a bit:(Red is older, green most recent)

It’s been a pretty steady decline from October 2007, though February was an excellent month this year.

Let’s look at what is near and dear to the industry – estimated commissions. I’ve just used 3.5% as a wild guess – what’s important are the orders of magnitude. The fives months between September 08 and January 09 saw $182 million more less in commissions for the industry than the corresponding period a year earlier. $182 million pays for a lot of agents, and a lot of agents’ flash cars and investment properties.

Let’s also smooth out the effect of a lousy January and a great February – and apply the average of the two to them both. You can see that we are not really seeing a resurgence.

Finally, as The Bank Manager notes in the comments on interest.co.nz, the February sales in 2009 were a huge drop from previous years. This chart is telling:

Things are really not good for the real estate industry, nor for homeowners with large mortgages and uncertain jobs. Nice February statistics are a start, but is it a bounce or a dead cat bounce?

<update. Alistair from realestate.co.nz has introduced an excellent chart:

This is really scary – it shows we still have quite a way to fall. Brace yourselves – and remember that these things tend to overshoot.>

I absolutely agree – a directorship is a very serious obligation.

I propose a simple philosophy

• Blame the Board of Directors for failed companies
• Credit the CEO and management team for successful companies

The Board is responsible to shareholders for the performance of the company. Their ultimate power is to take out the CEO and replace him or her with someone else. If they fail to exercise this power in time then value is destroyed, and (in a reasonable jurisdiction) they are opening themselves up for shareholder lawsuits and more.

The CEO on the other hand is there to do the best job he can do to increase the value of the company – and a smart board steps aside a bit and lets a successful CEO go for it. A smarter board will keep challenging the CEO with questions on strategy, implementation, culture and succession. They will also make sure the legal and fiduciary obligations are up to date and keep a very jaundiced eye on what could go wrong.

And plenty has gone wrong recently, often in companies ruled by a strong CEO/founder/majority shareholder.

So here are a few starter Q&A’s for existing and prospective board members

What should you do if you do not agree with the company’s strategy?

Voice your concerns. Your responsibility is to the shareholders, and you are their representative. So if you don’t like the strategy, then get the discussion going. You are on the board because your voice needs to be heard. If it is a matter of degrees, or if it is big but you can live with the alternative, then a good discussion (with well researched inputs, and a constructive atmosphere) is the right thing to do. If the strategy is wildly different from your beliefs then perhaps it is time to make a stand, or get out. More on that down the page.

What should you do if you think the CEO is “off”

CEO’s can go off – they may get stale, not grow with the company or change with the times. You may have employed the wrong person in the first place, or they may have out-grown the role and want to move on. Firstly talk to the other board members, and see if your concerns are shared. Then constructively engage with the CEO to help him change his ways or move aside for a successor.

However if the CEO is really going off the rails, or if you think there is fraud involved, then you need to get down and dirty. Call or meet with the other board members, or with the non-executive board members only. Agree on a course of action, which may be asking toe CEO to resign, issuing him with firm instructions or demands (or else) and/or shopping for a new CEO. It’s important to move together, and firmly.

What should you do if someone makes an offer for the company?

If they are serious, then you have a duty to the shareholders to maximise the value of their investment. This is a duty to all shareholders, not just the majority, and it is a duty taken very seriously by courts (at least in the USA). You should consider the company “in play” and the  independent directors need to step up to make sure that the interests of the executives and/or major shareholders do not come first.

Next you should retain professional advice (a great way to CYA), and seek to maximise what you can sell the company for. You firstly need  to have a very clear understanding internally of what you believe the company is worth – actually this is something that you should always have. If the offer is within reach of your internal range (or above your share price) then it’s time to create and run an auction process, whether public or not.

Should you accept board positions when the founder has a majority share?

Yes, But. Yes you can accept these, but the founder has to understand that you are putting your reputation and more on the line. That means he needs to accept that the board has a certain amount of “veto” power, and even more specifically that the independent directors have a de-facto veto over any major decisions. If they do not have this power then the board cannot represent the interests of all shareholders, and is a powerless advisory board only.

What should you do if the founder/majority shareholder/CEO/rest of the board doesn’t take your advice?

If it persists, then resign. You are not a figurehead, and if they demonstrate time and time again do not want to listen, then go gently into the night. After all you may be wrong, but like it our not as a board member you will be responsible for the failure of the company, and if you strongly believe they are going the wrong way, then you need to get off the ship. Of course this is a drastic action, but you have to keep your integrity.

What should you do if you see illegal activity happening by the company/founder/majority shareholder/CEO?

Resign, and quickly. This is the main power that you have, and you should also report any illegal behavior to the relevant authorities. Illegal behavior is a huge indicator of impending financial disaster, and so as a board member you should treat it with utter seriousness. It’s also, well, illegal, and you can go to jail yourself if you do not react appropriately.

On occasion the CEO (say) may have stepped out of line a bit, but not too  far, and the Board can place controls and mandates to bring things back into control. However as a board member your reputation and freedom are on the line so these will be treacherous waters.

What do you do if the board meetings unproductive or simply do not happen?

Step up and make the changes required. Boards that do not meet are asking for trouble, while poor board meetings will rubber stamp poor decisions. If you see this happening then it is your duty to shareholders to make sure that meetings happen and that the board it doing the right thing by shareholders. Once again it is your reputation and even perhaps freedom on the line.

How many boards should you be on?

Up to as many as you can cope with – and this is a function of what else you have on, but more importantly on how efficient and effective you are, and what else you have on your plate. It’s the old adage t0 give the busy person things to do and they will get done.

Should I recruit a “professional director”?

Rarely I say, and even then maximum one person. I’m defining a professional director as someone who is only doing directorships for income, they are usually older and retired from direct involvement in business. To me this risks losing perspective, as the professional directors are not engaged at the right level. It may make sense to have one elder statesman of this type for the history and network – but the majority of the board should be dynamic and involved. This doesn’t mean don’t get people that are experienced, but please make sure you have a mix of youth and experience.

I’m a founder/CEO – what sort of people should I have on my board?

People you respect, can learn from and will listen to – they have to hold you to account after all. People that are different enough from each other so they bring different points of view – be it from their skill set, industry experience, age, gender or ethnicity/country of origin or seniority. They are there to work, are are underpaid, so genuine interest and passion for the company is really important.

I’m a founder/CEO – how many people should I have on my board?

From 3 to 12, and it varies by the size of the company and the complexity of the business. The EBRD has a live-in board of 23 Directors and 20 alternates, along with a Board of Governors 126-strong (2 from each country). Somehow it works. I’ve also seen a board of 3 people work well for Lingopal. It’s the skill-set and the engagement around the table that is important, and you should get the minimum number that works.

How should you compensate board members?

Some research I saw (part-directed) at McKinsey was equivocal on a lot of board behaviors, but very clear on one. The more money on the table when the board meets, the better the results to shareholders. That means the major shareholders should be there, and that board members should have their own money at stake. It’s true for the 3 people Lingopal board meetings, and it is true for Microsoft and the EBRD. Let the non-investors accumulate shares, by earning them or buying them at a good price, (preferably not by options as it encourages risk taking) helping them pay for those shares with a loan. Pay them a bit in cash as well to help make ends meet.

That’s my take – Do you agree with these answers? What other questions are important?