Customers on the Board? Not!
from
Summer 2001
by John Engen
The difficult search for qualified directors has led a growing
number of high-tech start-ups to an unlikely source to plug board
vacancies: their own customers. Merix Corp., a manufacturer of printed
circuit boards in Forest Grove, Oregon, has elected two representatives
from customer companies, Solectron and Intel, to the board. “These
people understand the dynamics of our business,” says Greg Wolfond,
chairman and CEO of 724 Solutions, a Toronto-based maker of wireless
banking technology, who has reps of three big-bank customers on his
board. “And they bring a special wealth of experience we otherwise
wouldn’t have.”
Sounds logical. But, warns Charles Elson, director of the University of Delaware’s corporate governance center, “If I were giving advice, I’d say, ‘Don’t do it.’” Elson points out that having customers on the board violates one of the fundamental precepts of corporate governance: Directors should have a single-minded interest in looking out for the rights of the shareholders. Board members who are also customers—or outside counsel earning fees from the company—carry competing loyalties that could jeopardize that watchdog role.
For instance, they could use their position to steer the development of products to benefit their primary employer rather than shareholders. “The very nature of the relationship is rife with the potential for severe conflicts of interest,” Elson says. “They’re wearing two hats, which is highly inappropriate.”
Even if directors’ motives and actions are pure, their mere presence on the board could jeopardize sales to other customers who don’t want to tip their own strategic hands to a competitor, says Ted Jadick, a managing partner in recruiting firm Heidrick & Struggles’ board practice group. “If you get customer A on the board, it could kill any opportunity you have to sell your wares to customers B and C.”
Throw more than one customer on the board and things can get really messy. Meetings can easily turn into fact-finding and sabotage missions, as directors seek to learn more about their competitors’ strategies. That in turn can lead to meetings where little of substance is discussed.
That’s what happened at Integrion, a maker of Internet banking technology, which was owned by a consortium of banks. Several financial institutions put employees on its board, “not because they had any intention of using Integrion’s software, but because they wanted to see what everyone else was doing and have some control over it,” says Octavio Marenzi, founder and managing director of Celent Communications, a bank technology consulting firm in Boston. Board infighting delayed the hiring of an acting CEO for more than a year, he says, eventually helping to doom the firm. Last year, Integrion shuttered its operations.
724’s Wolfond concedes that it’s probably more difficult using customers as directors: “You have to manage things very carefully and be watchful not to align yourself with any one of your customers.” But he adds that the board seats have strengthened relationships with several of his largest customers. “Given the choice between a board filled with venture capitalists and accountants or one with bank leaders who run these operations every day, who would you want advising you on how to build your business?”
If you are determined to put customers on your board, make sure those directors remain focused on broad strategic goals and aren’t privy to initiatives pursued specifically for other customers. “To maintain confidentiality, our directors don’t have any involvement in day-to-day operations,” Wolfond says.
A better plan, according to Jadick, is to seek noncustomers with
experience in sales and marketing who can help you build stronger
relationships with your client base. “You want to be close to your
customers,” he says. “But you don’t want them running your company.”
