Relationship management 101

About Dion Mortensen and Movac

Movac is a Wellington based private investment partnership.There are eight partners, three who are currently active. They operate a $12m fund that invests in early stage high growth potential businesses originating in New Zealand. Since 2004 they have seen around 500 proposals and invested around $9m in eight ventures. Since 1998 the Movac partners have helped entrepreneurs start-up and grow 15 companies, their most notable success coming from the TradeMe exit in 2003. These companies collectively turn over tens of millions of dollars per annum and employ more than 100 New Zealanders.

Dion is a full-time investor and director. He specialises in assisting owners and CE's of early stage companies to develop ambitious plans to grow the value of their companies within their ecosystems. He is an advocate of practical, agile governance systems that focus resource, promote sound decision-making and minimise risk in the high growth context.

Dion is a proven entrepreneur. Among other things, he has held several CE roles and led a successful exit from a company he owned. Since 2003 he has served as director or chair on 10 boards, five are current today including a not-for-profit. Dion has been a partner with Movac since 2006 and prior to that was the chief executive of Movac's first business now known as Maven Consulting.

Stocking the board

The chair

In the early days, when an organisation allocates capital to growth we always reserve a small amount of that investment to siphon off into stocking and growing a board. The first appointment is the chair – someone we trust and share values with who knows how to build a board, has a network and is experienced. The chair is then responsible for looking at the business plan and stocking the board in a relevant way.

The independent director

If you can assemble the right team and structure them in a way that makes sense, then you are likely to outperform other businesses in your market. We consider good independent directors to be a crucial part of the formula to accelerate growth in the ventures we invest in. Often one or two independents will balance out shareholder directors and help them to focus on developing the value of the business and away from representing their individual shareholding. Independents are hired for their skill and experience relative to those needed to achieve the strategic goals of the organisation. Chances are that shareholder directors are not as good a fit. A board is like building any other high performance team – you need to have a good plan, and the best people working well together in the right roles, to achieve it.

But, directors must firstly have the capacity. We meet a lot of people who have great energy and experience, but not enough time to leverage their experience to the benefit of the venture. We're constantly trying to keep our networks fresh and looking to meet people who have real energy, experience and the available time to deploy them.

There's quite a difference between an early-stage and a high-growth organisation. An early-stage business could be on quite an organic growth path, ie one that is on the normal curve inside its own market – whereas a high-growth business, by definition, is trying to outperform that market. People can get the two confused. The work requirements for a director in a high-growth organisation are higher, maybe double that of a steady-stage organisation, We would look for people to be committing 250–300 hours a year as an independent director on a high-growth board. The principal reason for the increased pressure on directors has to do with the greater iterations of change, growth and reinvention that these organisations must go through. But the rewards are higher. Often we allocate options as part of a package to secure the best talent. Given the rates of growth that we expect these mean much more in an organisation that's able to return on our investment strategy/targets (generally 30 x ROI in 5–7 years).

The chief executive

Quite often the CE is the founder and major shareholder, that sets up a potentially delicate relationship with incoming investors and the board. That's one of the reasons why a shareholders' agreement is so important (and is a condition of our investment). A good one will predict the inevitable difficult situations that will arise in the future and mandate terms that set expectations, minimize opportunity for conflict and protect relationships.

One of the worst situations that you can find yourself in is when you are dissatisfied with your CE. If you get to a point where you have grown capability and both parties realise that the growth in the organisation requires a fresh CE, the fact that the existing CE is a material shareholder works in your favour, because you encourage them to act in the best interests of their shares/the company.

But where there's a difference of opinion, what do you do and how do you deal with it? A strong genuine relationship between the chair and the CE, based on candour and mutual respect assists that very difficult situation. This is all Relationship Management 101; having a great relationship in place before you need it. If you don't then you are going to suffer the consequences. The chair can also set up and contribute to the state of ‘no surprises' ie the fact that a CE is not performing to expectation should not be a surprise to them. They should have been given the opportunity to first measure themselves against expected capability then to improve in any areas where they fall short. This approach gives all parties the chance to present and even align their views and can often take the sting out of major changes.

A good chair will consider the good of the organisation, ie exercise fiduciary duty, contribute to the quality of the strategic plan and the health and capability of the CE. They will balance the needs of the various shareholding parties against the health of the organisation.

The investment partner

One of the things that we used to do but have since stopped doing as investors, is to take the role of chair. Although we have some experience in chairing organisations, we found there's a segregation of responsibility that's required between the investor director and the chair.

Experience showed that no matter how close a relationship you have with the chief executive who is the founder, they are still a little bit suspicious of you/what motivates you in certain situations (ie capital raising). The last thing we want is a split in the team at such important stages in the evolution of the venture.

One of the first things we do is get an independent director in as chair, to provide a balancing point between the two sides of shareholders – the investor and the existing shareholders. Quite often, we invest with other investors at the table and we're looking at investing with a group of people who have put "sweat equity" in, and they want to feel secure that their interests are going to be well represented. So there will be a balance of existing shareholders versus the new shareholders. Once trust is established we want to move that board on as quickly as possible and install independent directors that are able to leverage their expertise towards the goals of the business plan. The above goes for us as well – as soon as the board is established and functioning to our satisfaction, we replace ourselves with better qualified independent directors.

Key messages

1. One of the important balancing factors is the tension between stocking the board with diverse points of view and keeping the board in harmony so that productive conversation can result in great decisions. That's very important, harmony between diversity (because without it, there is no real reason for you to be there as a board) and commonality of purpose that allows you to capitalise on that diversity. It's much easier to achieve that when you induct directors to strongly articulate the values and goals of the organisation.
2. When you're investing you've got a set of goals that are very well documented. So it's easier to articulate that through the interview and induction process. Generally speaking, then you should not make so many mistakes in bringing people in.
3. Ideally, there is an odd number for the early board, with a balance between the number of directors appointed by founding shareholders and the number of directors appointed by investment shareholders, and the balance of power held by a chair who both parties have appointed. We would very reluctantly move away from that ideal now, because you can spend so much energy in conflict in a board – and it's a terrible waste.

Find out more about starting a board