Tom Perkins, co-founder of venture capital firm Kleiner Perkins, wrote about corporate governance in a recent Wall Street Journal piece that I found both compelling and disappointing. In Perkins' framework, privately held ventures are governed by "Guidance" boards of directors, where "the board's emphasis is on performance, getting the venture up to speed as quickly as possible, and...taking the company public..." According to Perkins, "Few question the effectiveness of this model, as few involved question the desirability of creating shareholder value," and I agree.
But the board's responsibilities change after the venture goes public, Perkins writes:
Once [a] startup becomes a public company, a strange metamorphosis commences. It begins to be assumed that the public investors have different goals than the original backers. The continuing creation of shareholder value--the primary goal of the venture capitalist--while not forgotten, must take its place along side a host of other considerations. Is the company socially responsible? Is it inclusive? Does its board represent the population? Are women and minorities seated around the board table?...
(All of these things, unquestionably, are desirable; I helped effect these kinds of changes on all of the boards with which I have been involved.) [emphasis original]...
Above all, when the venture goes public, the emphasis shifts, with the inevitability of the tides, to obeying the laws pertaining to traded companies. The SEC, the stock exchange rules, and most recently the Sarbanes-Oxley act, come into play. Since directors must be cognizant of these, bit by bit the newly gender and racially inclusive board evolves into a new model: the Compliance board...
Don't misunderstand. A Compliance board is a very, very busy board. It works as hard, maybe harder (because it's all so boring) than a Guidance board. There are so very many matters to comply with, so very many governance (compliance) experts to listen to.
Diversity and inclusionary problems are always there to be discussed. Sarbanes-Oxley audit committee meetings can easily require a five-hour agenda, and require one hour even to summarize for the full board... Inevitably consultants and lawyers take more and more of center stage in the workings of a Compliance board...
Like it or hate it, what I have described is the evolving standard model in corporate America today. Would a Compliance board be able to prevent another Enron? I have the lurking suspicion that directors have to understand the fundamental business to understand when it is going off course... But that's just the old Guidance director in me.
I fully agree with Perkins' overall thesis that we're ill-served by a regulatory regime that compels corporate boards to focus on compliance functions that minimize risk at the expense of guidance functions that maximize returns. (And I'm well aware that making this argument allows Perkins to revisit the H-P pretexting scandal and take a few shots at Patricia Dunn; that's his prerogative.)
But what I find disappointing is the lack of clarity around the issues of inclusivity and representativeness. Despite Perkins' adamant assertion that these qualities are "unquestionably desirable," it's hard not to read the whole piece and sense an implication that they may be drags on financial performance that must be accepted as part of today's politically correct business climate.
If a "newly gender and racially inclusive board" which has evolved from a Guidance role to a Compliance role is now less likely to "understand the fundamental business," does that suggest that the "women and minorities" who were added to the mix are playing token roles rather than adding real value? I don't think Perkins believes this, but his unclear language opens the door to that interpretation.
In my experience, diversity lends real strength to groups and helps them achieve better outcomes, and that includes boards of directors. Inclusivity and representativeness aren't just PC buzzwords--they're performance-enhancing strategies. But this ideal is dependent on interpersonal candor and truth-telling. Group members must be able to speak freely from their individual perspectives if the group as a whole is to benefit from its diversity. And this requires an honest, heartfelt commitment to these values. Nothing stifles candid discussion about differences faster than the suspicion that the group's "diversity" is mere tokenism.
It's not my intention here to doubt Perkins' commitment to diversity or to impugn his character in any way. I simply want to note that his compelling argument about the dangers of prioritizing compliance over guidance is diminished by a lack of clarity around the value of diversity.
Disclosure: I work for and am an alumnus of Stanford's Graduate School of Business. Perkins rightly cites Enron's board as a body that neglected its compliance duties and notes that former Stanford dean Robert Jaedicke was an Enron board member and chair of its audit panel.
