BIOTECH : A testing time for governance?

Andrew Kelly is firm believer in biotechnology companies using their directors to set strategic direction and their managers to carry that out. This might seem fundamental premise for any company to operate by. However, according to Kelly, an executive director of life sciences venture capitalist company BioPacific Ventures, those lines become blurred far too often, especially in young companies.
Organisers of the annual NZBio conference in Auckland earlier this year dedicated session to the do’s and don’ts of governance in their sector, with Kelly as the headline act. He was ably supported by Brad Duft, chief executive of US-based CoDa Therapeutics, and Trevor Wilkinson, chief executive of Auckland-based Vital Food Processors.
Kelly says “wise heads” are chosen by the owners to direct the company, not manage it.
It’s fundamental, he says, that all companies should have board, even if there are only three or four directors during start-up phase. “There is certain illogic around not having board if you have company – company is legal structure actually created to separate the business that the company will be conducting from the people who may own it,” he says.
Kelly says substantial owners will usually put themselves on the board, especially if the risk is high.
Theoretically, there is clear line between the board and management. “The board sets direction, the management executes it.”
A board chairman has unique and pivotal role, especially as spokesman for the board in discussions with management, especially the chief executive.
Independent directors also have special role, by nature of their “pure” interest in the company, meaning they do not have vested financial interest in it.
Kelly says the tendency of substantial owners to usually vote themselves on the board is “just another fact of life”.
“They often have the key vote or the numbers of votes, depending on their shareholding, to influence the composition of the board, especially if the risk is high. Those owners will frequently nominate themselves to be on the board.”
Kelly says that approach is one used by BioPacific Ventures. “As venture capitalists we always insist on board seats … on what we think is substantial minority of the board.” That might be one out of three, or two out of five.
“The reason for that is we are very very interested in the fortunes of the company, and very interested in its direction. Therefore we insist on being on the board.”
Kelly says that will apply for all classes of owner, depending on the size and the clout of any particular owners of the company.
“The companies we read about in the paper more often are listed companies with thousands of shareholder-votes, and power blocs and things become standard.”
“But in the biotech community in the early stages, the approach is much simpler.”
An appreciation of risk and market knowledge and expertise all help directors set company’s direction, and are the ideal attributes for people on boards in young company, Kelly argues.
“The key thing in setting the direction for company is knowing as much as possible about the territory that company is going into,” Kelly says. This means things like market knowledge are critical as well an understanding of how these companies evolve.
“For young company developing new food product, the sort of people we want on that board will be people who have deep experience in the food industry globally, or deep experience in the development of those things.”
“They must bring to the board table that connection with the area that the company is going to. That is the most critical attribute of board member in my book.”
Young start-ups inevitably have maybe one, two or three managers, or board of three directors.
“They are all heavily invested, mentally invested in the company and really want to help. It’s all hands to the pump.”
Kelly says scenario might arise where director is going overseas on business and is asked to “meet and greet” client while he or she is away. “That’s all forgiveable and reasonable. But it is true that if you are looking for the rule to determine whether there are lines being crossed – and I tell you, those lines get crossed with some danger – use the board to set direction, and management to execute.”
There are couple of “classic” warning signs about that demarcation being breached, says Kelly. “The first is where board members find themselves riding CEO and saying ‘Exactly how are you going to deliver on that – we want to see the actual paper about the way you’re going to do that. I’m not sure that that’s right, I think you should do that again.’
“That’s boards getting involved in management, that’s boards trying to do execution,” says Kelly. “Boards are often experienced people and execution is forgiveable sin, but sin it is.”
Conversely, the management might say: “I just don’t agree with the direction the board wants to take this company.”
“If you think about it, that is not only illogical, that is suicidal. If you’re sitting in the position of CEO, and you’re fundamentally disagreeing about the direction of the company, you’ve got problem, big problem.”
Kelly says board chairman must not allow his directors to manage the management “by committee”.
“It is dangerous thing if boards all start interacting with the CEO independently. It drives the CEO mad and it also confuses the signal coming out of the boardroom.”
“Boards must speak with one voice.”
Kelly says board table is an “excellent place” for robust discussion.
“At the end of the day, the signal should come clearly from the CEO to the chairman and vice-versa.”
BioPacific Ventures’ preference has always been to have chairman “independent from us”.
“In our case, the chairman often has deciding vote on board and if it’s an independent chairman, he or she is one of the few people with an open mind about an issue rather than the vested interests of the owners.”
Kelly says “special set” of communication skills is needed in good chairman. “If you see board running well, you’ll see the chairman doing couple of little idiosyncratic things which might seem harmless or smooth, but they’re quite significant.” The chairman would usually close off the discussion of point by summarising where the point has got to, and as appropriate giving the clear direction that that discussion needs to rest with the CEO “right there on the spot in the board meeting”.
Similarly, the CEO might be frustrated, especially if the board is communicating independently to that person. “That CEO has role to push aside the noise, and just say: ‘OK, the chairman relationship is the one that matters, Mr or Mrs Chairman, I think you should pull your members into line bit.’
“That sort of candid frank communication must go on between chairman and CEO,” says Kelly.
He says it is an advantage when recruiting directors to find people who are well connected to the company’s target market. “That is hugely valuable.”
Kelly says boards are often drawn from well-connected people – “Never underestimate them.” Independence among directors is an “interesting and critical thing”, he says.
“Believe me, it doesn’t matter how well you think company is going, there are always tensions. You always need worst-case scenario.”
“One of those in dysfunctional board is conflict between vested and personal interests.” Independent directors have “beautiful” role to play here, says Kelly.
“Unlike the vested interests of we, the venture capitalists or of the founders, who say ‘we want it to go this way and our money really depends on it’ their thinking has purity of thought. The only thing that matters to them is the good of the company.”
Kelly says in New Zealand, board composition can be challenge. “We are often confronted with friendly, and local, and very useful board members – people with track record. But I put it to you that in our industry, the biotech community, we really need high-powered boards, we need offshore boards or people