By Eric Jackson, Forbes.com
Special to Online Career Tips
Two weeks ago, I wrote a post about why no operating executives should serve on outside boards.
Most of the responses I got were very positive.
One of the observations I made in the post (which I didn’t really spend a lot of time discussing) was that there are quite a few prominent high-profile (tech) executives who don’t serve on any outside boards. They include:
Of course, the common denominator with all of them is that they’re all founders.
Why do these founders seemingly have no interest in joining outside boards while other well-known tech executives who I mentioned in my post like Meg Whitman of HP (HPQ), Henrique De Castro of Yahoo (YHOO), and even Tim Cook of Apple (AAPL) see it as important to do?
I think the issue is really the difference in mindset between a founder and a professional manager.
Professor Michael Jensen of Harvard Business School (along with Bill Meckling of Rochester) did some formidable research now almost 40 years ago on the agency-principal problem in modern corporate America. In their classic “Theory of the Firm” article, they start with an Adam Smith quotation:
The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
Later on the article, they say (in their own words):
We define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers, there is good reason to believe that the agent will not always act in the best interests of the principal. The principal can limit divergences from his interest by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the aberrant activities of the agent. In addition in some situations it will pay the agent to expend resources (bonding costs) to guarantee that he will not take certain actions which would harm the principal or to ensure that the principal will be compensated if he does take such actions. However, it is generally impossible for the principal or the agent at zero cost to ensure that the agent will make optimal decisions from the principal’s viewpoint.
Ten years ago, it was common for founders to pass the reins over to the “professional managers.” Jerry Yang and David Filo stepped aside at Yahoo for Tim Koogle and then Terry Semel. Pierre Omidyar handed over the keys for eBay (EBAY) to Meg Whitman. Larry and Sergey brought in Eric Schmidt at Google (GOOG). All of these handovers of power worked out well for the principals and the company in the beginning. As time went on though, the principal-agent problem manifested itself in each one. The “professional managers” somehow became unhooked from the company’s core and the company got off track from its core operating principles.
Mark Zuckerberg changed all this at Facebook (FB). He stayed in charge – determining that his founder mindset could be more valuable to the company in the long run as CEO rather than taking a more ancillary role. Larry Page seemingly got jealous that Zuckerberg got to do what he probably had always wanted to do and took over for Schmidt. And Mark Pincus was adamant that he’d never give up control of his baby.
Last year, Mark Pincus did a fireside chat with Sarah Lacy of Pando Daily.
There are lots of interesting insights from the nearly 2 hour discussion. One of the things that jumps out at you when you watch the exchange though is that Pincus expects that he’ll be CEO of Zynga (ZNGA) for life. He’s not expecting that this job running Zynga will be a 5 – 10 year gig before he moves on to his next company. This is it. And, of course, he’s set up the governance of the company (with dual class shares) to ensure he remains in control of the company.
So why should these principals serve on boards? To be more popular? They have the friends they want. For prestige? They have enough. To learn more so that they can be more effective CEOs back at their own companies? I suspect, if you asked them, they would say they have great talks with lots of friends, investors, business colleagues from whom they learn plenty. Why do they need the extra time, effort, and – let’s not forget – fiduciary responsibility of being on a board? If some of them aren’t great CEOs yet, they can improve by developing some important mentor relationships — not serving on the board of Coca-Cola.
I think these founders would also feel a sense of guilt – to their employees and investors – by taking away time from their companies to fly all over the country as a corporate director for Proctor & Gamble (PG) or Kraft (KRFT).
“Professional managers” – on the other hand – seem to be drawn to taking on outside corporate boards like moths to the flame. I’m sure they all try to do a great job and believe that the insights they gain more than outweigh the “costs” of serving on that board. That’s human nature. We justify every decision we’ve ever made.
Founders aren’t perfect. Perhaps after 10 years in the saddle, Zuckerberg and Pincus will make questionable decisions just like Whitman and Semel did. If that’s true, it should manifest itself in the next 3 – 5 years.
However, the ultimate commitment of the founder to the enterprise in undeniably strong. It’s a stake in the ground for all to see that says to the world “this is what I’m going to be doing for the rest of my life.” It promotes more of the long-term view among employees, if not always investors.
A “professional manager” by definition can never be a founder. However, they’d do well to emulate the commitment that founders always exhibit to their companies that – good times and bad – they’ll always be there for them and not flitting around socially looking for their next job.
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