Oversight

Having recently read Going Infinite, the story of Sam Bankman-Fried and FTX by Michael Lewis, I was going to write some thoughts here on that fiasco. Then a few days ago OpenAI’s board abruptly fired CEO Sam Altman in a story that is still unfolding, so I thought I would write about that. Then early this morning I read that Binance CEO Changpeng Zhao pled guilty to a number of federal charges which resulted in his company being fined $4.3 billion, him having to pay $50 million, spend time in jail, and step down as CEO.

None of these are life science startup stories, at least not directly. But they are stories that apply to all startups. From what we already know, there are important messages regarding company and CEO oversight, board composition, the CEO-board relationship, mission alignment between CEO and board, termination of a CEO, company leadership, and value of key personnel - just for starters. That’s a lot to unpack, and there have been many articles written in the past few days and weeks covering all of these topics. The one aspect that I’d like to focus on here is company and CEO oversight by boards, and the nature of boards in early stage companies.

As an aside, I should point out that all three of these events qualify as the type of “unexpected event” in the life of an early stage company that I’ve been tracking and discussing for the past two years (see more about this at the very end). In a draft that I wrote yesterday, I commented that while the OpenAI story is still playing out, in my opinion Altman’s initial response to his firing included a number of actions that I felt would increase the likelihood that he would successfully navigate past this unanticipated challenge. These include the fact that he remained calm, was clearly focused intently on the issue at hand, had a variety of options (e.g., moving to MicroSoft), and was leveraging his many relationships throughout Silicon Valley. I also wrote that I’m not as confident that OpenAI will survive, as his board members seem to have been less prepared to deal with the consequences of their unexpected actions. As of this morning it appears I was somewhat correct, as Altman is back in charge at OpenAI. So while both he and the company survived, Altman’s former board has not. This is a good thing, in my opinion, as the original board was established with very different goals in mind, and was not well suited for where the company is now heading.

There was a very unusual and unhealthy board situation at FTX too. Sam Bankman-Fried resisted having any board at all, refused to have investors on his board, and when he did have other directors he appears to have viewed their sole function as signing documents to rubber stamp his decisions. There was no oversight, no audits, no internal controls, no useful record keeping. Noam Wasserman wrote a nice article about this situation in the Harvard Business Review in Dec 2022, titled “FTX and the problem of unchecked founder power” (https://hbr.org/2022/12/ftx-and-the-problem-of-unchecked-founder-power).

I haven’t taken a close look at the board of Binance, but given what is already known about that company’s actions and the penalties they face, there clearly was no adequately functioning oversight of the CEO.

So how are boards set up in early stage life science companies? The answer is that there is no single formula. In the beginning, it’s often the case that boards are comprised of founders (or some subset of them). This is often due to the fact that the legal requirements to incorporate necessitate that one or more people be designated as directors. Sometimes one or more of the founders recognizes that being a director provides an opportunity to exert some level of control over the company, so they volunteer to take on the role. In addition, sometimes the founders recognize from the start that they could use some independent oversight, or access to people with useful experience or contacts, and seek out one of more individual to join their board because they bring these assets.

Key roles of any board include corporate governance (operating within the law, and properly documenting such), fiscal responsibility (often overseen by an audit committee), setting executive compensation (often the focus of a compensation committee), working with the CEO on developing and regularly modifying as needed corporate strategy and related action plans, ensuring that the company has the resources it needs to address its mission (financing), and ensuring that corporate decisions regarding operations are in the best interests of the shareholders (fiduciary responsibility).  

I’ve been fortunate to participate in, or report to, a number of boards that checked all of these boxes. I’ve also lived through situations where boards ignored some of these responsibilities, or operated in a manner that caused problems for the company, or even resulted in outright dysfunction and the death of a company.

When we started Genetic MicroSystems in 1997, the original board consisted of myself, my co-founder and one investor who had significant prior board experience. As is often the case, in the very beginning there was no need for committees or much work in many of the areas outlined above as the company was properly focused on just getting going. Over time, and with good legal guidance from the start, we put in place all of the necessary processes and structures to ensure good corporate governance. This same approach was followed when three of us co-founded Transplant Genomics in 2013, and when a group of us co-founded a stealth company last year.

When I joined NimbleGen Systems as CEO in 2003, there was already a large board in place. The company was four years old, and had been through several rounds of investment, so the board included some of the founders as well as representatives from the leaders of various prior financings. This was a very well disciplined board, even if the various members came with differing perspectives on certain issues, which at times led to vigorous debate. I personally think this is a good thing as long as it is constructive in nature. As with GMS, NimbleGen had strong legal guidance from the start, and by the time I arrived the board already followed all of the appropriate processes and included all of the necessary committees. They operated with proper attention to legal requirements, documentation, and fiduciary responsibility to investors.

Without naming the company, I’d like to describe one startup situation where the board did not function so well. In this company the original board included the founders. I was not the CEO, but I was one of the founding directors, as was the company’s scientific founder. As we raised funds, representatives of the new investors joined the board. When we hired a full time CEO, they joined the board. At some point the interests of the investors and the founders diverged, and with the board now weighted in favor of investors, decisions were made that caused the company to move in directions that the founding scientist and I did not agree made good sense. After each board resolution was voted on they told us how much they valued our input, but they continually voted against us. This continued over many months, and at some point we decided that life was too short (and the risk of liability too high) to continue participating on a board that kept making decisions with which we didn’t agree. The company was no longer pursuing the mission we had envisioned at the start, and both the founding scientist and I decided to resign.

When it comes to CEO-board relationships, the main message I want to convey to any CEO of an early stage life science company is that trust, transparency and good personal chemistry are critical. In an ideal situation the CEO should be able to rely on the board for assistance when they encounter the inevitable unexpected events that will occur as the company grows. When structuring a board over time, the CEO should be considering the long term needs of the company, and how their board might be able to assist in achieving their goals. Others have said that directors should be sought who can bring “wisdom, wealth, or work.” By this they mean relevant prior experience, access to funding, or ability to contribute in an executive role – or to help the company find key executives through their professional networks. With all this in mind, CEOs should also be very careful when giving up board seats in conjunction with fundraising (especially when more than one seat is sought). Often this cannot be avoided, and in any case there is a good argument that any round of investors should have a representative on the board. 

My take home message for CEOs of early stage companies is to be very careful and proactive in considering board composition, especially in times when board expansion is proposed as part of a financing. You don’t need to have unanimous agreement among board members at all times. Having said this, some boards are structured so as to require unanimous agreement of any resolution - and this can have benefits for certain groups. Regardless, I’ve generally found it helpful to have a diverse range of perspectives to consider, and essential to have respectful, trusting, transparent communication with your board members, as well as alignment of goals and incentives. With such a board in place, not only should you be able to avoid the types of disasters discussed at the top of this blog (FTX, OpenAI, Binance), but you may even have a chance to realize the vision you had when you founded your company.  

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For those interested in my upcoming book, Can’t Tame A Mongoose: Memoir of a Genomics Entrepreneur, there is now a page live on Goodreads where you will soon be able to see a preview of what’s coming, and pre-order the book: https://www.goodreads.com/book/show/202333432-can-t-tame-a-mongoose