Building Trust Between Boards & Founders

Speaker: Today, join host Richard Conway as he interviews Peter James, Chair of Macquarie Technology Group, MYOB, and Droneshield, about how boards can provide effective oversight whilst respecting a founder's vision.

Richard Conway: Welcome to Minutes by boardcycle. I'm your host, Richard Conway, and today on the podcast I have the pleasure of interviewing Peter James.

Richard Conway: Peter is a highly experienced non-executive director and chair, particularly in the technology sector. He's currently the chair of Macquarie Technology Group and Droneshield, and was formerly chair of Ansarada, Nearmap, and longtime Director of iiNet.

Richard Conway: Peter, welcome to Minutes by boardcycle.

Peter James: Hi Richard. How are you?

Richard Conway: Good. Thank you. So Peter, as I said, you've been the chair of a number of listed companies, and for many of those, founders have been actively involved in the business. And so as we know, founders can be very invaluable to a business, but also present some challenges for independent boards.

Richard Conway: So I wanted to ask from your experience, what do you see as the key elements of a successful relationship between founders and a board?

Peter James: Yes, thank you, Richard. And look, I've had the pleasure of working with many founders in a number of successful Australian technology businesses.

Peter James: And the first thing, I think it's important for us all to understand that while many of us can be executives or board members, chairs, and we can have successful careers, but very, very few of us, can actually start and grow a successful business.

Peter James: And the first thing I think it's understanding that perhaps this is overstating that founders, you know, they're a precious, unique resource. That have certain skills and, you know, sometimes those skills can bring some, shall we say, quirky attributes.

Peter James: But, you know, I think it's really important for boards to understand and appreciate that it takes a lot to mortgage a house, to live off the smell of an oily rag, and grow a business to the point where you actually need, perhaps to take external money, or where you need governance of a chair and an experienced board.

Peter James: And then I think, it's at a point where the founder starts to take external money and shall I say, you know, particularly, significant money. Sometimes founders will live off dad's credit card or whatever it is. But once you start taking OPM as I call it, other people's money, it's at that point that everyone's gotta grow up a little.

Peter James: But I think open communication might seem fairly obvious and perhaps trite, lots and lots of communication and particularly, from the chair to the founder. And I think it's important for the chair to ideally have had, if not been a founder, to have had an executive role. Ideally a CEO's role, where they understand what it's like, the loneliness of the long-distance CEOs as I understand it. I think no surprises is, is fundamentally important. And I think, and this goes for any board chair, founder, or CEO relationship. A real level of trust where whatever is said publicly has already been discussed privately so that there's no surprises in the business and certainly no surprises in the boardroom.

Richard Conway: Yeah. Peter, I wanted to ask to pick up on what you talked about there.

Richard Conway: I guess often by the time a founder is starting to take other people's money, they have gone through a lot of sacrifices, so they have, they have a history, I suppose, of sacrifices they've made.

Richard Conway: How important is it for you as a chair coming in to dig in and understand that history? And, and I guess also, do you need to sort of actively help the founder to let go of some of that history as well?

Peter James: It depends. The one thing I've learned, Richard, is every company is different, and certainly every founder is different. They typically have those skills of vision, strategy, timing, but they also have tenacity. And they have a lot of self-belief.

Peter James: So I think it comes back to trust and understanding that particularly, if they have an experienced chair, and really someone who understands the business, I think is really, really important.

Peter James: But typically, stating the obvious, founders are used to doing it their own way. They may not be the best communicator. Can they scale the business? Will they take guidance? Will they listen?

Peter James: I often will give a founder a little more leeway to enable them to do things the best way that they can, depending on their style. I mean, if I look at someone like Sam Riley at Ansarada, he'd founded that business 14 years before I'd got there. It was getting ready for an IPO. There was perhaps some noise around shareholders, et cetera.

Peter James: And I said to Sam, you run the business according to some agreed criteria, and accountability is fundamentally important. I will give you as much oxygen as I can. I will be the boundary rider that keeps noise away from you, provided you communicate with myself for the board and we communicate with shareholders. And provided we do, as we say we're going to do, or if we don't, we communicate very quickly.

Peter James: My job is to give you oxygen to let you get on with what's best. And I think that's an important component, Richard, for chairs. Give the founder, give your CEO the oxygen to do what they do really well. Hold them accountable.

Peter James: Another one was Rob Newman at Nearmap. And you know, Robert had a VC background, had a PhD in Electronics. Super smart guy. Ran it a million miles an hour, which was great. Hadn't actually been the Founder but had been in that company from the early stages when I joined it. And again, my job was to give him oxygen, be the boundary rider, but also be a sounding board for him in a way that we could trust each other.

Peter James: And that's not to say, you know, I said to Rob the other day, we had some pretty robust discussions, debates, and it always went on until he agreed that I was right. And I, you know, it wasn't quite like that, but you know, it was also, I think, trust and freedom to have very robust debates just between the two of us, and then we'd work out common ground on a way we'd go.

Peter James: The other thing I'd say is, you know, these founder-led businesses, you've gotta be always on, always available, particularly in tech. There's no such thing as nine to five, it probably hasn't been for decades. But there's probably no such thing as Monday to Friday either.

Peter James: You'l find with a founder, they're always on. And they'll want to talk. They'll need to talk. And likewise, you know, I'm thinking about matters. Wanna be able to call someone, and to have, perhaps the trust and respect you can do that. And, and that means sometimes people are busy, sure. But it's that cadence.

Peter James: I think cadence is a really important word where you get up to operating speed and just talking all the time.

Richard Conway: And Peter, I wanted to ask you about the founder as a shareholder in particular. Because you've been talking a little bit there, I think from the perspective of the founder as the CEO or managing the business.

Richard Conway: How does your interaction change depending on their shareholding?

Richard Conway: So we see obviously some founder led businesses where founders have a really significant stake. They ultimately can at least block anything that the company wants to do. Versus, you know, where the founder has been diluted to a much smaller shareholding, still meaningful, but doesn't have that kind of shareholder power.

Peter James: Well, I think the, the first and obvious thing, one of the great things about founder-led businesses is, typically the founder has skin in the game. And I think that's fundamental in any board, any CEO or executive. You need alignment, and the only way, the best way to get that is skin in the game.

Peter James: People have good shareholding, and I think that's why founder-led businesses often do well and why there are investment firms, investment houses. Wilson Asset Management, for example, has a fund that just invests solely in Founders.

Peter James: So I think firstly, having founders with skin in the game, and I like boards myself to have good skin in the game. It means we're all there, obviously, to look after all shareholders.

Peter James: I'll give you two examples, specifically of your question. At iiNet, Michael Malone, the founder, founded the company in his parents' garage. He grew that to 1.5 billion.

Peter James: By the time we got to that point, Michael actually stepped aside in the last 12 months, but as he left, look, I don't know what he held, it was single digits. Let's say 5%. He still had a significant influence in that company. So it's not just the shareholding. He'd founded it, he was the visionary, he was the strategist.

Peter James: But you know, Michael was always trying to do the right thing by all shareholders. But, you know, and I, I think it's really important that everyone understands, you know, starting with the chair and the board, but also the Founder. We are there for all shareholders.

Peter James: And you know, sometimes, perhaps you've got to have a conversation around that, but, you know, Michael only had, let's say 5% or 6% still had significant influence. If we go to the other end, Macquarie Technology group, another wonderful Australian company, ASX 200, David and Aidan Tudehope founded that business 30 years ago. They're still in the business, I'd say pretty much, you know, five to seven days a week. Lots of hours. They love it.

Peter James: The board, we've got a good relationship. They own, I don't know, circa 40% of it. The shareholder never actually enters the boardroom. And, you know, that's an unwritten law. It's an unstated law. Not a law, but it's just an agreement, tacit agreement. We are their board and CEO and executive, and matters of shareholding very much off to one side.

Peter James: I think, you know, as Chair, I'm mindful of it. It's never come up and actually in, I don't think in any of my companies have I felt there's been a conflict. Because there's so much open conversation. And look, we're all, we're all aligned to try and do the right thing.

Peter James: At Nearmap, I had the major shareholder, Ross Norgard was on the board, you know, we heard his view, but at the end of the day, we had a cabinet solidarity and away we went. I think if you ever get misalignment of major shareholders, whether they be founders or not, that's when things can be difficult. But again, a lot of communication can overcome these.

Richard Conway: And so, following on from that, Peter, we see particularly in technology, investors reward founder-led companies more than scenarios where there's professional management. So I wanted to ask you, how important do you think it is to keep founders involved with the business? And is there, you know, how dire do the circumstances have to be for a board to start thinking about exiting a founder if it's even possible?

Peter James: Yeah, let's jump in on that word dire. Because it may not be dire, it just may be that in the evolution of a company, that a founder's skillset and experience, may not be suitable to take the company to the next level.

Peter James: And, you know, as companies grow, going back to earlier, it's a great example of that, Michael founded that company way back in his parents' garage. And I used to say to him, okay, we're now a $200 million company, ASX Market Cap, different perspectives. But we still need to remain nimble, you know, you need to start thinking differently then to $500 million.

Peter James: By the time we got to a billion, what Michael had done was actually build a first class world class executive team underneath him. And he was smart enough to still be in the business, but smart enough to be on it. So there was an example where Michael was actually able to grow the business, and grow with it. But look, when it got to about a billion and a half, I think we, you know, Michael, you know, put his hand up and I think we all agreed it was probably time for him to step aside.

Peter James: And, and I think the other thing too, is, how many years at the helm, how many years at the crease do people want to do? And it's that transition, but it's important to have a team come in or one or two players that can take it to the next level. But it's a non-trivial exercise because no one arguably knows the business as well as the original founder. And you know, certainly there's been plenty of examples where founders have stepped aside for whatever reason and the result has not turned out as well as people might have wanted.

Richard Conway: Absolutely. And, and last question on this topic, Peter. When your approach to be a Chair or go on the board of a business that is founder-led, are there particular qualities that you're looking for in a Founder or particular things that would be red flags to you?

Peter James: Look, I, I'd start with the basics of what I always look for. I look for a good business model. And you know, one of the analogies I use is the Ice Hockey Wayne Gretzky, the Canadian Ice Hockey Player, that, where the puck is going, you know, you wanna be where trends are going, where technology particularly is going.

Peter James: And a good business, I look for alignment of shareholders. As I indicated before, you don't want to get into a situation where one shareholder, for example, might wanna expand globally, another one might want to perhaps be far more cautious, domestic based and retain cash and pay dividends. I mean, there'd be one example.

Peter James: Where I can add value is another one. And having a really good executive team because we can have the best strategy is the best company, but it is always about execution. You mentioned red flag. The thing I look for is undue ego, undue hubris.

Peter James: And look, we've all got a sense of ego. That's fine, but I look for people that are grounded. Now, as I said before, Founders are a particular breed, they probably have a higher ego than most. They probably have to have.

Peter James: And also I think to understand what the various objectives are of the Founder. They want to stay, do they want to grow the business? Do they want to exit it? I think having those open conversations up front, I look at a lot for various reasons. I don't choose many or they don't choose me. But they'd be the key criteria to start with, Richard.