Communicating good news and bad

September 29, 2010

In this brief MarketWatch interview S.P. Kothari, deputy dean of MIT’s Sloan School of Management, offers advice on how boards can “tease out” better information from their management teams.  Although Mr. Kothari is speaking about publicly traded companies, we do see some similarities that apply to private company boards as well.

Management teams often feel implicit pressure to sugarcoat negative events or downplay bad news.  As a result, Mr. Kothari argues, board members should direct their questioning to areas which management covers more quickly or in a more perfunctory manner.  Look for omissions and do not assume things discussed briefly (or not at all) are fine.

In our experience, the relationship between entrepreneur and venture partner in private companies is more cooperative, longer-term, and (mercifully) not subject to the quarterly reporting pressures of public companies.  Moreover, venture investors have real “skin in the game” and have the same incentive as the entrepreneur to understand the nuances of the business and focus on long term value creation.  As a result, the communication of good news and bad tends to be more forthright and in real-time, enabling partners (assuming they are good partners!) to understand intuitively the right kind of counsel and support to offer during both the good times and during the inevitable challenges of building a business.

Still, even in private companies with strong, motivated board members, there is sometimes a reluctance on the part of entrepreneurs to lay all the cards on the table.  Board members should strive both to do their homework and understand the right questions to ask and make sure they have built the kind of relationship with their entrepreneur partners that will facilitate open and honest communication.

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