Wall Street Journal - © 2000 Dow Jones & Co.
Article written by Karen Jacobs
For many start-ups, directors offer desperately needed management skills.
The problem is finding qualified candidates. If you think a cash-conserving dot-com has to settle for less when looking
for directors, consider Skyauction.com.
The year-old New York-based start-up, which auctions travel packages on its
Web site, has managed to snag
seasoned experts in compensation, auditing and fast-changing cable TV, and even
a former head of state.
In many ways, Skyauction's directors represent a new breed of board, spawned
by the Internet. Many of today's start-ups are headed by younger,
less-experienced executives who aren't well-steeped in corporate governance. As
a result, many of these new entrepreneurs see value in creating a board with
several proven business leaders who can help them navigate the dot-com
frontier.
So, rather than merely being a sounding board, today's dot-com directors must
be an extension of management. They must be active participants in creating and
shaping strategy, defining markets and building senior-management teams. They
have to hit the ground running, and sometimes help build a business from the
roots up. And they have months, not years, to make an impact.
"This isn't a job where you get a call once a month and are asked to read the
financial statements," says Leonard Schutzman, Skyauction's nonexecutive
chairman. "This is an active job."
Enticing Equity
How did Skyauction attract this group?
Having a well-connected chairman helped. But the company also devised an
attractive pay plan. Instead of a cash retainer, its six outside directors
initially received options to buy 100,000 shares each of Skyauction stock at the
first-round investor rate, or a pre-initial-public-offering price. Mr. Schutzman
says those grants amount to less than 1% of the company's total equity being
held by the outside directors.
If the company's IPO goes off as scheduled later this year, those grants
could produce a pretax gain of about $1 million for each director. Mr. Schutzman
says the directors are expected to pay less than $2 a share for their options,
and the company has an IPO target price of $10 to $12 a share. Skyauction also
is considering giving the directors an additional 25,000 options every year.
"In this world," says Derek Reisfield, a 37-year-old Skyauction director,
"equity is the name of the game. And the big payoff for management and employees
is if the value of that equity rises."
But as this fast-paced, do-or-die dimension to dot-coms raises the bar on
director-level qualifications, the pool of candidates deemed most suited for the
job -- those already in top executive posts -- is drying up.
"Most of the best board members have reached their limit" on the number of
boards they can sit on, says Jeffrey Christian, chairman and chief executive of
Christian & Timbers, a Cleveland executive-search firm. Therefore, "a number
of companies are looking further down in the executive ranks for those future
marquee names," considering as directors division presidents, vice presidents of
interactive or electronic-commerce units, and chief executives of smaller
companies.
While these up-and-comers may not have had the responsibility of managing big
corporations, they still have skills dot-coms can use. "They may lack the
experience of being a CEO," says Mr. Christian, "but they may have others --
such as technology expertise, or being closer to customers."
Skyauction's nine-member board is a mix of young and old, with ages ranging
from 33 to 65. One-third are company officers, compared with the average 18%
insider tally at most big companies, according to recruiter Korn/Ferry
International in New York. And while some of Skyauction's outside directors
aren't household names in the business world, they have diverse backgrounds and
a wide range of experiences.
Mr. Reisfield started a couple of dot-coms while working as president at CBS
New Media Group, a unit of CBS Corp. He now heads I-Hatch, a New York
venture-capital fund that invests in early-stage Internet companies. Tom Baxter,
53, chief executive of Audible Inc., a Wayne, N.J., Internet distributor of
spoken-word audio content, guided Comcast Corp.'s cable unit through its fastest
period of growth. Merlin Dewing, the 65-year-old head of Skyauction's audit
panel, is a retired former partner at accounting firm KPMG Peat Marwick. Brian
Mulroney is the 61-year-old former prime minister of Canada. Brent Longnecker,
43, chairman of the compensation committee, had headed the compensation
consultant practices at Deloitte & Touche and KPMG. The lone woman on the
board is Ciara Burnham, 33, a vice president at New York investment firm
Evercore Capital Partners LLC and a former research equity analyst at Sanford C.
Bernstein & Co.
Compensation experts agree that traditional director pay plans may be out of
step with dot-coms, many of which need to hang on to what precious dollars they
have in order to be nimble in a fast-changing industry. "It's a very competitive
dot-com world," says Mr. Schutzman.
Bids at Skyauction, an offshoot of Magical Holidays Inc., a New York travel
consolidator, start at $1, and the typical auction lasts 24 hours. Many of the
fares have limited windows of availability. The company says it makes money on
most, but not all, of its auctions, but hasn't yet turned a profit.
Mr. Schutzman and Skyauction's two chief officers -- CEO Michael Hering and
Chief Operating Officer Sal Esposito -- compiled a list of credentials they
deemed most important for board members to get the company through its initial
growth stage. They wanted someone who had worked with an Internet company and
successfully financed it, someone who had guided a company through explosive
growth, a compensation and audit guru, and someone with international
connections, because many foreign airlines with which they hoped to do business
are state-owned.
"Our attitude was not just 'Let's pick out the best names,'" says Mr.
Esposito, 41. "More important was the question of 'What type of knowledge do
they have?'"
Mr. Schutzman, a former senior vice president and treasurer of PepsiCo Inc.,
knew some people who fit the bill. He approached many of them and told them
about Skyauction and its prospects. To reduce the chance of blemishing their own
records with a failed start-up, many of the candidates insisted on doing their
homework.
"I wanted to make sure I wasn't lending my name to something that was a bad
apple," says Mr. Longnecker, now an executive vice president at Resources
Connection, a Santa Ana, Calif., professional-services firm. "I think you should
interview [for boards] as you would for a job."
He and others held meetings with Skyauction's officers, examined the
company's business plan and even talked to analysts who cover the industry.
"We're going to have a big shakeout with all the start-ups going up," says Mr.
Longnecker. "You better make sure the one you're applying to is the right
one."
The directors say they were sold on Skyauction's business model and the
smarts of Messrs. Hering and Esposito, who both had travel-industry experience.
But there were other reasons some of them joined the board.
"Being retired, I look for intellectual stimulation," says Mr. Dewing, the
KPMG veteran who heads Skyauction's audit committee. "Discussing business issues
is still very rewarding for me."
All Stocked Up
In crafting the board's compensation package, officers considered cash
stipends and a cash-and-equity arrangement. Because most of the directors had
been successful in other jobs, says Mr. Schutzman, "we figured a small retainer
of $20,000 or $30,000 wouldn't mean very much to them." Mr. Schutzman also is
being paid solely with options.
The company also felt an all-equity package would ensure it had the full
attention -- and participation -- of the directors. The officers very much
wanted directors who were going to be involved. "We didn't want to pay a sitting
fee because we didn't want people to sit," says Mr. Hering, the 46-year-old
CEO.
And so far, none of the board members have been sitting. Mr. Reisfield goes
to Skyauction's offices about twice a week. And Mr. Dewing, who lives in
Minneapolis, keeps in touch weekly. "In the next year or two," he says, "this
company probably fits in the high-workload range."
Most of the board members were willing to forgo cash for options. "I didn't
think we needed cash compensation," says Mr. Longnecker. "I believe it sends a
huge message to shareholders when they see the board's entire package is based
on equity. You do need to motivate board members to make sure they're working"
on behalf of shareholders.
Mr. Longnecker says he sees dot-com board compensation going beyond the
all-equity package. He says he has suggested that some companies require their
directors to buy stock, and then grant them a certain number of options for
every dollar of stock they buy. "It's far to the right of wanting to go
all-equity," says Mr. Longnecker, who adds that many companies have dismissed
such a plan as too aggressive. "But I think we'll evolve to that."
In the meantime, his fellow directors at Skyauction seem well aware of the
risks in taking an all-equity payment.
"The potential of the equity compensation is very hard to judge," says Mr.
Dewing. "What I do is look at the best-case potential. Worst case is, obviously,
you walk away with nothing. I think that's how you have to go into it."
Article written by Karen Jacobs