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June 17, 2006

The Welch Way, Tough Bosses and VCs

To my wife's chagrin, I'm an avid reader of many magazines.  The Economist, Business Week, Newsweek, Sports Illustrated (did you see Big Papi on this week's cover?  I'm praying there's no jinx!) and many others are regulars in my weekly diet.  I also have an affection for management books (Patrick Lencioni is one of my absolute favorites).  So it has been with great delight that I've been reading Jack Welch's weekly series of columns in Business Week, called "The Welch Way".  The one that caught my eye recently was the April 25th column (yes, I am a few weeks behind in the pile...) called, "Tough Guys Finish First".  I thought it had great (probably unintended) lessons for VCs as well as managers.

Welch writes in answer to the question, "Do tough bosses really get more out of their people?", a simple answer:  "yes".  He argues that the right boss is tough as in tough-minded:  "They set clear, challenging goals. They connect those goals with specific expectations. They conduct frequent, rigorous performance reviews. They reward results accordingly, with the most praise and the highest bonuses going to the most effective contributors and commensurate compensation levels distributed down the line, ending with nothing for nonstarters. They are relentlessly candid, letting everyone know where they stand and how the business is doing. Every single day, good tough bosses stretch people. They ask for a lot, and they expect to get it...Weak performers usually wish these bosses would go away. People who want to win seek them out."

Early in my management career, I was eager to please.  I'd avoid confronting people directly with negative feedback because I was nervous that they wouldn't like me and if they didn't like me, they wouldn't follow me.  Then I got a piece of tough feedback from my seasoned boss:  "leadership is not a popularity contest".  His point - good managers give tough feedback and confront issues directly.  Good managers don't worry about being popular or liked - they worry about results and treating people fairly.

Do VCs, in their role as board members, operate like good managers - tough-minded as Welch puts it?  My experience from both sides of the table suggest it's all over the map.  Some VCs view their role as the "invited guest" at the entrepreneur's party and are therefore loathe to rock the boat.  Others think of themselves as the entrepreneur's boss and therefore dictatorial in providing feedback and direction (one of my VC friends reported to me recently that he thinks of "his CEOs" as divisional presidents that report to him).  Others are conflict avoiders - they seethe with annoyance over company and management performance and talk behind the entrepreneur's back, but grin to their face and claim they love them - up until the day they fire them.

I'd like to think the most effective technique is to strike that right balance between being a service provider (where, like the lawyer, accountant and recruiter, the VC is there to provide a range of services to the entrepreneur to add value and be helpful) and a board fiduciary who provides tough, direct feedback where appropriate (e.g., I've been surprised that VC-backed boards often don't systematically provide formal, written performance reviews to their CEOs).  Either way, it's not a popularity contest - that's certainly not what the LPs pay us for.

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Hi Jeff: I agree with your comment about the power of (truthful) performance reviews. Here is some empirical data to additionally support this hypothesis which I recently blogged about: http://breakoutperformance.blogspot.com/2006/10/predictors-of-significant-vc-backed.html . Cheers, Eric

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