Enterprise Health Checkup: Tips for the Incoming CLO and Other Executives

The Savvy Startup Advisor™ Enabling Your Zero-to-IPO™ Journey Edition # 57 Topic: Accelerating Executive Awareness of Business and Legal Requirements

Health Tips for the Leadership Team. Without good health, what are all the riches in the world? Good physical and mental health enables us to engage in fulfilling and meaningful lives. Good health is typically most accessible when we engage in a regular cadence of checkups. Doing so improves our chance of early diagnosis of serious illness and disease lurking under the surface. Individual patients may not be able to remove all health risks, but most people engage in a consultative relationship with a trusted physician to mitigate them.

It is no different with a business or other organization. Good practices promoting enterprise health ensure on-time arrival of your most critical missions. Just like people, enterprises can achieve better long-term outcomes when running in a clean fashion with regular check-ins with specialists trained to help diagnose and fix their problems. Don’t take unnecessary commercial risks! It’s akin to walking around with an undiagnosed tumor which a specialist would easily diagnose.

Early Diagnosis – A Real-Life Saver. Seasoned owners and operators recognize that while it is important to do everything within their power to grow their businesses, successful growth often requires a balancing of interests. Good business leaders understand that a well-run operation requires processes for fostering and maintaining long-term business health. Administrative wellness is a critical requirement for winning in the trenches and achieving long-term business goals.

Early warning systems and preventive care matter when it comes to individual well-being. For instance, you can optimize cardiovascular health with a healthy diet, exercise and regular check-ins with your physician. Such guidelines and processes support general cardiovascular well-being, helping prevent cardiovascular issues through timely, early detection. The net result: people avoid expensive, life-threatening alternatives.

Unfortunately, many of us do not abide by the standard instruction manual. For the fortunate few, EMT technicians save heart attack victims with triage on the way to the hospital, or a skilled cardiovascular surgeon saves them with just-in-time interventions. Such triage and turnarounds test the limits of the human body. With the advances of modern medicine, some individuals survive such incidents even without the benefit of any process or plan for health maintenance. However, identifying health issues at a severe point of pain (i.e., when your loved one is phoning 9-1-1!!!) is not an ideal diagnosis! Absent use of a reliable process for maintaining your health, you are not optimally managing your health and wellness; instead, you are relying upon luck and circumstances.

Proactive vs. Reactive Issue Resolution. In business, there is a substantial difference between proactive issue recognition and reactive issue resolution.

Assigning defense of a litigation matter to your preferred law firm is typical reactive measure. You’re doing so to reduce an identified serious risk to your company’s financial assets and brand reputation. Indeed, it is not uncommon to find out that the leadership team did not recognize (diagnosis) the potential risk or gap before it became a serious problem. For example, at the point of being served with a PAGA lawsuit rooted in a violation of California wage statutes, handing over the defense of this case to your equity sponsor’s preferred law firm is an expected reaction, but it is not proactively maneuvering around an avoidable problem. Don’t get me wrong. It is the right move to mitigate the company’s damages at that point. However, doing so is a reactive measure, not a proactive solution to a diagnosable issue.

The proactive, solution-oriented approach is quite different. For example, an internal legal specialist with a deep understanding of your business and its operational requirements recognizes the potential for wage statute liability issues in advance and recommends action to avoid or mitigate the situation. In this example, you could avoid the bad legal outcome, a PAGA lawsuit and civil liabilities thereunder, by anticipating gaps in your company’s employment practices during the early innings and proactively planning corrective actions and remedying gaps in a timely manner. The upside is significant, including side-stepping expensive litigation and long-term reputational damage.

The best legal outcome is expensive litigation that never happens in the first place because your legal team, armed with all your business and legal requirements, designs compliant systems and programs which avoid costly operational mistakes. To do so, your professional advisors must do their homework, learning about your business, identifying its unique business and legal requirements and understanding the goals, objectives and risk tolerances of its leadership team and stakeholders.

Tamping Down Your Commercial Risks. How can your leadership team tamp down commercial risks associated with operating the business? Let’s not wait for the train derailment or plane crash to figure out that the brakes on our company’s systems require tuning. Brake maintenance is important.

It is essential to gain a clear understanding of your company’s health, especially if you’re an incoming member of your company’s executive team. Do the colors match? Are you now finding out for the first time – “Houston, we’ve had a problem?”

A coherent understanding of the commercial risks of the business drives alignment of the business teams. Seasoned veterans enter roles with growth-oriented startups and early middle-market firms with an understanding that “done is better than perfect,” and absent adequate resources, such companies cannot operate in lockstep with a goldilocks plan.

Challenges for the Incoming General Counsel. The issue of understanding commercial risks is even more pronounced for the incoming General Counsel / CLO. How so? Your subject matter expertise is of little help if you don’t know where the goal posts stand. You need an accelerated knowledge about the significant challenges, competitive threats, product launch risks, technical risks and meaningful opportunities of the business.

You cannot assess the risks being taken by your company’s leadership team without clarity about the main issues facing your business. What are the business and legal requirements? Has the leadership team set clear goals and objectives? What are they? Can they articulate how these goals will be met, such as through a strategic business plan?

Are the team’s existing goals realistic? What hurdles must be overcome to reach them? How does this leadership team, and the company’s other stakeholders, feel about risk? How do their views on risk align with the requirements of the business? Without coherent answers to such questions, an incoming General Counsel/CLO is likely hindered in effectively carrying out their role for the organization.

Diagnostic Tools Accelerating the Onboarding Process. One of the biggest value-adds of onboarding an in-house legal counselor(s) is assuring the leadership team’s fluid access to a legal leader and subject matter expert fully versed in the contextually relevant details of the business operation. Such legal leader takes the time to learn your business and industry, considers the unique attributes of the business, ascertains the business and legal requirements, and builds legal systems which align with your company’s business and legal requirements as well as the goals, objectives and risk tolerances of the stakeholders.

Having a toolkit to perform diligence on an organization and assess the state of its health is important. The value of a durable process for unlocking the secrets of the organization, including its latent injuries and illnesses, is extremely high.

Getting an Accurate Patient History. During the first days on the job, an incoming General Counsel faces an experience not unlike that of your first visit to a new physician, e.g., the General Internist. Your new physician requires complete and accurate information about your health history and lifestyle to gauge the “state” of your Nation and the riskiness of your daily activities (diet, exercise, etc.) on your overall health. Quite typically, your examination will yield vials of blood and urine samples, and depending on your age, you may be asked to submit to a variety of tests to determine your overall health. With high quality information, your internist should be well-positioned to accurately diagnose your health and develop a patient plan designed to put you on a happy trail of sustained good health.

There are several remarkable similarities in these professional experiences:

· The internist and the in-house counselor are highly trained and skilled subject matter experts in their respective fields.

· Most of us think that we can gain significant (cost-free) access to similar repositories of (reliable) subject matter expertise through online tools, such as AI-enabled search results.

· Most of us will only rely upon their expertise when there’s a developed relationship of trust.

· The advice of these experts is useless when the patient (client) ignores the expert’s advice.

· Most importantly, without an immersive experience – know your customer / know your patient – the subject matter expert is unable to do much more than offer generic advice. With live interaction and experience, including direct communication with the leadership team, board members, key personnel, investors and other important stakeholders, the General Counsel develops an authentic understanding of the business and legal requirements and gains an appreciation of the team’s goals, objectives and risk tolerance levels.

In short, if you want to gain useful insights from your internist or in-house counselor, you need to actively engage in a due diligence process which equips your specialist with the necessary information to accurately understand, diagnose and solve your problems. AI-generated answers may be available from an online solution provider, but without the active involvement of the medical or legal expert applying knowledge, skills and abilities to the specific situation, it’s very unlikely that the client (or patient) is doing much more than self-diagnosing the problem, while lacking the underlying knowledge, skills and abilities to appreciate the subtle nuances of the issues required to accurately diagnose and solve the problem.

In-house counselors require good communication and engagement about the business requirements and the goals, objectives and risk tolerances of its stakeholders. Without such information, it’s difficult to develop a strategic plan or offer proactive solutions. Active engagement in a thoughtful diligence process is a good means for optimally positioning your incoming GC/CLO with the right information to act proactively and strategically in furtherance of your organization’s best interests.

Developing and Using the Enterprise Health Checkup. Using a diligence checklist is a good means for gauging the health of an organization, and for incoming GC/CLOs, or similarly situated professionals, such as incoming members of the company’s board of directors, advisory board members, fractional and full-time professionals (attorneys, CPAs, etc.) and members of the leadership team, it offers a means for rapidly understanding and evaluating the key business challenges and opportunities.

An Operator’s Guide for Building the Legal Team (https://www.amazon.com/dp/B0D8PXX9HQ) offers a complete framework for a GC - or any other executive – to accelerate knowledge about a company as part of the onboarding process.

For a less complete, but nonetheless, useful diligence exercise, consider developing your own customized Enterprise Health Checklist to quickly understand the fundamental challenges and opportunities of the business. Bottom out the essential, such as:

· What can we expect from this business based upon its strategic plan?

· What type of growth might we anticipate, given its current operations, workforce, and markets?

· How do important data points, such as the company’s projected capital raising requirements, impact other operational issues?

· Do we have the right resources and people to realize our vision? If not, what types of activities, such as execution on the hiring plan or completion of one or more acquisitions, are necessary for closing these gaps and successfully executing the company’s business plan?

The Enterprise Health Checkup is a high-level inquiry. It is not going to answer every one of your questions. However, it will help you develop an initial picture and give you some basic insights about the goals, objectives and risk tolerances of the stakeholders. It is intended to start you on the discovery journey, accelerating your understanding of the business fundamentals. That enables you to take quicker, more complete ownership of your role and gives you accountability for your strategically important work for the business. Indeed, early- stage diligence into the workings of the business position leaders with the essentials for prioritizing activities, developing and controlling a budget, and driving successful outcomes.

Paid Content. In today’s Appendix, we offer an Enterprise Health Checkup Questionnaire to our paid subscribers. Every business is different, but you may find it helpful to customize it to the requirements of your business.

About the Author: Kevin R. Davis is a seasoned legal operator who focuses on developing and leading legal teams for equity sponsored businesses. A “serial” General Counsel for sponsored businesses, Kevin advises operators seeking to optimize their businesses, undergo transformations and manage liquidity events. Earlier in his career, Kevin worked as a corporate attorney with Kirkland & Ellis, LLP in Chicago, Illinois and as a legal executive with Publicis Groupe in Paris, France. Kevin is a graduate of Northwestern University’s Priztker School of Law.

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* This is one of a series of articles with tips for entrepreneurs, startups, VC and PE professionals and small-and-medium sized (SMID) business owners or operators aimed at helping them operate their businesses more effectively. Some articles reflect a partial adoption or extension of ideas discussed in greater detail of the author’s books, including Legal Disruptors: An Operator’s Guide for Optimizing Legal Services - Transforming Legal Services with Disruptive Delivery Systems and Technologies (https://www.amazon.com/dp/B0D5738PLY) and Legal Disruptors: An Operator’s Guide for Building the Legal Team - Transforming Your Company's Legal Services by Focusing on its Requirements (https://www.amazon.com/dp/B0D5683JLP).

Nothing contained in this article should be construed as legal advice. This article does not create an attorney-client relationship between any reader and its author. Neither the author nor the publisher is responsible for updating this publication to consider any changes in applicable laws. Nothing in this article is based upon the author or publisher’s experience with any specific individual or organization; any resemblance to actual persons, places, or events is purely coincidental. If legal advice or other professional assistance is required, the services of a competent professional should be sought.