How to Assess Integrity
Should Sequoia - or any other elite venture capitalist - worry about a founder who can't shake that old Sammy Hagar song "I Can't Drive 55"? Harvard business school professor Aiyesha Dey and I recently had an illuminating conversation on this topic, and her insights may surprise you. Dey's research suggests that an individual's lifestyle behaviors outside of the office can offer important tell-tale clues for their potential behavior within the work environment as well. This can be of great significance to investors who may be considering a new venture investment, or corporate boards on the verge of announcing a new CEO appointment.
Leaders who disrespect societal rules (like speed limits) tend to be more prone to other, more serious ethical meltdowns, such as fraud or malfeasance. Worse, speeding isn't the only warning sign. Investors and board members should pay close attention to the lifestyle habits of top prospects before green-lighting a major hiring or investment decision. Does the founder have a lavish lifestyle that seems incongruous with his or her peer group? Does the modest-salaried CEO candidate have a house that looks like it was shown on Million Dollar Listing? These should all be considered red flags and serious warning signs.
When I pressed Professor Dey on this topic - suggesting that we all succumb to the heavy foot syndrome once in a while, especially when we are late to an important appointment - she stuck to the data. Her large sample size and statistics clearly convinced her that leaders willing to break rules in one context were more prone to skirt ethical regulations and cultural norms in business situations, too. Many venture investors have learned this lesson the hard way. The legendary Sequoia investor Alfred Lin was a huge supporter of - and early investor in - the highflying but now bankrupt crypto firm FTX. Lin recently commented in the New York Times, regarding the founder he backed (Sam Bankman-Fried who is now charged with fraud), "It's not that we made the investment, it's the year-and-a-half working relationship afterwards that I still didn't see it," he said. "That is difficult." What is the lesson here? Silicon Valley firms will undoubtedly still expect a little swagger among entrepreneurs - after all it takes confidence to implement a bold vision and create a unicorn company out of thin air. However, investors are thinking and looking twice before writing big checks. Above and beyond sizing up the market opportunity, investors are digging beneath the surface to better understand a founder's character, core values, and personal integrity. How will she be likely to act when venturing into nebulous shades of grey, an inevitability in today's volatile and unpredictable world? One false move can cause irreparable harm.
Here's the key lesson that venture investors have learned: confidence isn't the same thing as competence, and it certainly doesn't always correlate to integrity. In fact, sometimes confidence can be misleading. Charismatic founders who lack sound judgment, for example, will inevitably make bad decisions and lead the entire organization down the wrong strategic path. Worse, the founder won't recognize or admit to his mistake and will keep evangelizing and inspiring everyone toward the wrong goalposts, right up until they score in the wrong end zone. Low integrity mixed with poor judgment is a lethal cocktail for investors.
With all of this to consider, how exactly should key decision makers - top venture capitalists and corporate boards - assess integrity and character ex-ante, before pulling the trigger on a new investment or before hiring a new CEO? Professor Dey was (partly) correct. External clues like speeding tickets or lavish spending habits can be helpful. But these clues are just one data point. Savvy organizations - like one of the world's best private equity firms, Partners Group - are far more meticulous. They hunt down multiple, mutually reinforcing data points that in aggregate paint the whole picture of a candidate. As with the master pointillist Georges Seurat's work, the image can't be fully appreciated until the artist includes enough data points on the canvas.
In my work with corporate boards and private investors, I recommend they conduct case-based assessments, kind of like the ones they use at top business schools, which allow the company to see how prospects react in real time to challenging but unfamiliar circumstances. These situations require sound judgment, empathy, and ethical awareness.
Although case studies won't guarantee integrity, they will help illuminate whether the candidate understands subtle ethical nuances when there are shades of grey embedded in key decisions. Specifically, these case studies (during which specific questions are asked about past experiences and lessons learned), combined with a thorough past behavioral interview and 360-referencing, provide the complete picture.
Thrown into stark relief during this assessment process will be the candidate's sense of self-awareness and good judgment. Do they make well-informed decisions? Do they know their weaknesses? Are they able to articulate their leadership style, core values, and most importantly their insecurities and anxieties, like a lack of impulse control? After all, there is no such thing as a perfect leader.
Again, there's no way for any company to guarantee the integrity of a candidate. Some residual risk remains in every big hire or investment decision. However, this multi-data-point assessment process is still significantly better than the alternative: being wowed by a confident, charismatic, slick entrepreneur with "all the answers" during an investor pitch or board presentation, who ultimately may be following the same path as Sam Bankman Fried, or countless other entrepreneurs who were hailed as visionaries - right up until the moment they weren't.
Going full circle, I can't help but wonder: did Sam Bankman-Fried have any speeding tickets before he wrangled a big check out of Sequoia?