That'll Teach You

Ellen Carnahan

Principal, Machrie Enterprises LLC, a Chicago-based venture-capital company where she serves as a director of several technology companies. She also is a senior advisor to three venture-capital and private-equity funds: WMG Capital, Ceres Venture Fund and the I2A Fund.

The CHALLENGE:

Building consensus as an army of one to remove a renegade CEO
 

The STORY:

In 2000, Ellen Carnahan (BBA ACCT ’77) was co-manager and technology lead investor at William Blair Capital Partners in Chicago. The best venture capitalists, she explains, blend a unique set of skills: financial expertise to uncover hidden value in companies, diplomatic skills worthy of the State Department and, most of all, “the ability to trust your gut.”

That year, Carnahan joined the board of one of Blair’s investments, a technology company with bright prospects and great expectations for its CEO. Yet Carnahan smelled trouble at her first board meeting. “We had done our due diligence. We had just wired $12 million to the company. But at that meeting, the CEO stood up and announced he wanted to reverse the company’s strategy dramatically from what we had signed on to invest in,” she explained. “There was an immediate integrity issue.”

It wasn’t the only one.

Within weeks, Carnahan—the only woman on the company’s board—began
getting calls at home from two senior female executives complaining of sexual harassment from the CEO. “Here I was the newest face in the room, and already hearing from senior management that the CEO was allocating resources in ways we hadn’t planned. And now, on top of that, I have to bring a sexual-harassment claim to my peers.”

To say the least, Carnahan had to move very carefully. Initially, she was operating alone in a two-front war against the CEO. It was a long battle to get the entire board behind her—nearly two years from her first meeting to the day the CEO left. Carnahan was prepared for this. “Alliances can be a little different in venture capital, and that’s because you have investors on the board with different timing issues. You really have to build a consensus.”

Notably, one of her earliest supporters was a major California venture capitalist who helped recruit the CEO in 1998. But several local board members still wouldn’t budge. Carnahan would have to spend more than a year trying to convince the loyalists to approve the addition of two new outside directors to apply fresh eyes to the situation. “We were careful to recruit respected, local people—people the loyalists knew. But the new board members came back to us quickly and said, ‘Oh my God, you have a real problem with this guy.’ In the end, it really took a third party … and a lot of time.”

The LESSON:

Carnahan says the situation was an object lesson in patience. “It reinforced
the importance of trusting your gut and working through the collective group, even when you’re facing a lot of resistance.”