Corporate governance concepts are crucial for the long-term success of a business. Listed companies (e.g. those with listed debt or equity instruments) are even required by most regulatory bodies to adopt a code of governance that complies with the minimum requirements of the listing country. This just highlights how important corporate governance is.
While it sounds intimidating, governance per se simply means establishing and maintaining a set of systems or processes to direct and control the business.
Board of directors
The typical governance concepts heavily focus on the role of the board of directors. These people are typically referred to as those charged with governance in most professional texts.
The board of directors, in their capacity as those charged with governance, represents the interest of the shareholders of the company in the business. This mechanism provides a check-and-balance between the management (i.e. c-suite and below) and the shareholders (as represented by the board of directors).
The startup scene
Most startups are initially structured with peers working together to develop a product and do not necessarily involve external parties. Although there are several companies that are externally funded (e.g. through venture capitals or angel investors), these only represent a small portion of the startup population.
Startups that do not have a formal board structure and established practices in good governance are at risk of failing. Several startup postmortem reports show that around nine out of 10 startups fail for various reasons.
Good governance
Before I go further into discussing the bridging mechanism that startup founders can adopt, it would be good if I discuss first what good governance actually means. The UK Corporate Governance Code, as published by the Financial Reporting Council, indicates the following underlying principles of good governance:
- Accountability
- Transparency
- Probity
- Focus on sustainable success
Accountability refers to the board’s overall responsibility on the nature and extent of risks taken by the company to achieve its strategic objectives.
Transparency refers to the full disclosure of potential conflicts of interest between the board and the company. It also applies to the decision-making process of the board.
Setting the tone at the top should not be just on the management level; probity and ethics should be the driving force that the board of directors should represent.
And lastly, sustainable success provides the big picture of corporate governance. Governance at its best is not about taking excessive risks (even to the extent of fraud) but making sure that the business can continue long-term.
Bridging the gap
The lack of a formal board structure presents a unique challenge for startups. I’ll talk about governance here in two parts. The first one will be on the governance role of the founders themselves and the second part will be about governance role of external parties.
Internal mechanisms
Governance mechanisms for startups begin with establishing a system to ensure trust and confidence that the founders do their fair share of work. This is the foundation for the owner-founder structure; a breach of trust can mean the collapse of the business itself.
The process of establishing governance mechanisms is usually waived due to strong relationships among the founders. But failing to draw a clear line between work and personal relationships can cause future misunderstandings within the founding group.
Implementing internal governance involves at least a clear delineation of the following:
- Individual roles and responsibilities of founders
- Scope of work
- Payment schemes for founders and employees
- Agreement on crucial business processes (e.g. recruitment, procurement, and business development)
Establishing a clear governance policy upfront might sound a bit uptight. But making sure that business relationships are well–managed provides a solid ground a sustainable business.
External mechanisms
The expansion of the startup community has established a strong network of mentors and founders. These support groups help most new founders and entrepreneurs in navigating the business landscape.
While most of the businesses do not have the support of an incubator to help them learn how to manage their businesses, a lot of founders owe their success to a mentor. Richard Bransonis an example. When he was launching Virgin Atlantic, Sir Freddie Laker served as his mentor in gaining experience in the aviation industry.
Source: Tech in Asia