There is a considerable amount of writing dedicated to corporate governance for public companies; however, there is substantially less dedicated to governance for private corporations considering the number of Canadian-controlled private corporations dwarf the number of public corporations in Canada traded on its various stock exchanges.
The entrepreneurs that start businesses in Canada are often mystified by the amount of jargon and best practices thrown at them under the guise of “corporate governance”. In this article I will attempt to give the reader five suggestions that should be implemented if the founder of a tech growth company desires to scale and succeed.
To quote Richard Leblanc, a York University Professor, “how a company is governed influences rights and relationships among organizational stakeholders, and ultimately how an organization is managed, and whether it succeeds or fails. Companies do not fail: boards do.” Or to paraphrase for a new entrepreneur, this structure gives investors, acquirers and other stakeholders the confidence that your company is well managed.
It is just not good enough for an entrepreneur to have an idea. They must develop a strategy and it is a board member’s responsibility to ensure that the strategic direction is set. When there is a pivot from that strategy, there are good fundamental and business reasons for doing so. Although you will hear me say “strategy without passion or vision is useless,” it is incumbent on a board to understand and measure a company’s performance against the agreed strategy. In the early stages of a company, this process is fluid; however, an investor will be motivated when they see achievement against those strategic goals.
In March 2014, BDC discovered, through their extensive research into small business governance in Canada, that only 6 per cent of Canadian companies have advisory boards. In addition, 76 per cent of companies had neither advisory boards nor boards of directors. Notwithstanding, where either advisory or corporate boards existed, gross revenue was 24 per cent higher and productivity was 18 per cent higher than those companies without boards. It can be concluded that private companies in Canada benefit from stronger corporate governance.
There are a number of relationships where there is a misalignment or imbalance of skills and experience that a founder will face in starting a business that will include accessing venture capital to being acquired. Putting in place sound governance structures will assist the entrepreneur, evening the playing field.
Although access to capital, talent, partners, and customers are an entrepreneur’s most important considerations, having a strong corporate structure ensures confidence in management’s ability to succeed. The following recommendations are the “low-hanging fruit” to enable the CEO of a growth company to implement several governance structures without getting overly complicated.
1. Create an advisory board early in the company’s growth cycle and set up a board structure just before the company raises a professional investment round
When creating an advisory board, you are hoping to recruit significant resources who provide support, knowledge, and access to unique professional networks. When raising a professional investment round, governance, and board seats can be skewed. Not all board members have the same interest. For example, after a professional round it is often seen that an investor will sit on the board; however, their interests is more so prioritized on increasing capital, and eventually having a big payout, which is not always conducive with what’s best for the company. An advisory board is a great sounding board for your strategy and business plan.
2. Appoint a Non-Executive Chair or Lead Director to lead the governance structure
Having a Lead Director or Non-Executive-Chairperson is a key criteria for a company’s governance structure. The Chairperson will be a mentor for the CEO, they provide guidance, structure, and support to the CEO. Not only is the Lead Director a mentor to the CEO, but he is also a spokesperson for the board, weather it is an Advisory or Corporate Board. They collect input from the board and from the senior management team for the CEO’s annual review, reports any relevant feedback to the CEO. Hosts an executive session without management at the end of the meeting in order to gather feedback, and creates and runs the agenda of the board meeting. A Non-Executive Chair by enlarge allows the CEO to run the company and the Chair to manage the affairs of the board.
3. Structure the board of the company for the size you want to grow to, i.e. audit, compensation, risk and governance committees.
In order to ensure a solid governance practice in the future, different committees must be established early-on in its stages in order for the committees to grow with the company. The objective is to allow the committees to function efficiently, all members to participate, and an appropriate level of diversity of experience and knowledge that provide oversight to the company.
4. Ensure the company uses a skills-based criteria to select board members
It is important for your board to have a diverse skill base. Constructing a quality board is about the calibre and perspective of individual directors chosen as well as the deliberate creation of a dynamic, and a chemistry that allow for the effective execution of corporate governance and strategic oversight. Building a skills matrix that is overlaid on management and board positions ensures the company has the necessary skills to scale, acquire clients, and manage its affairs.
5. Regularly communicate with shareholders through quarterly newsletter, AGM, etc.
Communication between shareholder and directors is strongly beneficial for both parties. Directors will benefit from hearing factual views from shareholders. Investors will benefit from hearing the board’s philosophy and perspective related to certain governance and strategic issues, in turn justifying the board’s decisions and actions.
Private corporations, such as Spartan Bioscience of Ottawa, have demonstrated that good governance practices – regular shareholder communication and appointment of a non-executive Chair have contributed in this year’s strategic investment from Canon USA. “Good governance provides checks and balances for private companies. It’s especially important for startups where experienced Board members can help young entrepreneurs avoid mistakes and capitalize on opportunities,” said Paul Lem, M.D., CEO, Spartan Bioscience Inc.
“We believe good corporate governance is an essential foundation for strong performance and fundamental to our success. It provides proper oversight and accountability, strengthens internal and external relationships, builds trust with our stakeholders and promotes the long-term interests of shareholders,” said the Leading Canadian Bank Management Circular. This is as true today for private corporations accessing capital as it is for the largest public corporations.
Governance is not meant to thwart innovation, but to allow it to thrive in an environment of trust and communication based on the strategic direction of the company.
Written by Gerard Buckley with Harlen Suslik.