This is part 1 of a two-part series on how startups can set up their governance structure. For part 2 of this series, head on over here.
Most early and growth stage company founders that had the opportunity to attend one of my presentations will have heard my analogy of a CEO or founder “driving the bus.” Today’s blog is another such article where I continue to empower CEOs of early and growth stage companies to be in control of their own destiny and therefore be driving the bus (their company) on the path to success.
Too often I hear CEOs complain of the divisiveness in their boardroom or even worse, their board members focused on counting pencils (a euphemism for micromanaging the finances of the business). I always like to quote David Beatty a University of Toronto governance professor that I attended classes with. A board member’s role should be “noses in and fingers out” and with regards to strategy, it is the board’s role to “hold the CEO’s feet to the fire,” ensuring the CEO is meeting the performance metrics and pursuing the strategic direction set for the company by the management team with board approval.
Outside of the legal requirements of a board under statute, the board of directors’ most important role to a company is its unwavering focus on the strategy of the company and its assessment of the success in the founder and CEO pursuing activities that contribute to its strategic direction.
The Achilles’ heel of governance for a founder is that its value is often discovered too late. I like to refer to this as an opportunity loss. Anecdotal research has shown that a well-governed and managed company receives a higher multiple in an acquisition or a higher price in an IPO. Corporate governance assists companies to develop efficient management structure and decision-making processes making them more transparent and objective. This gives shareholders and would-be investors a sense that the company is aligned with its investors and that the management team feels a degree of accountability for the company’s performance.
In my last blog, I forecasted that one of the unintended consequences of the introduction of equity-based crowdfunding would be the increase and introduction of stronger governance for early and growth stage companies. As the public is brought into this ecosystem, as investors there will be ever increasing pressure on companies to be more transparent.
Some best governance practices for early stage companies.
- Form a structured advisory board early. This can often become a proxy for a future board of directors.
- Create a formal board of directors when the complexities of the decision-making process grow beyond the capabilities of day-to-day management. I like to advocate this should occur prior to raising your first round of non-family, friends and business associates’ financing. The founder needs to both understand this process and have ideas of its formation before professional investors asks for either a board seat or board observer status.
- Select a non-executive chairperson or lead director to lead and manage your board of directors. This does two things. First, it allows the CEO and founder the freedom to focus on the business; and second, it allows the board lead director to focus on the governance of the company and manage the directors of the company. Of course, this can only be achieved when there is a strong working relationship between the CEO and lead director. In Canada, this separation of duties is becoming the norm for public companies.
- Establish committees such as audit, compensation, risk and governance early in the company’s life to demonstrate the company’s alignment with shareholders.
- Have an off-site board retreat annually where the focus is on the forward direction of the company.
- Ensure you select a majority of independent directors. Through the process of creating a board mandate, the company can ensure the roles and responsibilities of directors are outlined and agreed upon. This gives the lead director a platform from which to manage board meetings.
- Ensuring you have a strategy of investor relations creates communication with shareholders and gives them confidence in your ability to execute on a plan through your information disclosure.
- The lead director should evaluate the board’s performance annually, completing 360 reviews, and a senior independent director should evaluate the lead director’s performance.
- Strong board policies with regards to conflict of interest and code of conduct should be put in place as a guide on a director’s execution of their duties as a board member that clearly show the best interest of the corporation is front and centre.
- With regards to compensation, I believe paying a board member with stock options ensures accountability and alignment with the goals and objectives of the company. To quote my good friend John Huston of Ohio Tech Angels: “If you pay peanuts you will get monkeys.”
- Ensure you are able to afford and put in place directors’ and officers’ insurance. Without it you will not be able to attract quality directors.