Corporate governance, at its core, is about building systems that protect the integrity and longevity of an enterprise's operations. It involves hiring the right Chief Executive Officer (CEO), approving the company's budget, and making strategic plans. According to Mark Suster from Upfront Ventures, “Boards are fiduciaries to represent the interest of all shareholders — big and small — and this includes employees who bet with their careers and with reduced pay in order to have equity they hope will be valuable.”
The benefits of corporate governance are manifold. It not only reduces the risk of fraud but also improves company processes and performance. Moreover, it provides access to broader pools of external capital and offers the opportunity to learn from domain experts. At the heart of corporate governance is the relationship between the board of directors and the top management. The board is responsible for overseeing the company's overall direction and strategy, while management is responsible for executing this strategy and managing the company's day-to-day operations.
As a company grows, its governance structure must evolve to meet the changing needs and challenges. Initially, a startup might have a simple structure with a small board. However, as the company expands, it needs to develop a more sophisticated governance structure with committees focusing on different aspects of the business, such as audit, compensation, and nominations. The primary objectives of corporate governance are to ensure the accountability of individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. It is also aimed at promoting fairness, transparency, and accountability in a company's relationship with all its stakeholders.
Board of Directors
The board of directors is central to corporate governance. It is responsible for setting the company's strategic aims, providing the leadership to put them into effect, supervising the management of the business, and reporting to shareholders on their stewardship.
To enhance effectiveness and focus on specific issues, the board may establish committees with specific mandates, such as audit committees, remuneration committees, and nomination committees.
Corporate Policies and Procedures
These are the company's policies and procedures that relate to the governance framework and practices which the board and senior management establish. This includes codes of conduct, risk management policies, and internal controls.
One of the key components of corporate governance is the role of directors. Good directors focus on their primary responsibilities, which include hiring and compensating the right CEO and approving the budget and strategic plan. They create an environment where it is safe to share bad news and actively engage in problem-solving. Good directors also contribute significantly at least once or twice a year by bringing in a customer, recruitment, strategic partnerships, or new investors.
On the other hand, bad directors tend to micro-manage the CEO and think that their main job is to provide ideas. They often berate management for bad news, leading to a lack of transparency. Moreover, they are not actively involved and only show up for meetings.
As Sonali de Rycker from Accel puts it, “Part of being a sophisticated board member is seeing the potholes coming. You don’t take the steering wheel, but you point at the potholes that are coming.”
Responsibilities of Good Directors:
Strategic decisions form the backbone of corporate governance. These decisions guide the direction in which the company moves. Strategic decisions are decisions that are important, in terms of the actions taken, the resources committed, or the precedents set. They are integrated into the systematic process of corporate governance. It includes decisions regarding mergers and acquisitions, entering new markets, or launching new products. These decisions shape the course of the company and the board of directors plays a crucial role in making these strategic decisions and ensuring that they align with the company’s long-term goals.
In the early stages of a company, it is common for one person to hold both the CEO and Chair positions. However, as the company grows, it may become necessary to separate these roles. This separation is particularly beneficial when the company is performing poorly.
There are three typical approaches for separating these roles:
Corporate governance is not just about ticking boxes to appease investors; it is a critical component in building sustainable and successful businesses. By ensuring that the right systems are in place, that directors are actively engaged and focused on the right issues, and that strategic decisions are made with the long-term health of the company in mind, corporate governance can be a powerful tool for companies of all sizes.
Good governance is an ally to entrepreneurs. It helps them focus on the important day-to-day work with the correct checks and balances in place to enhance overall effectiveness. It’s about steering the ship in the right direction while being vigilant of the potholes ahead.
Whether you are an entrepreneur, an investor, or an employee, understanding the pillars of corporate governance is essential. It not only helps in making informed decisions but also contributes to the creation of value for all stakeholders involved. Embracing corporate governance serves as a guide to creating sustainable businesses that stand the test of time.