The term “governance” refers to the structures, rules, and processes through which companies pursue their objectives. It encompasses a variety of issues, ranging from shareholder rights to a company’s internal decision-making processes and control systems. “Governance for startups not only determines survival of companies, but also the success of them”, believes Michael Hilb, an Expert at Innosuisse and the CEO of the DBP Group. Ms. Poyni Bhatt, CEO of SINE IIT Bombay feels that “it sets a base for processes, culture and people within a startup”.
It is very important to define the profile of the board by identifying the types of directors needed in relation to the business goals. Startups should focus on finding the right balance between the executive directors (ones who also serve in the startup’s executive team) and the non-executive directors, whilst having independent directors to bring in an external perspective and ensure accountability and transparency.
Role of the board
The board plays a very important role in not just implementing governance processes but also serves a link between the investors and the entrepreneurs. It is always recommended to keep the board and the CEO as two separate roles as the main role of the board is oversight and planning. They are also responsible for ensuring that communication to and from different stakeholders is effective.
Why is it important? Examples of failures to implement it
Governance is relevant to startups/companies of any size or situation and in any market. In fact, a good governance model brings in multiple benefits. Two of the most significant benefits are process improvement and improved access to finance.
Governance allows startups/companies to define, develop and follow best practices that ensure the business activities are conducted effectively without adding unnecessary risks. Overtime, such a setup has improved the valuation of any company.
Investors (both equity and debt) consistently look for governance in startups, as it increases the company’s transparency and accountability to them as well as other stakeholders. For example, imbuing the business with good governance practices ‘derisks’ the entity and reduces if not completely removes any possibility of shareholder conflicts.
The most recent example of Wirecard, a German payment processor and financial services provider that is in the news these days has brought back the topic of governance to the forefront. WeWork, Theranos are very good examples of startups that grew at an unprecedented rate only to fall down due to lack of proper governance procedures.
The Flip side? Is it costly?
Right from the ideation stage, startups have a number of challenges in front of them. Product-Market fit, pivoting strategies, tangling with weekly sales targets, hiring the right fit, raising funds and much more. All of these are non-negotiable priorities. Governance adds processes that can potentially reduce the runway of a startup: one of the key metrics that determines how long a startup can afford to remain in business. It also removes fluidity from a startup as it adds structure to the day to day activities, thereby, slowing down the malleability of any startup. These two components are very important to any company and their importance increases in startups. Implementing governance definitely feels like a double edged sword.
It is important to see governance as an investment rather than as a cost, says Michael Hilb. He believes that whilst governance may reduce the runway in the short term, its benefits will be felt in the long run for any startup. The key is to add governance practices at the right time to extract maximum value out of it.