Governance is an essential element of business success - especially in early-stage startups. Newborn companies are usually in the most in need of the support structure that a small, fit-for-purpose board provides. The earlier that board is put in place, the better it should be for the founders and for the company.
Lead presenter on Boardpro's recent startup governance webinar, Debra Hall reflected on her own experience of starting a business, some 30 years ago.
“It was hard, and honestly, I wish I’d known what I know today. I had no experience at all of owning or managing a business - had never really known a business owner – so it was first principles all the way. It didn’t occur to me to recruit a board, or even surround myself with a bevy of trusted advisers. I relied totally on my husband for support – and he was great – but looking back, a good board might have enabled us to grow faster, and to do more. In particular, a good board would have encouraged me to hand over the management reins well before I actually did, leaving me free to do the 'rainmaking' without being wrapped up in the day-to-day minutiae of the business – that I was seriously bad at!”
But not all directors are a good fit for start-up businesses. Startup directors are a special breed. They generally have a much higher risk appetite than your average corporate director, and the courage to act on what is sometimes scant information. Moving the company forward requires decisiveness, and the willingness to pivot on a penny if need be. Being willing to admit you were wrong, and having a plan B, plan C and more is all part of the essential toolkit.
For the entrepreneur, bringing these ‘strangers’ into the inner circle of your business, taking shared responsibility for the company itself, is also a step not to be taken lightly. The company’s first directors will inevitable make or break the business – and getting rid of the wrong people is perhaps even harder than getting rid of a bad employee hire. Debra says “I encourage founders to do at least as much due diligence on potential directors as we investors do on the founders and the company – you’re going to be stuck with these people, and if you’re CEO, actually reporting to them!”
When it works, the company flies – and that’s why early stage directors do what they do. The financial rewards are negligible (unless you manage to grow a unicorn), but the emotional rewards of seeing the next generation of businesses grow, under your stewardship, are without equal.
A governance board is different from an advisory board. A company can have one or the other or even both, depending on its sector, age and stage. The most fundamental difference is this:
Company management reports to the governance board, where as an Advisory board reports to company management (or sometimes, the governance board).
The value of governance
Governance provides a framework of guides and guard rails within which the business grows. The board adds a wide range of perspectives on how to grow a business, and in particular, this business – enabling founders and management to get on with doing it, without the full burden of sole founder responsibility for every decision made.
A good board looks to the future, ensuring that the focus remains on the longer term strategy, balancing immediate needs of revenue with longer term needs of building enterprise value.
Governance boards comprise “directors”, who are legally responsible for the ongoing health and compliance of the business. The board delegates the operational functions of the business to management, ideally under a formal ‘delegations policy’, that identifies what decisions rest with management, and what needs board approval.
The roles of management, advisers and directors overlap, and ideally all three groups are aligned to focus on growing the business, and achieving its success.