Governance from the start (up): Why corporate governance should be a priority, rather than an afterthought

By Ben Nowlan, CEO — Shaparency.com

Ben is a serial entrepreneur, a transformational business leader with over 15 years experience with his own ventures and as senior executive in global firms. Ben is passionate about technology in the age of disruption, bringing a wealth of experience, innovation, vision, leadership, and entrepreneurship. Ben was co-founder and CEO of Sherpa, Australia’s leading logistics technology business to which he partially exited in 2018. Applying discipline as well as a scalable commercial framework within an agile, fail fast mindset has helped Ben transform companies and grow multi million pound businesses.

We know — it’s exciting and overwhelming to launch a business. After all the initial fear that many CEOs and entrepreneurs have, there is a lot to think about to make sure that this idea is not just an idea — but a successful venture. There are a lot of issues to consider to get from idea to success — what legal framework will we use, have we done the market research to make sure our product is getting to the right people, so we have the right execution strategy in place for launch, and how are we approaching fundraising — are some that come to mind.

“It’s important for early-stage companies, especially innovative ones with exponential growth and market disruption potential, to be proactive about governance by ensuring a strong board is in place before periods of growth and important inflection points occur.” — Center for Financial Inclusion

While all important, this cannot be the only focus of getting off the ground. Getting a corporate governance structure in place needs to also be on the “get it done early” list. Sure, it’s not as sexy or thrilling as fundraising, and it may not be as tangible as seeing your product hit the market, but it is one of the most important things a business can do to help ensure long-term success.

Corporate governance is about enabling organisations to achieve their goals, control risks and assuring compliance. Good corporate governanceincorporates a set of rules that define the relationship between stakeholders, management and the board of directors of a company and influence how the company is operating. Corporate governance is about making your business work better while abiding by the rules. The most basic function of corporate governance is to see that a business strategy is made effective by the company’s executives and workers.

Corporate governance impacts all aspects of an organisation, from communication to leadership and strategic decision-making, but it primarily involves the board of directors, how the board conducts itself and how it governs the company. It is the board of directors that is the principal agent for corporate governance: The board is given a mission by shareholders, translates that mission into specific elements of strategy, and then provides direction for the management, which makes it all happen.

Bad things happen when corporate governance is ignored. Most examples of good corporate governance have something in common, too: they’re built on a foundation of transparency, accountability and trust. They have immense value, whether a business is family-run, a nonprofit or a publicly-traded company. The annual Edelman Trust Barometer, a global survey that measures consumers’ trust in business, the media, the government and non-governmental organisations, found that trust in all four is down for the first time in 17 years. Governance will help reestablish trust across the board.That’s one of the reasons why corporate governance is top of mind for so many business professionals. Above all, the role of corporate governance in modern organisations is to demonstrate these key principles to shareholders, stakeholders and the public.

While it may seem like something that can be setup as an afterthought, companies are in a far better position when they get a governance structure established from the beginning. This paper explores why that is the case.

“Governance and leadership are the yin and the yang of successful organisations.” — Mark Goyder (Director of Tomorrow’s Company)

Here are reasons why you should care about corporate governance from the beginning:

Businesses scrambling to get governance structures in place when they are in the midst of a problem are already too late. Here’s why companies should set up governance at the beginning:

It establishes processes and mitigates risk. One of the hallmark lines of a startup is “we are nimble and have flexible teams.” While organisations may need to pivot and make decisions on the fly as they establish their footing and get into a groove — especially at the beginning — it is important for companies to establish processes from the beginning. Processes can refer to a variety of situations across a company — from hiring to accounting to firing — having a set process allows a company to see what works and what doesn’t. Additionally, repeatability and consistency quickly highlight non-conformities in the processes, and make it easier to institute needed changes. Companies will also find themselves in fewer ‘fire-fighting’ scenarios, and operations are either ‘conform’ or ‘non-conform.’

Additionally, an effective corporate governance framework helps to mitigate risks, providing shareholders in non-listed companies with the comfort that although their exits may be difficult, their interests will be safeguarded by the board and management. A good governance framework will also induce reflection on exit strategies, giving additional comfort to prospective shareholders deciding whether to invest in the company.

Reduces costs. When you launch a company, one of the key considerations is keeping costs low in order to maximise profits and show a high return for those initial investors. Governance structures keep costs low. Think about how much it takes to onboard a person. According to a study by the Society for Human Resource Management states that the average cost to hire an employee is $4,129, with around 42 days to fill a position. That is an incredible sum of money for a startup to invest in an employee, and it will be exponentially more if there are no processes in place for hiring. And that’s just one expense businesses have to incur. If companies wait to establish governance frameworks and processes, then there is an increased likelihood that they will take an action — make a mistake — have to pay in some capacity to fix the mistake — and do it all again. Repeatability and consistency eliminate waste from scrap, rework and other costly inefficiencies.

The Financial Times writes, “Good corporate governance is a competitive advantage.”

Creates a better culture from the get-go. The credibility of CEOs is at an all-time low, with 63 percent of Edelman survey respondents saying CEOs are somewhat credible or not credible at all. Corporate governance plays a role in this number. Corporate governance shapes a company’s culture, which, in turn, shapes the way an organisation’s leaders lead, the way its workers work and how customers perceive the businesses with which they choose to engage.

Consistently good governance as an input at all levels creates as an output a culture of excellence. Those that ‘swim against the tide’ stand out against the ‘blueprint’ or ‘DNA’ of the organisation. The leadership’s behaviour defines the behaviour of the workforce, and it becomes far easier in such circumstances to fit in with the defined culture. Because corporate boards are linked to company leadership, the more involved boards become in corporate governance, the more they influence company culture — and vice versa.

A positive culture will also result in higher staff retention (and thus, less of a need to onboard new people and take on new costs…). This should be expected, especially from senior staff, when the company has a well-defined and communicated vision and direction. A focus on the company’s core business will also make it easier to penetrate the market and attract the interest of shareholders. Additionally, millennials — now the largest single group on the labour market in many countries — tend to rank an organisation’s commitment to responsible business practices highly in their employment choices.

Enhances brand reputation. According to the Edelman survey, just 52 percent of respondents to the survey said they trust business to do what is right. This number is important, as the reputation of a company can make or break it in the market. Companies who have established governance practice have a higher likelihood of being on the right side of these numbers. Good governance delivers good products, which, in turn, lead to good business performance.

Additionally, we are living in a world where the reputation of a company has the potential to go viral — from a public employee complaint to a negative tweet — all companies are at risk of having to answer to the public at large. By establishing strong governance from the beginning and establishing processes to better the company, you lower the risk of becoming public enemy number one.

Transparency. Transparency in a company’s internal policies, control mechanisms and how it deals with its suppliers, vendors, media, staff and government bodies will boost its reputation and thus its brand value.

All organisations have issues, problems and nonconformities, which is why transparency is a critical component of corporate governance. It ensures that all of a company’s actions can be checked at any given time by an outside observer. This makes its processes and transactions verifiable, so if a question does come up about a step, the company can provide a clear answer. And companies who have a history of transparency are more likely than not to stick with a company, even when mistakes are made. In fact, according to Sprout Social, 85% of consumers are likely to stick with a business during a brand crisis if it has a history of being transparent.

An organisation with good governance can isolate issues and reduce the impact on the market and very often contain the risk internally. Also — making corporate governance framework public enhances trust among the public, which, as we have stated — is one of the key reasons to establish governance early.

Financial stability. A company’s corporate governance is important to investors since it shows a company’s direction and business integrity. As a result, corporate governance helps promote financial viability by creating a long-term investment opportunity for market participants. Good governance reduces the threat of safety, legal, performance and warranty concerns that can severely impact an organisation and its stakeholders and/or interested parties.

Finally, an increase in confidence by investors and banks in the company due to robust financial management reporting will not only improve access to capital, but also minimise both cost of capital and cost of equity, resulting in an optimised capital flow. Deciding on an appropriate capital structure is thus a key element of good corporate governance. Transparency, especially regarding everything of interest to investors, will command a lower risk premium, therefore lowering the cost of capital and equity.

What if you ignore corporate governance?

None of this is to say that if you don’t establish governance from the beginning then your business will fail — but if you do establish governance, you are better set up for success.

A lack of corporate governance can lead to profit loss, corruption and a tarnished image to the company. This form of corporate governance management is also designed to limit risk and eliminate corrosive elements within an organization.

So yes — there is a lot to think about when launching your new venture — but setting up a governance structure from the beginning will help get you past launch. It will help establish you as a serious business, and help you retain talent. Governance may be a bit boring, but it is one of the most important processes you will implement as a leader.