As organisations evolve through their life cycle they have differing governance requirements. board should be structured to reflect competencies required by the company’s strategic circumstances. The challenge of governance in start-ups is to balance the demands for effective governance with the challenges of high growth. This balance is achievable if the board avoids focus solely on the owners’ entrepreneurship, which can lead to single director having too great an influence.
This requires developing an entrepreneurial board with accountability and controls that foster “corporate entrepreneurship”. For start-ups this is most important if the Icarus paradox – the tendency to “crash and burn” – is to be resolved. CEO-entrepreneurs who understand the value of strong and effective board with the requisite characteristics for meeting the particular challenges of their life cycle will be better placed to utilise their board’s strength in ensuring that the company evolves into stable, high-performing enterprise.
In local study the type of governance prevalent in established companies was compared with that of start-ups to determine if there are significant differences in the way they are governed that may suggest basis for effective governance during the start-up phase and how this might link with organisational performance.
The research focused on three key areas of governance: the board’s role in strategy; its level of influence and control in the decisions and activities of the enterprise; and the composition of the board in building capability to meet the strategic requirements of the enterprise.
The board’s role in strategy
Boards of established companies focus more on setting the strategic framework and then assisting management with strategy formulation whilst maintaining separation between management and governance. Start-ups follow similar procedure, but appear to be more focused on the outcome. They are concerned more with the content of the strategy and are active in the strategy process. Directors on these boards typically take more hands-on role. This is consistent with the directors of start-up generally being equity holders who will also have direct impact on critical decision making which may include aspects of day-to-day management.
The board’s influence and control
Unsurprisingly, both start-ups and established companies regard tasks impacting on organisational performance as very important, especially growing shareholder value and ensuring corporate survival. While established companies reportedly attach greater importance than start-ups to their relationships with their main stakeholders and their public image, as is consistent with dispersed shareholding and focus on accountability, compliance, risk management and market reporting, start-ups tend to place relatively higher value than established companies on monitoring the strategic health of the business. This is consistent with the more precarious stage in the life cycle of the business in the start-up phase.
Established companies reportedly also have relatively more influence than start-ups over these accountability, compliance and market-related relationships, which is consistent with the maturity of their organisation. By comparison, start-ups appear to have relatively greater influence than established companies over the appointment and remuneration of directors, company profitability and shareholder value, which reflects the types of issues they face during development. This may also reflect start-up directors’ direct involvement in decision making which impacts on both board composition and value creation.
Board composition
Established companies see new directors as bringing industry knowledge as well as their reputation in business and industry to the company. Most of the factors that influence established companies in the selection of non-executive directors are external to the organisation and are consistent with the role of the board in this type of enterprise as being primarily associated with accountability and oversight. Their approach could be summarised as “what the candidate brings to the company”.
The criteria used by start-ups, on the other hand, could be encapsulated as “what the candidate can do for the start-up”. The data showed that for start-ups the ability of director to bring contacts, key networks and capital to the business is paramount. The importance of other criteria such as strategic capability, expertise in areas of interest to the business and understanding the business’ risks are also indicative of the desire to use the director as resource for the firm. These factors centre more on how directors can have direct impact on the business.
For start-ups the board is seen as resource pool and think-tank with specialist skills that are directly applied to the business issues at hand, with less emphasis on compliance but concern for mitigation of current risks, particularly that of failure. goal of many entrepreneurs may be to create large multinational organisation, whilst others might aim to sell down, float as public offering, or exit in trade sale to realise the value of their investment. Thus the governance of start-ups reflects the emerging needs of the organisation at crucial stage of its development.
Coral Ingley is associate professor, AUT University.
Kevin McCaffrey is director, Effective Governance.
