Tabled : Start-up firms and corporate governance

The New Zealand economy has slowed. Much of the blame is placed on macro-economic factors and the volatility of international markets; sort of fatalistic conclusion that militates against the rugged self-reliance and innovative capability for which Kiwis are renowned. Indeed, in New Zealand the entrepreneurial paradigm flourishes through an inner motivation accompanied by strong belief that “I can make difference” to circumstances and to environment.
Does good governance have part to play in assisting entrepreneurial activity in the New Zealand economy? Can governance principles be applied to start-up and entrepreneurial enterprises carte blanche or must they be adapted?
Schumpeter, the famous European economist, argued for economic growth through the development of new entrepreneurial capital. He advocated process of ‘creative destruction’ whereby new firms would eventually replace old and moribund ones. Revitalisation of the economic landscape over time was therefore predicated on providing fertile conditions for firm start-up as way of ensuring that enterprises remain healthy, relevant and growing.
New Zealand has stock of more than 460,000 enterprises, number that has been steadily increasing over time. Growth in numbers has recently been around two percent per annum, however examination of this trend indicates high rate of churn. Data released by Statistics New Zealand in March shows high number of enterprise births (60,440) and deaths (54,410). Examination of the longitudinal data shows peak of births in 2004, which is now steadily falling and rising trend in deaths from low in 2003. If these trends continue then New Zealand business deaths will exceed births in the next year.
So what about Schumpeter’s creative destruction? It seems that in New Zealand we have the numbers, but we could improve the quality. The high rate of new venture births and deaths provides the potential for invigoration. How can we move from activity at the edges to economic significance? Perhaps governance has role to play.
Most governance research has focused on the larger enterprise where the distinctives of governance are plainly in view. There is separation of ownership and control, shareholders appoint board to look after their interests, the roles of governance are defined and the focus of governance is clear with activities targeted at both compliance and strategy. The overall and underlying objective is to maximise returns to the owners of the enterprise. For publicly traded stocks there are annual reporting requirements that thrust governance into the public square for scrutiny.
Many of these conditions do not apply to start-ups. There is often no separation of ownership and control as the owners often operate the enterprise. The activity of governance, where it exists, is therefore undefined and there is an overlap between ownership and operational concerns. Compliance activities may well be ad hoc and strategy unclear. Even the goal of maximising returns to the owner is modified by the non-monetary benefits that ownership can provide.
If the start-up survives and grows it is expected that more formal and visible governance arrangements will, at some point, need to be instituted. For example, the need for board may arise out of the need for external finance. Alternatively it is often argued that many businesses outgrow their entrepreneurs and require access to broader base of talent, advice, and networks to buttress continued development.
These kinds of generalisations may be true of new venture start-ups in general, but may mask the benefits obtained by the few who incorporate good governance practices from the very genesis of the business.
What about start-ups in New Zealand? There is very little known on the subject of governance in Kiwi start-ups. It is interesting to note that most business planning templates do not include section on governance. fairly typical example is published by New Zealand Trade and Enterprise and titled “Determine Whether Your Business Idea Will Work”. It has excellent advice on many areas of start-up, but virtually nothing about governance. Is this an unintentional gap that needs addressing?
The sheer numbers of new start-ups and their potential economic impact provides urgency to the need for more study of the factors that lead to their success. Do governance practices have role to play? Do normative governance practices need to be reconsidered in the light of the significant differences that new ventures exhibit when compared to large organisations? At present we simply do not know.

David Tweed is senior lecturer in the Department of Management at Massey University. He is also research associate of the New Zealand Centre for SME Research.

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