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Fighting the chaos of growth: 5 practices to improve corporate governance beyond the board

In today’s market, where there is greater investor scrutiny on profitability, processes, and protections, especially for companies that are well beyond their first product-market fit, in more than one market, holding licenses, or composed of several levels of management, corporate governance is front-and-centre in these considerations.

And while issues with corporate governance have been uncovered in venture-backed startups through fundraising due diligence (as they should be), the importance of corporate governance is not just “because the market climate demands it” or “without it, it’s difficult to fundraise.”

An organisation can’t run effectively beyond a certain scale without corporate governance. It also serves as a way to build trust with the organisation and the rest of the world. For example, for retail investors, knowing there is a reputable and trustworthy independent director on a public company’s board builds trust in potentially investing in that company. Corporate governance requirements are also typically sought after in applications for licenses and other government certifications.

While corporate governance is executed and handled primarily by the company’s board of directors (the formation of which over time is a topic on its own), the corporate governance issues boards have to deal with often stem from beyond the board of directors itself.

Five ways to develop a company’s corporate governance muscle

In this article are five key learnings on how to build a company’s corporate governance muscle and reduce “governance debt” early on in the life of the company, perhaps when it may not seem as much of a priority compared to finding product-market fit or raising money to keep things afloat for the next 18 months and beyond.

But it is clear that all these things — people, product, fundraising — are all related and, without processes, are ultimately a house of cards waiting to fall.

A robust finance function starts with the books

Sure, you need a finance function. But it’s important to know first what “being in charge of finance” means to the company and align the finance function development with this evolving definition. Early on, more than focusing on revenue and growth, being in charge of finance is more about having solid bookkeeping foundations.

Do you have competent bookkeeping capabilities/bookkeepers? Are you unknowingly making accounting assumptions? Rather than speed, bookkeeping should be optimised for the organisation.

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Then when it comes to growing the finance function over time, it is important to identify how the tasks are evolving vis-a-vis what the organisation needs — do they demand investing in world-class talent? Are there audit tasks that can be outsourced?

The ideal situation is one where you are able to bring in a finance professional early on to set the standards — a great example in this regard is Alibaba’s Joe Tsai, who was there from the beginning.

Governance lives and dies on data and reporting

Beyond bookkeeping and cash management owned by the finance function, it is important for the company to also build up a way to organise the ownership and communication of operating data and metrics across the business.

For example, Slack used its own product, integrating bots to shoot real-time data into channels as they were needed. Every company will organise that differently, but it’s important to figure out how real-time data can be made available to make decisions at all levels — where does each type of data come from? How is it delivered?

Tools and processes are one thing here, but it’s also important to have trust in the people tasked with their data ownership.

Manage reporting functions not as singular requirements or events but as a continuous process to reduce the burden on finance teams

The demands of reporting periods (e.g., financial audits, fundraising, budgeting) on finance teams are rigorous, and there is pressure to move quickly while at the same time not dropping the ball on any detail.

From a management perspective, it’s important not to forsake accuracy for speed and think about reporting not just as an “event” or “exercise” that needs to be achieved at certain points in the company’s calendar but as part of a larger, continuous process of data collection and documentation that occurs beyond reporting periods.

Doing it fast is great, but the price of mistakes cannot be traded for speed.

Retain problem-solving “scrappiness” to mature financial discipline

As the company grows, it will naturally have a higher volume of cash flow to manage (the health of this cash flow is another matter entirely), and having more money to manage naturally increases the temptation to just throw money at problems.

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A way companies have been able to stay disciplined in terms of spending is to “remain scrappy” in terms of their problem-solving mindset.

This sounds counterintuitive to maturing a company’s governance, but creativity in problem-solving as it relates to reducing burn ultimately makes an organisation more mature in the way it handles money.

Have “boards” and “watchmen” beyond the board of directors to diversify risk mitigation and governance capabilities

As the company grows, there are more sources of risk, and it can become increasingly challenging for a single group of people (board of directors) to exercise checks and balances. Companies nearing public markets debuts will often introduce sub-boards as working groups to deal with the robustness of internal controls, create an enterprise or operational waste management frameworks, serve as advisory boards for a specific market, or even facilitate succession planning.

For example, in the case of the Alibaba partnership, a working group outside of the board of directors ensures the health of the organisation’s mission, vision, and values through its leadership appointments. Apart from working groups within the organisation, companies will also engage with external auditors as they raise growth-stage rounds not just to qualify audited financial statements but also to do health checks on their organisation.

The ideal scenario is to leverage both internal and external “watchmen” to have more holistic visibility over potential risks. From the board of directors itself, risk mitigation is often done over time by building up the diversity of a board and engaging with experts across the various needs of the company.

Governance as a cyclical battle against chaos

While not an exhaustive list of practices, this list is built on three ideas about governance.

The first is that governance is often shaped by behaviours and decisions from day one — the decision on what assumptions to use when measuring product-market fit, the decision on whether to start spending more on a specific vendor or not and the decision on how data is reported to management.

The second is that governance is centred on de-risking an organisation as it grows. It is a battle against natural tendencies toward chaos (entropy, as it is called in physics).  This means that governance should be optimised to have visibility on these risks (e.g., audits, data collection, and reporting) and the capability to address these risks (e.g., diverse board of directors, solid mission, vision, and values).

The third is that, again, company growth is cyclical. Putting systems in place will not stop the emergence of risks and issues. Having one audited financial statement is not the end.

Companies already practice the items we have listed above and more, and yet these do not ensure 100 per cent protection against crises. In governance, the process and its continued practice matter more than any specific ends or results.

See the full article on Insignia Business Review with 7 practices for more robust corporate governance.

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