The collapse of cryptocurrency exchange FTX and Singapore-based fashion startup Zilingo involving financial fraud and corporate misconduct are just two examples demonstrating how lax corporate governance is a recipe for disaster.
As investors and regulators ramp up scrutiny and shift to a zero-tolerance stance on fraud and corruption, startups will need to get the balance right between growth and governance.
Founders should understand that corporate governance is a strategic tool that delivers value rather than being an inconvenient process that will stagnate growth. Communication is a vital component of good corporate governance and will help boost overall investor confidence. This will, in turn, facilitate fundraising, particularly when corporate goals are aligned with the interests of the board, management, shareholders and other stakeholders.
Implementing governance best practice means protecting the interests not only of the company’s shareholders but also of other stakeholders, including employees, customers, vendors and communities.
A good approach is to incorporate five core principles:
- Transparency
- Accountability
- Impartiality
- Awareness
- Responsibility
Since a “one-size-fits-all” approach cannot be applied to companies at different growth stages, we have outlined below the key actionable steps for startups to kickstart their corporate governance journey.
Early venture – Establishing core values from day one
A strong culture and set of company values should be the cornerstone for any business at the start of its venture journey. Typically, this is the point where the firm lacks adequate capital and must build its customer base and focus on revenue and business growth.
In this instance, key stakeholders are limited to the management team and founding team – the early employees of the company. The initial board of directors is formed when the company is incorporated, usually represented by the founder or co-founders.
It is vital that everyone is aligned in terms of expectations, values, and measurements of success. It would be useful to create a Code of Conduct Handbook, thus providing practical guidance to everyone in the company on how to ensure compliance with corporate governance principles.
Ensuring fairness across all aspects of the business with clearly defined roles and responsibilities for each team member is key, as is their duty of care to make decisions that are financially, ethically, and legally sound.
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At Velocity Ventures, we incorporate ESG metrics when evaluating startups, considering risk management factors, as well as assessing the founders’ willingness and commitment to adopt strong ESG practices. Additionally, to encourage our portfolio companies to be forces of change, we have a quarterly ESG scorecard that is mapped to the UN’s 17 SDGs (Sustainable Development Goals).
We work alongside founding and management teams to implement and develop an ESG strategy and ensure that there is robust and effective decision-making through processes, practices and policies.
Transition stage – Seek guidance from an advisory board
Usually, after the first year of operations, founders should consider enlisting external help from industry experts. At this stage, it is important to ensure that founders are not bogged down with business processes that will impede the firm’s growth trajectory towards pre-seed/ Series A but, at the same time, build the foundations for a strong governance framework.
Forming an advisory board and inviting industry experts who are accomplished in their respective fields is a good start. Advisors need to be able to see the big picture and provide third-party perspectives. Look for individuals that can challenge and test their thinking, have a strong network, industry knowledge and plenty of experience to help solve business problems.
Typically, advisory board members do not have the authority to vote on corporate matters or get involved in day-to-day operations, but they can act as an extension of the company’s leadership team. By overseeing organisational performance, risk management, and profitability, they can help ensure startups stay on track with good corporate governance.
Remuneration for board members can be based on a fee for each meeting attended, or an annual retainer can be agreed upon, depending on the level of engagement. Sometimes, equity may also be offered if the individual advisor provides access to their expanded professional networks of potential customers and investors.
Scaling up – Form a board of directors before raising seed capital
As the company grows and needs to fundraise, founders should set up a formal board of directors and appoint at least one independent director. A corporate governance roadmap and board terms of reference should be implemented.
Key areas of focus of the board will include:
- A critical review of past and forecast performance
- Strategy and risk
- Corporate Culture
- Social responsibility for ESG matters
- Human capital and workforce engagement
- Fundraising
- Crisis management
While it may be useful to have a board that can support fundraising initiatives as a high-profile industry veteran to help drive business growth, it is equally important to have experienced individuals of a specialised industry who can provide organisational stewardship in doing the right thing.
Boards of Directors have oversight responsibility to mitigate the risks of fraud or misconduct. They do so by monitoring the company’s business operations and ensuring management prioritises the startup’s social, environmental, economic and financial impacts.
Boards of Directors are subject to a wide scope of fiduciary duties, which means they are bound legally and ethically to always act in the best interests of the company. This would include a no-conflict rule, and directors are legally liable if they intentionally or negligently cause the company to incur financial losses or become bankrupt.
Members of the board of directors have voting rights and even have the power to remove the CEO or replace the management team. To avoid a conflict of interest, the Chairperson of the Board should be an Independent Director and not be an executive of the company.
At Velocity Ventures, we value the balance of representation on the board and like companies that have at least one independent director and one investor representative director.
The duties of the Chairperson include running meetings efficiently, deciding on the agenda of the meeting, and mediating between investors and founders in the boardroom.
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We highly recommend that startups formalise the scope of responsibility of the board of directors with a Terms of Reference (TOR) document where key roles, functions and processes of management and the board are listed clearly. This will ensure business continuity implementation and helps the company to be more adaptable and effective when responding to both crises and opportunities.
It is important to set up a schedule for board meetings where the management team will update board members on the company’s financial and operational performance and make full disclosures regarding potential conflicts of interest or risks to shareholders and other stakeholders.
Usually, board meetings are held once every quarter, and the information provided needs to be timely, accurate and clear. If there is a circumstance where business decisions need to be made urgently, an ad-hoc meeting may be convened. We emphasize the need for good reporting with our portfolio companies because transparency is of utmost importance for good governance, and full disclosure of all relevant information can help shareholders and management make informed decisions.
Velocity Ventures takes an active role in supporting our portfolio companies and will usually request to be one of the board members, participating in strategic company decisions that will impact performance, growth, and profits. However, we don’t sit on every board of all our portfolio companies. Where we do not hold a board seat, we work with other majority investors to nominate one investor director to represent the interests of investors.
Incorporating corporate governance is not always a smooth process for startups, as administrative policies may get in the way of your firm’s hyper-growth path. However, by prioritising corporate governance, founders build a platform for future growth, and it will allow the company to attract better valuations and a larger pool of investors.
The investment team at Velocity Ventures has created a Corporate Governance Playbook (Infographic) that provides a quick overview of activities that should take place in tandem during different growth stages.
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