January 16, 2008

Is governance important at the start-up level? - By Sanjay Anandaram

The young founders of the young company looked happy. They had just finished a long meeting with a top class candidate for CEO of one of their soon-to-be-launched businesses. They had decided to bring on board seasoned professionals to help them achieve their long term goal of building a nationally admired and respected company. The CEO candidate too felt energized after the meeting with the founders and was excited by the passion and drive exhibited by the founders. He was impressed by their open style, frank assessments of themselves, their understanding of the market landscape and by their willingness to share financially.

Yet, he was a little uneasy. He called up the next day and wanted to meet the founders. He was concerned about “governance”. The founders were taken aback – what was this guy talking about?! They were taken aback only because of their lack of awareness about the intangible issue called governance. Sure, they had heard about it but hadn’t really worried about it enough to find out what it really meant. It was something, they thought, that only large public companies needed to bother about, that it was something bureaucratic that would only hamper their freedoms.

The above situation regarding governance related concerns is quite common in India. In an India that’s globalizing rapidly on multiple dimensions, Indian entrepreneurs too need to wake up to the important issue of governance. Especially in family owned companies. What is this thing called governance and why is it important for startups? A few sample concerns from the CEO candidate illustrate the types of issues that come under the umbrella of “governance”.

“Are the founders taking salaries or are they siphoning money out of the company?’
“Are all family members getting involved in the management of the company just because they happen to be shareholders?”
“Do family members report to each other in the hierarchy? How do they then do performance appraisals?”
“Does the company do business with related parties or persons?Is there a proper arms-length relationship”
“Is there a board that takes decisions or does the family decide?”

The delineation between ownership and management is an important aspect of governance. All too often, the distinction gets blurred and downright murky in India. It is important for a startup to seriously think of governance because good governance results in the creation of truly valuable, respected and admired companies. Professional executives tend to migrate to better governed companies. Investors feel very comfortable dealing with well-governed companies. Employees believe that their company will be fair not out of a patronizing attitude but out of respect for due process. Customers and partners trust a company that practices good governance. Stock markets reward well governed companies.

However governance, like many other things, isn’t a set of statements that’s written on a piece of paper, laminated and hung on a wall only to be forgotten. Governance is something that the company has to relentlessly demonstrate every day. There are multiple so-called “moment of truth” that will confront employees and management each and every day. It is through the execution of “well-governed” practices that the truly great company emerges.

The founders of the company have to practice it every day. It is hard work especially for a startup when cutting corners to achieve a short term goal seems very appropriate. But remember that there are others in the company who are watching and observing. And if the right company culture, namely one of a well governed company, is to be really brought into play, then each and every action has to be weighed against the yardstick of governance.

One of the critical issues relating to governance in a startup comes from the fact that the founders tend to identify themselves with the company. It takes emotional maturity to see that the company and the founders are two distinct entities with different interested stakeholders. What is therefore good for one might not always be good for the other. So, the realization that “what’s good for the company is almost always good for the founders” and that “what’s good for the founder isn’t usually good for the company” is what makes or breaks the governance issue.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.