Scratchpad welcomed John Burns, Managing Director of the Maine Venture Fund to its headquarters recently to talk with our entrepreneurs about governing their companies. John has over 30 years of institutional investing experience, and specializes in corporate governance. He has been directly involved in bringing risk capital to more than 40 Maine companies, and has led the Fund through a number of successful exits. During his talk, he shared key insight on how our rapidly growing companies should govern themselves as they grow into larger operations, and why it is a vital consideration in scalable business.
Corporate governance addresses the overriding theme of how an organization is run. It is fluid, and is how a company defines and dictates how to reach their goals and objectives. Corporate governance also encompasses the culture of the business. As the Scratchpad companies grow, it is important to clearly define how their organization will be governed so they can set, attain, and monitor their objectives. John introduced the entrepreneurs to two major topics during his talk: the purpose of the board of directors and the components of the board.
Purpose of the Board of Directors:
The main focus of the board is how to financially outperform competitors with good practices. Though this manifests differently depending on the industry and type of company you run, a governing body is a crucial part of maintaining effective corporate governance practices. Boards that reach for this goal are good for business. A recent study of more than 5000 US companies by Institutional Shareholder Services found that “the best-governed companies significantly outperformed the worst-practice companies on 13 financial measures, including return on investment, and net profit margin.” This demonstrates the importance of creating a company based on well-governed policies from its origin.
Responsibilities of the board:
Understanding/approving company strategy and operational oversight- This aspect of company governance is all about measuring success. There need to be concrete metrics in place to measure growth with set performance indicators.
Risk management- In both the external and internal aspects of the business, the board is responsible for measuring and monitoring risks in the company.
Financial accounting and reporting and significant transaction oversight- This includes monitoring both financial policy and performance.
Compliance, ethics, and culture- Boards are responsible for reviewing a company’s performance on both social and legal obligations, such as social reputation, sustainability, and compliance with legal standards.
Hiring/compensation, succession planning, and board operational assessments- Monitoring senior executive and CEO performance, and developing human resource departments.
Giving advice and mentorship to management- One of the most important hats a board member wears is that of a mentor. They should be able to give objective wisdom, and offer support when necessary.
Duties of the BOD:
Duty of Care- Every member is responsible for staying up to speed, as well as understanding the strategic direction of the company. Companies, especially developing ones, do not need uninvolved team members who do not have any personal interest in the business, or as Burns coins: “Seagull Directors”.
Duty of Loyalty- Directors are expected to put company before themselves, and look at all problems and opportunities objectively. Thinking on the mere personal level can affect decision making, and introduce bias into the workplace.
Components of the Board
No matter your size, have a board:
A startup doesn’t have to be a Fortune 500 company to have a board of directors. Even the smallest operations can benefit from them, as it serves as an unbiased voice of reason. It can be comprised of merely three people, and function as a braintrust off of which you can bounce ideas (or as Burns puts it, people to ask: “Am I crazy? Or am I crazy?"). They help seek out the potential blind spots. In addition, it gives credibility to outside investors, showing that you have a separate body to inspire confidence in company decisions.
When recruiting your BOD, there are a few key factors to consider:
Make sure they have the right skillset- It is important that a BOD knows something about your industry to “help pull the wagon”. They also need to be willing to have hard conversations, and do their due diligence when it comes to the company. If there is room for improvement, they have to be able to spot where it is and have the expertise and confidence to discuss it.
Do not hire friends or family members- The purpose of a board is to whip a company into shape, and serve as a way to keep companies on track. This process is not always pretty, and often takes an objective entity to have those tough conversations. This can not be done effectively if your board consists of only family members or friends, as it much easier for feelings to get hurt or hard truths to be softened. It may not be fun, but it is necessary.
Independence is important- Management and shareholders need to be independent. There is too much room for conflict or bias to occur when they are mixed. Boards take the pressure off of management, especially when performing tasks like setting wages, so they should be completely separate entities.
This model is tool used to evaluate the effectiveness of your board of directors. The closer the guidelines are followed, the more successful the operation.
Goals- Every company should have clearly communicated goals that every employee in the organization is working toward. These objectives must be understood and accepted by everyone, and it is the responsibility of the governing body to ensure this.
Roles and responsibilities- In order to achieve these goals, each team member should be carefully selected for their position. This is done by making sure they are both aware of their responsibilities, and that they possess the skills to effectively fulfill their roles. In addition, making sure that the responsibilities of each role and position is recognized and accepted is vital.
Processes and procedures- The processes and procedures umbrella encapsulates how all tasks are to be performed, how to create proper communication channels, and dictating authority levels. In order for these to be clearly understood and accepted, each P&P should be designed in support of group goals and roles. You can evaluate this section by asking: “How are conflicts within my organization solved?” “How are decisions made, and who makes them?” “How is activity coordinated? Are reporting procedures understood and adhered to?”
Interpersonal relationships- A functional team is vital to the success of an organization and governing board. The organization should foster trust between members and employees, and allow for open and candid conversations or debates. In addition, it is the team leader’s responsibility to encourage feedback and listen to the group’s concerns.
By the end of his talk, it was clear to all of the founders just how critical governance is if they want to build a scalable, growth oriented business. They were already thinking about who should be the first person they should invite to join the board.