A good governance guide for startups
Dr. Mussaad M. Al-Razouki is the Director of Investments and Business Development of Kuwait Society of Life Sciences. He has over 15 years of experience in venture capital and private equity, with a focus on healthcare and technology.
The California Public Employees’ Retirement System (CalPERS) is the largest public pension fund in the United States of America and one of the most influential investors in the world. with approximately $470 billion in assets under management.
CalPERS recently submitted a regulatory filing that would support a National Legal and Policy Center proposal that Berkshire Hathaway’s chairman of the board should be independent. A role currently held by legendary investor Warren Buffet, who is also the CEO of Berkshire. If passed, the idea would prevent Mr Buffett from running for president at Berkshire’s next general meeting. More on that later.
The National Legal and Policy Center has also filed actions arguing that the chairman should be an independent board member of various companies (many of which are also part-owned by CalPERS and Berkshire), including Goldman Sachs, Coca-Cola, Mondelez International, Salesforce.com and Home Depot.
According to consultancy Spencer Stuart, companies are increasingly deciding not to hand over the presidency to their CEOs. In 2021, 59% of S&P 500 companies shared the roles of chairman and chief executive, compared to 55% in 2020 and 41% in 2010.
Personally, I prefer the Chairman of the Board to be separate from the CEO, while the CEO has the ability to sit on the board as a voting member. You don’t have to be the team captain and the main referee at the same time. This obviously applies mainly to large publicly traded companies where the ultimate responsibility of the board is to protect the interests of shareholders. This is called the board’s fiduciary duty (fiduciary is just a fancy way of saying trust).
At the start-up stage of a business, titles mean a lot less and the founders are basically the vice president of everything. However, as the business grows, it is important to consider the various options available to you to maintain what is known as good governance. In the beginning, the temptation for many entrepreneurs is to find the most powerful/richest person in their (extended) network and appoint them to a board of directors or beg them to be a Potemkin chair wielding a rubber stamp. It’s actually a little counterproductive compared to what startups need most in their early days; sweat not spatter, more hands than alms.
It’s paramount that your early board members commit time, ideally on a daily basis or at the very least, weekly compared to the more mature quarterly cadence enjoyed by boards of established companies. Opening doors is appreciated, but the best members of the board hold your hand as you walk through those doors and help you figure out how to knock down a few more. I also recommend limiting your first boards to a maximum of five members, ideally not counting co-founders. There should also be at least one independent board member, that is, a board member who has no financial interest in the company. Tech startups, especially those in the medtech or fintech sector, should also have a more technical advisory board, such as a clinical advisory board or a Shariah compliance board, for example. You see, you already have more soft power sinecures at your disposal. Quick decision-making is the key rate-limiting step for early-stage startups, so weave a tight net. It is also possible to have an even number of board members, with the chairman usually having a “casting vote” to break the deadlock or simply to have a mechanism whereby an absolute majority of all members voting yes is required for any important strategic decision.
As your company and your board grow, you may want to create committees. There are a few committees that are absolutely essential to ensure good long-term governance. three keys Committees come to mind:
The Audit Committee – whose primary role is to select a financial auditor (ideally annually or at least every three years) and review the audited financial statements
The Risk Management Committee, whose main role is both to identify and troubleshoot the various risks that could affect the company’s core business.
The Remuneration Committee – whose primary role is to monitor and approve management’s proposals for remuneration, including employee stock option plans and others. Imagine if you could just increase your own salary and compensation without any oversight. Of course, you deserve this bonus. Of course you do.
Boards really can create as many committees to handle any number of essential tracking items as they collectively want. The key is to use these committees to distribute power fairly and maintain pressure on management, for example as a strategy or implementation committee to monitor all management KPIs or the uber- meta to ensure that the board “governs its governance well”. . A strangely effective committee that tends to be touted in the Arab world is the Executive Committee of the Board of Directors (abbreviated “ExCom”), where a smaller subset of the Board of Directors (e.g., three members on 10) will meet more regularly. to pass key decisions between more formal and ceremonial board meetings.
For investors reading this article, I will mention a few other vehicles that can allow you to be a bit more passive in your investment involvement. These include the position of Board Observer, where you have the “luxury” of attending board meetings, but without the firepower of an actual vote. Influence can be exercised verbally or non-verbally at these meetings. Rolling eyes and sighs can sometimes shake a CXO more than a unanimous vote. Another position, again somewhat passive, is to be a member of the LPAC or Sponsor Advisory Committee. This is generally reserved for investors who are limited partners of a venture capital fund. Smart general partners will tend to seed LPACs with supporters when they disagree with their own board or investment committee.
Back to Buffet. The CalPERS motion is unlikely to find real support. Same although California retirees own nearly $2.3 billion worth of Berkshire stock, which is just 0.3% of its market value. Mr. Buffett alone owns more than 100 times that (a 32% voting stake) in Berkshire and last year’s poll for the presidency, Buffett obtained 97.8% of the vote. Perhaps as a hedge, Calpers still backs Mr Buffett’s re-election to the Berkshire board.