Missing the Forest for the Trees – Never Underestimate Culture in Understanding Corporate Governance

Corporate governance is a hot topic these days. Though at the startup stage, your company may not be subject to the same extensive corporate governance rules as a large public company, it’s important to never lose sight of how important a healthy culture is to good corporate governance.

All too often, companies tackle corporate governance by drowning themselves in checklists and policies and processes. This can be especially true for founders at an early stage as it’s hard to find time to dedicate thought to intangibles like culture. The challenge that results from focusing too much on tick the box compliance is this approach can be mistaken for good corporate governance. The foundation to good corporate governance, and the underpinning of any good policy and procedure, is a healthy culture. This becomes increasingly important for businesses that are on a rapid growth trajectory. Just ask Uber or its former CEO.

To protect your budding business from exposure to loss of business or shaken investor confidence as it grows, we suggest never losing sight of the following:

  1. Don’t bank on rules-based compliance, it is not effective on its own.
  2. Create clear lines of authority and structure, and openness to challenge at every level. Practically, this means an open-door policy and/or whistle-blower policy where toxic behaviour can be reported and there is a legitimate follow-up process to deal with complaints.
  3. Don’t apply a different code of conduct for your top performers. Money-makers can be a big liability in the long-run if they aren’t reigned in.
  4. Each director on the board should keep a direct line of communication open with management and staff at the operational level (including entry level employees).
  5. Unplanned site visits should be conducted by the Board on an ongoing basis.
  6. Compensation and other rewards should not be tied, at least not wholly-tied, to short-term financial targets.

If founders keep the above in mind as they get their business started, it will assist in developing a healthy culture right from the beginning. Red flags should be treated as warning signs of a flawed culture which will negatively impact corporate governance.

The future of a startup can sometimes involve an initial public offering (IPO) as a potential exit strategy for its founders. If a startup ends up going public, it will become subject to more stringent corporate governance requirements including, among other things: auditor oversight; certification requirements for financials and internal controls; disclosure requirements on the independence of directors, female representation on the board, continuing education for directors and releasing the written mandate of the board. For public companies, a healthy culture remains a key component of good corporate governance. Fostering a healthy culture from the outset is a much easier process than trying to fix an unhealthy culture later, so start early and save yourself, and your business, the struggle (and potential exposure) down the line.

Leila Rafi and Michael E. Reid

Published by

Leila

I'm a Toronto girl who practices securities law at the Toronto office of McMillan LLP. I take a particular interest in startups and helping founders build their budding businesses! Getting the legal details right is important in establishing a business.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s