A guide to good governance for startups
Dr. Mussaad M. Al-Razouki is the chief investment and business development officer of Kuwait Life Sciences Company. He has over 15 years of experience in venture capital and private equity investment 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 world’s most influential investors; with ~$470 billion of assets under management.
CalPERS recently submitted a regulatory filing that would support a proposal by the National Legal and Policy Center that Berkshire Hathaway’s board chair should be independent. A role that is currently held by legendary investor Warren Buffet, who is also Berkshire’s Chief Executive Officer (CEO). If passed, the notion would disqualify Mr. Buffett from running for the Chairmanship at the upcoming Berkshire General Assembly. More on that later.
The National Legal and Policy Center has also filed measures arguing that the chair should be an independent member of the board at a variety of companies (many also partly owned by CalPERS and Berkshire) including Goldman Sachs, Coca-Cola, Mondelez International, Salesforce.com and Home Depot.
According to consulting firm Spencer Stuart, companies are increasingly deciding not to have their chief executives serve as chair. As of 2021, 59 per cent of companies in the S&P 500 had split the chair and chief executive roles, compared with 55 per cent in 2020 and 41 per cent back in 2010.
My personal preference is for the Chair of the Board to be separate from the CEO, while the CEO does have the option to be part of the Board as a voting member. One should not be both the captain of the team and the main referee. This is obviously mostly applicable to large, publicly traded companies where the ultimate responsibility of the board is to protect the interests of the shareholders. This is known as the board’s fiduciary duty (fiduciary is just a fancy way of saying trust).
At the startup stage of a business, titles mean much less and founders are essentially the Vice President of Everything. However, as the business grows, it is important to take into account the various options you have to maintain what’s known as good governance. Early on, the temptation for many an entrepreneur is to find the most powerful/wealthiest person in their (extended) network and name-drop them into a board position or beg them to be a Potemkin chair wielding a rubber stamp. This is actually a bit counterproductive to what startups need more at their earliest stages; sweat not splosh, more hands than hand-outs.
It is paramount that your first board members dedicate time, ideally on a daily basis or at the very least, weekly compared to the more mature cadence of quarterly enjoyed by boards of established companies. Opening doors is appreciated, but the best board members hold your hand while walking through those doors and help you figure out how to kick down a few more. I also recommend keeping your first boards down to a maximum of five members, ideally not including the co-founders. There should also be at least one independent board member, meaning, a board member who has no financial interest in the company. Technical startups, especially those in the medtech or fintech sector, should also have a more technical advisory board e.g. a Clinical Advisory Board or Shariah Compliance Board respectively as examples. See, you already have more soft power sinecures at your disposal. Fast 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 Chair usually having a “casting vote” to break the deadlock or to simply have a mechanism that an outright majority of all members voting yes is required for any important strategic decision.
As your company and board grow, you might then want to create committees. There are a few committees that are absolutely essential to ensuring good governance in the long term. Three key committees come to mind:
The Audit Committee - the primary role of which is choosing a financial auditor (ideally ever year or at least every three years) and reviewing the audited financial statements
The Risk Management Committee - the primary role of which is to both list and troubleshoot various risks that may affect the core business of the company.
The Compensation Committee - the primary role of which is to monitor and approve the management’s suggestions in terms of pay, including employee stock option plans and the like. Imagine if you could just increase your own salary and compensation without any oversight. Of course you deserve that bonus. Of course you do.
Boards can really burp out as many committees to handle any number of essential follow up items as they collectively like. The key is to use these committees to equally divide power and keep pressure on management e.g. as a Strategy or Implementation Committee to keep overall track of management KPIs or the uber-meta Governance Committee to make sure that the board is ‘governing its governance well’. A weirdly efficient one that tends to be touted in the Arab world is the Executive Committee to the Board (abbreviated to “ExCom”), where a smaller subset of the board (e.g. three members out of 10) will meet on a more regular basis to push through key decisions in between the more formal and ceremonial board meetings.
For the investors reading this article, I will mention a few other vehicles that can allow you to be a bit more passive in your involvement with your investment. These include the Board Observership where you have the ‘luxury’ of sitting in on board meetings, but lack the firepower of an actual vote. Influence can be exerted either in spoken or unspoken terms during these meetings. Rolling eyes and sighs can sometimes shake up a CXO more than a unanimous vote. Another, again somewhat passive position is to be a member of the LPAC or Limited Partners Advisory Committee. This is usually reserved for investors who are limited partners in a venture capital fund. Smart general partners will tend to seed LPACs with supporters in case of loggerheads with their own board or investment committee.
Back to Buffet. It is unlikely that the CalPERS motion will find any real support. Even though the pensioners of California own nearly $2.3 billion worth of Berkshire shares, that translate to barely 0.3 per cent of its market value. Mr. Buffett alone has over ~100X that (a 32 per cent voting interest) in Berkshire and in last year's balloting for Chair, Buffett received 97.8 per cent of the vote. Perhaps as a hedge, Calpers still supports re-electing Mr. Buffett to the Berkshire board.