The importance of corporate governance
Having invested in numerous Finnish and international startups, one thing has become clear: effective corporate governance starts with the board of directors.
A good board will force the CEO and management team out of their comfort zone. Directors need to demonstrate open-mindedness, foster constructive dialogue and maintain a respectful environment. This means being able to challenge management and directors while still contributing to a productive and collegial board-room environment.
An ineffective board is one that does not allow any opposing dialogue or exchange of ideas and sticks to a template agenda. It simply hears presentations from management rather than engaging with management.
Signs of a bad board:
1. Dominant voting power
- Companies that choose directors who will always vote in unison with the company/founders will end up giving excessive voting power to one block of directors.
2. Uneven mix of directors
- Some companies choose famous directors thinking it will make the company famous. But board members need to be dedicated to guide the company in the right direction by providing strategic or financial advice.
- In failed US company Theranos, the board was composed exclusively of friends – everyone was in agreement and there were no diverse viewpoints.
- A board that always agrees is dangerous.
3. Unclear answers from the management team
- Be careful if management repeatedly doesn’t provide a straight answer to why some deadlines were missed or hides information.
- Does the CEO understand the core technology? Can they discuss technical issues or do they only describe the technology vaguely?
- If management continuously reassures the board that there is nothing to worry about, then the board should be worried.
4. Disagreement is discouraged
- Boards should embrace critics externally and listen to internal challenges rather than disparage or threaten dissenters. Dissent is not disloyalty.
How to build an effective board:
1. Create a climate of trust and candour
- Directors should insist on receiving information before the board meeting and come to the meeting ready to discuss.
- The CEO should provide information on time and trust the board not to meddle in day-to-day operations. The CEO will give directors free access to people who can answer their questions.
2. Foster a culture of open dissent
- No matters in a board meeting should be “undiscussable”. Directors should probe silent members for their opinion and justify their position but not pressure others to conform to the majority.
3. Utilise a fluid portfolio of roles
- Directors should have expertise in different aspects of business. Forming concentrated committees allows members to use their skills and focus on their specialities.
4. Ensure individual accountability
- Make sure that directors come to meetings for the entire duration and contribute. CEOs can assign specific task forces so a director truly understands the challenges facing the company.
5. Evaluate board’s performance
- CEOs have to determine if they feel the company is getting all the help it needs to achieve its goals. Review directors’ attendance, level of preparation, understanding of the issues and constructive roles in discussions.
- Board members should be independent.