Leadership Corner: Discussion on Corporate Governance
Leadership Corner on the Veloz Partners Blog is a series of posts that are nuanced discussions between Veloz Partners consultants and domain experts from the firm and friends of the firm.
The topic of Corporate Governance has been at the forefront of many boards and management teams recently given the turmoil at AI unicorn OpenAI. The seemingly sudden turnover of key management and board members at OpenAI brought to the spotlight the legal powers and roles within an organization that, under certain circumstances, permit such profound actions to transpire. But from the Veloz Partners perspective, if Corporate Governance is defined as the set of rules that determine how the enterprise is controlled and operated, it should be immediately evident how critical the topic is, given that it touches every aspect of operations and people in an organization as well as external stakeholders such as customers, vendors, shareholder, and regulators. Therefore, it is imperative for boards and management teams to consider some key questions: What do Corporate Governance best practices look like and how does it relate specifically to one's industry, company size, and stage? How does Corporate Governance drive enterprise value? These are some of the critical and often complex questions to answer given that the management, board, and shareholders view these questions from a differing vantage points. But answering these questions and addressing them within the enterprise, as it relates to operations and an overall updated way of doing business, can serve as a big advantage to organizations.
In this edition of Leadership Corner, we discuss some of the questions mentioned above as we interview a panel of three highly experienced executives and friends of the firm: Mr. Eric Allen, CEO of LISNR and a veteran Silicon Valley tech executive and operator. Mr. Allen has extensive experience with Corporate Governance both as chief executive and as it relates to dealing with private company investors, public company boards, international management teams, foreign multi-national ownership, as well as tech companies from the early stage to pre-IPO. Next is Mr. Jesse Pricer, CFA of investment firm Grandeur Peak Global Advisors. Mr. Pricer is an executive with deep domain expertise in asset management, having spent a significant part of his career at bond giant PIMCO where Corporate Governance was routinely at the forefront of client work as Mr. Pricer worked closely with investment committees, management teams, and boards. Mr. Pricer continues to sit several investment committees and board of advisors. Our third interview panelist is Mr. Daniel Bryant, M&A Finance professional at Google. Mr. Bryant has a unique background as it relates to Corporate Governance given his extensive experience and skill in the diligence and analysis of public and private companies for M&A and investment purposes. Mr. Bryant also views Corporate Governance from the all-important lens of compliance and audit given his experience in these areas while working for numerous years at Big 4 firm KPMG.
In discussing the topic of Corporate Governance, all comments and perspective by the panelists are based on their own personal views and career experience. At no time, do they represent the official views of their respective organizations.
Below is the transcript of the discussion:
Veloz Partners:
How do you think about corporate governance as it relates to its scope and importance in the enterprise? Over the course of your career and roles, how has corporate governance intersected with your responsibilities?
Panelists:
Daniel Bryant ("DB"): Some of the first things that come to mind for me are risk management/mitigation, thoughtful decision making, impact on culture, and an enterprise’s reputation.
I have seen firsthand how effective corporate governance practices impact decision-making. In my experience, organizations with healthy corporate governance practices can come to decisions quickly while also ensuring perspectives from all necessary sub-groups are considered, i.e. financial impact, legal ramifications, customer experience, internal culture, public relations, broader ecosystem impacts. An enterprise must have a system designed to ensure all needed perspectives weigh in on major decisions.
Eric Allen ("EA"): The importance of governance needs to effectively align with the maturity of the business as well as evolve to protect the assets of the company. In the early stage of a start-up that might be the people and over time it should mature from people to business assets. Historically, I’ve come into start-ups to help mature the product or business—which includes the shift in governance from the early stages, where the founders were the most important asset, to the point where the product/business becomes the most important asset.
Jesse Pricer, CFA ("JP"): A clearly defined corporate governance structure is imperative for an organization’s long-term success. A lack of governance can compromise an enterprise’s ability to consistently execute its strategic business plan or achieve its mission. A lack of governance will eventually lead to failure.
For most of my career, I have worked for a large asset manager and engaged with hundreds of institutional investors. I have observed some organizations operate within a well-defined governance structure that is followed while other organizations employ almost no governance discipline or fail to adhere to their stated governance policy. I believe it is very risky to work with those organizations which have loose governance standards. Relationships of trust hinge on consistency and it is impossible to be consistent without sound governance.
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Veloz Partners:
From your vantage point—whether it stems from career experience, leadership style, or a combination thereof—what do best practices in corporate governance look like? Please share your view of the characteristics and where possible provide an example where you’ve seen best practices in action.
Panelists:
EA: From my experience it’s not a one size fits all. I’ve taken a consultative approach using the basic principles of: First, Assess—validate company stage. Including external and internal view; second, Align—level set between founders & board on company stage/value regardless of traditional indicators such fundraising stage and/or traditional value drivers; third, Calibrate—reconstruct governance based on the appropriate phase of organization; and fourth, Execute.
However, I feel I need to modify the approach in that the founder influence and stage of the company might require further diligence on founders, with an additional focus on external factors and conflicts of interests. Increasingly, I’ve seen a lack of transparency from both founders and board members that create conflicts of interests that need to be addressed at the governance level.
JP: The best corporate governance structures are objective in nature and derived from mission statements or guiding principles. A corporate governance policy should supersede any individual authority. A corporate governance policy can only be followed if it is well known amongst stakeholders in an organization. It must be part of an organization’s cultural fabric and be socialized and referred to frequently.
I worked with a non-profit children’s research hospital for many years. Their commitment to governance started with a clearly defined mission statement. All staff received frequent reports from the leadership team on the hospital’s current projects and progress made in achieving their mission. To ensure that no one on the hospital’s campus lost sight of the mission, they encouraged primary care physicians, research physicians and patients to eat in the same cafeteria daily. This served as an easy but effective way to continuously remind everyone of the hospital’s mission.
During meetings with the investment team, I always received a research update before we discussed their investments. They believed it was also important for me to have an appreciation for the work they were doing as a research hospital and how important it was for their investment portfolio to support their mission. A full appreciation for the mission by everyone involved, directly and indirectly, helped to better “govern” the collective actions to focus on the mission. This pertained to both formal governance policies and unwritten conduct that was expected from staff and hospital vendors.
DB: Quite simply, it is having a process (or processes) that’s understood across the organization and that is expected to be followed. I mentioned decision making earlier, but this also can apply to risk mitigation or maintaining the reputation of the firm.
One example of best practices in action is having an escalation framework for major business decisions. This may not be as critical for smaller companies or startups, but as an organization scales it becomes even more important to have a predetermined process to be followed in knowing what issues are handled at what levels in the organization.
Veloz Partners:
Considering some of the following organization-specific factors such as: size of company (as measured by revenue or headcount), industry, ownership type (public vs private), or stage of company (i.e., emerging, growth, mature, turnaround, etc.) …how do these factors impact the quality and implementation of corporate governance in the enterprise?
Panelists:
JP: As noted earlier, corporate governance is critical for success at all stages of a company’s life cycle. This applies to all types of organizations; public, private, for-profit, and not-for-profit. Poor governance can lead to failure for any size of business. It can kill a small business overnight. For larger organizations, it may take longer, but it will also have a much more significant negative impact, socially and economically.
Unfortunately, there are very few cases that I can point to where I observed an institution with a well-organized corporate governance program. It is very difficult to maintain good corporate governance. Corporate governance is like a garden. It requires constant maintenance to keep the weeds from growing.
If an organization can establish a sound governance discipline early in its life, the better chance it has of staying on that path. Can you imagine how long the United States of America would have lasted as a nation without having a constitution in place to start? Also, as an organization grows in size, the more difficult it becomes to maintain good corporate governance or correct bad governance.
DB: These, in my mind, almost form a spectrum of how important (and well thought out) an organization’s corporate governance practices are. For example, I’d put an early-stage company (i.e. less than 100 headcount and pre-revenue) at the lower end of that spectrum, but a more mature company (i.e. headcount greater than 1000 and publicly traded) would be on the highest end of that spectrum.
That’s not to say corporate governance isn’t important for the smaller company, but when a company is just starting, I think growth/traction/establishing market fit are more, if not equally, important. I also think that, for earlier stage companies, the focus of corporate governance is different. For example, in the earlier stages you may have corporate governance practices centered around accessing capital and attracting talent; whereas a more established company’s practices should likely be more focused on risk management/mitigation—to ensure it is able to maintain its position in the market.
EA: Risks. Private companies’ risk typically leans more on the individuals and leaders of the company (board- or founder-level), with a lean toward ethics and public court of opinion. While in public companies, the leadership owns the risk but governance tends to be driven more by legal teams based on regulatory requirements that has more structure and definition.
Veloz Partners:
How do you think about strong corporate governance and its role in driving enterprise value? Specifically, what, from your perspective, is the interplay with other more commonly understood value drivers such as: growing the P&L, developing a high-quality balance sheet, or building a bona fide and sustainable competitive advantage?
Panelists:
EA: Following an earlier statement – in the early stage (seed through series B) my view is that the thread between governance and traditional value drivers are less connected and/are more associated with protecting founder. As the value shifts from founder to product/business and traditional value drivers (in series C and beyond), that is where you see the interplay between governance driving enterprise value that is more common. Public companies’ governance is directly associated to traditional value drivers and the moats that drive either those drivers or the industries themselves.
DB: All the factors I noted previously are interrelated with driving enterprise value. For example, effective risk mitigation and decision escalation policies can help ensure that a new partnership an organization is looking to enter has been vetted to ensure the range of economic outcomes (good and bad) have been fleshed out. Using the same example, let’s say a positive economic outcome for this new partnership, results in a negative ecosystem outcome that ultimately hurts an organization’s ability to grow in a particular market…effective corporate governance practices will help to tie in other non-economic dynamics which could also impact value.
JP: Stephen Covey once said, “The essence of true leadership is to get everyone in an organization pointed in the same direction”. Effective governance is only possible when everyone is pointed in the “same direction” (i.e., operating off the same value system). It is nearly impossible to get a team to execute a strategic plan effectively without sound governance. Sound governance derives from sound principles. When individuals embrace sound principles which often derive from a governance policy, they will govern themselves. With sound governance, an institution can more effectively and efficiently achieve its strategic business plan or mission.
If you are company management, a founder team, investor, or board member and would like to learn more about how Veloz Partners can assist your company please email to inquiries@velozpartners.com.