The need for an actively engaged board in companies – with special emphasis on startups
03 Jun 2020
Corporate governance… What do these words say for newly established start-up companies? For some of them, corporate governance means following the basic legal and ethical principles to meet strategic goals and corporate objectives. For some others, it means working collaboratively with the board of directors to increase and diversify shareholder wealth. In a world that has become so competitive, the role of boards of directors cannot be overestimated. However, it is not enough to have a few distinguished professionals on a company’s board. It is imperative for board members, higher- and mid-level managers, and employees to communicate, interact, and work as a team if they want to create a strong and competitive enterprise.
In the past 20 years, the world saw a boost in the global market – startups have mushroomed, creating a new model of entrepreneurship. Many successful startups act as a one-person enterprise. Many others have grown out of a collective or team effort. As the market moves toward a point of saturation, the need for actively engaged boards becomes more pronounced. Fairly speaking, for many businesses, particularly startups, a well-organized board can become a major source of competitive advantage. According to McKinsey Quarterly (2016), the best boards are those, which go beyond the basic fiscal responsibilities and take a full part in corporate processes. Members of these boards actively participate in strategic and operational decisions without crossing the boundaries of their responsibility within the company. Actively engaged boards are critical for strong corporate governance, Luis A. Aguilar states. They can frame the agenda for continuous growth, anticipate competitive hindrances, and leverage resources that are needed to help startups survive in a world of uncertainty and change.
Why an actively engaged board? After all, companies have chief executive officers who are in a position to govern everyday operations and evaluate their contribution to strategic goals and corporate objectives. It is simple: when the board actively participates in executive and operational decisions, the message becomes stronger and more compelling for stakeholders. The case is particularly relevant for startups, which require extensive resources to grow into a successful enterprise. Nick Price writes that actively engaged boards are better positioned to look for sponsors and donors in the initial stages of business growth. They know what is going on in their organizations. They understand their resource needs. They actively interact with CEOs and mid-level managers, as organizations keep growing. Members of actively engaged boards know the organization’s strengths and weaknesses, and they know how to present the organization as an attractive target for investors.
Actively engaged boards have a great competitive advantage over boards that are just formally present in startup companies: they know their shareholders, and they can inform the direction of startup activities that respond to shareholder expectations and needs. Aguilar is right: today’s companies operate in a litigious environment. Shareholders have become increasingly demanding toward companies that are using their wealth. Even a single failure can result in reputational and financial losses. Actively engaged boards can anticipate and prevent these challenges. The experience and expertise of board members can contribute to the rapid advancement of firms, particularly startups.
A company board usually includes the most respected, reputable, and experienced business and executive specialists; for this reason alone, actively engaged board can become a valuable source of information and guidance to startups. In fact, the role and function of company boards is persistently underrated. Beyond their visibly formal functions, board members can fulfill a diversity of roles that will improve the company’s performance and public image. For example, board members can become informal advisors with CEOs. They can actively engage in agenda setting and strategy making. As a result, startups with actively engaged boards are more likely to choose an optimal direction for their competitive growth. Culture and talent management are also great venues for boards’ involvement. Boards have knowledge, skills, competency, and motivation to engage more deeply in talent management activities, which are of critical importance for startups (McKinsey Quarterly, 2016). They provide information and advice to help create a productive workplace culture. As such, their involvement in the strategic and operational activities of a startup can determine its chances to survive market competition.
The only question that CEOs need to answer is how to engage board members in startup activities. Overall, it is not as difficult as it seems. Ken Banta and Stephen D. Garrow suggest that CEOs should seek individual and collective assistance from board members. Putting it simply, if CEOs want startup board members to contribute, they should be proactive establishing closer ties with them. CEOs may want to communicate with the board less formally but more frequently. With time, board members will see the advantages of strategic and operational involvement. They will be more willing to participate if they see the advantages of their engagement with startup activities. At the same time, CEOs should not forget that board members face significant time and resource constraints. Therefore, startup employees and managers may need to arrange board activities in ways that leave more time for strategic and operational decisions. All in all, it is in the best interest of startup CEOs to have an actively involved board. It is in the best interest of the board to be actively involved in startup activities.
Undoubtedly, startups need actively engaged boards. However, startup CEOs should be more proactive to keep board members actively involved in operational and strategic business processes. Collectively, boards, executives, managers and employees can create a sustainable and competitive enterprise.
Ed.’s Note: Samuel Alemu, Esq is a partner at the ILBSG, LLP. His partner at the ILBSG, LLP, Praveen C. Medikundam, Esq contributed to this article. They are both admitted to the bar associations of New York State, United States Tax Court, and the United States Court of International Trade. Samuel can be reached at salemu@gmail.com.
Contributed by Samuel Alemu Note: released first on Reporter English