By Omoruyi Edoigiawerie Esq
In today’s business environment, you cannot take start-ups and their contribution to economic growth for granted. They contribute to virtually every stratum of economic development.

However as important as they are, many start-ups operate ‘dangerously’, with little attention paid to processes and measures necessary for sustainable growth and optimal scalability.

It is often said that start-ups “build the plane while flying it”.

Founders are mostly consumed by every other thing except structure and measures necessary for long-term sustainable success. This may be attributed to the “growth at all costs” mentality, but the irony of this mind set is that it turns out to be one of the key reasons they fail; bad or absent corporate governance structure can mar a business and cast doubt on its processes, structure, and viability.

As a start-up Attorney, who has helped build a sizeable number of start-ups, I know for a fact that one of the most critical factors in building a successful, sustainable and scalable company is having a corporate governance culture in place.

•Corporate governance
Corporate governance is the framework that allows a company to thrive by balancing and addressing the vested interests of various stakeholders including shareholders, employees, and customers. Additionally, strong corporate governance practices foster a company culture built on high standards of integrity, accountability, transparency, fairness, and responsibility. Having this critical foundational layer in place at an early stage provides the necessary flexibility for management to fully focus on innovation and delivering a better product or service to its customers.

In simple terms, corporate governance refers to compliance with legal provisions, having an experienced team of board of directors, and a proper structure to guide the team. It also refers to a system of rules, practices, and processes that direct and controls any organization.

Corporate Governance encapsulates the soul of any organization and it must be not only intentionally formulated but also adhered to meticulously. In its finest form, corporate governance activates a system that establishes Management’s accountability towards the company’s stakeholders for effective management of the business.

It concerns itself with the morals, ethics, values, parameters, conduct, and behaviour of the company and its management with the underlying principles of corporate governance revolving around the following fundamentals:

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1. Integrity
2. Transparency and
3. Accountability

•Start-ups, their peculiarities, and the challenge of corporate governance
The challenge that start-ups often face in establishing an efficient corporate governance culture, lies primarily in the fluidity of the start-up growth process and the loose start-up culture fuelled by stakeholders who are often fixated on the profitability of the business and market growth, instead of the risks that come with running businesses.

The reason for this may not be unconnected with the fact that most start-ups have a troublesome, uncertain, and chaotic infancy. They tend to prioritize more pressing or immediate issues such as outstanding payments to vendors, crushing overhead costs, an unstable client base, and an uncertain cash flow.

These issues tend to overburden the founders that they are simply unable to focus meaningfully on a corporate governance system, they rather adopt the ‘tick the box’ approach by meeting all mandatory legal, financial, and regulatory requirements for running their business and proceed to manage their businesses unsupervised.

However, in their defence, it is important to point out that with their focus being on technology and innovation, their correspondingly high levels of risk, and the understandable emphasis on growth, start-ups are different from traditional companies or businesses and as such their governance structure must be envisioned differently to reflect their peculiarities; in this context, it would be more efficient and effective to adopt a more evolutionary approach in the application of corporate governance.

Industry experts believe that as it relates to start-ups, corporate governance should be understood as “getting the best people together to support a start-up” instead of viewing it as some kind of governance or management control and oversight. It must be clearly understood that start-up founders did not create their start-ups to become titleholders in corporate governance; their key values and interests revolve around creativity, freedom, and growth and this should be taken into account and respected by the corporate governance structures to be put in place.

•Role of the board
A corporate governance structure for start-ups would in more ways than one help in the identification of roles and the application of business decisions in a manner that reflects and protects the contributions of all players in the ecosystem; shareholders, investors, employees, directors and the founder(s)/management.

One of the hallmarks of corporate governance is the presence of regulation and external oversight to direct the business in the right direction and an ethical manner and this is what necessitates the creation of a governing board or advisory board to provide supervision and guidance from seasoned professionals in the same business field and ancillary sectors, to help minimize their business miscalculations.

While it is a given fact that founders are driven by their zeal and need expertise in the same field to appropriately steer their enthusiasm, it is also important that the Board can grasp their innovation as they apply the rules and regulatory practices to the start-up’s operations while also providing the founders that necessary leeway to create and build their innovative product.

Another very important issue to be considered is the appropriate time to establish the board – whether this should be at the early stage of a start-up or the later stage when the company is in fully functional mode. I believe that since having a board provides “checks and balances” and does not necessarily slow down growth or innovation (when you have the right fit), it is better to have the board at the early stage to ensure a healthy synergy of the business objectives with a corporate governance culture that fits.

The reason for this is simple; strong boards challenge founders, make important introductions and suggestions, a partner in growth, and ultimately make a company more sustainable for the long term. They join is the strategic projection and direction for the company’s growth and having them at the early stage is a benefit. The Board may however be expanded as the company grows to accommodate more experienced persons who will add more value to the company’s growth projection.

To buttress the above point, the lack of an advisory board at the early stage often leads to massive mismanagement and increases the probability of errors. This is because the founders are more prone to misguided operations, unchecked duplicitous behaviour, unethical practices, and multiple unchecked operations.

Today, stories are replete of start-ups that failed due to faulty regulatory compliance or outright default and those that were compelled to stop operations after fraudulent cases or unethical practices were discovered.

A sizeable number of founders have also lost management oversight over the companies they founded because of the lack of governance structure leading to unchecked actions and unethical practices.

The prevailing economic challenges and rife competition is capable of pushing start-ups to take unwarranted shortcut routes or apply unadvisable business models to prove exponential growth in a short time, even though such application is unsustainable in the long run.

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It is also very important, that start-ups establish a board with directors who possess robust and varied skill sets and experience that are well-matched to the organisation’s stage and growth plans. Appointing board members with deep domain expertise who can meaningfully complement the managerial role founders and employees play, should be prioritised.

As a best practice, companies should look for at least one or two board members who have experience with related industries and customers. It is also very beneficial to bring outside perspectives to the board, often achieved by naming independent directors with no material stake or interest in the company.

The role of the board should also evolve as the start-up grows, this is because an active and well-functioning board adds value at every stage of a start-up’s growth and development.

•Conclusion
Corporate governance creates the governance structure for start-ups not only because it is important to have a proper company management culture in place that supervises the founders by serving as a check on their management and business decisions, but it is also a protective tool to protect start-ups from many potential errors and serve as a check on their operations.

At the end of the day, corporate governance must not be seen as an obstacle to the fluidity of the decision-making process that characterises start-up operations, but rather as an enabler that sets a pattern and infrastructure for logical decision-making, for ethical business practices and legally compliant processes which form the bedrock for sustainable and scalable start-ups.

Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on start-ups, established businesses, and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at hello@uyilaw.com