Best Practices for Effective Governance & the Importance of Strategic Human Capital Planning
The abundant research undertaken on this topic uncovered an incredibly overarching quote that serves as a descriptive preamble: “Boards of early stage technology companies have significant challenges: incomplete management teams, inexperienced and aggressive founders, lack of resources, high risk with small margins for error, etc. Experienced directors can make a significant difference if the Board is structured and empowered properly. The technology industry needs a system of Board governance that addresses its issues”. (The aforementioned quote is from the Fall edition of The Hire Standard, the Newsletter of Corporate Recruiters of High Technology Talent).
Corporate governance is an essential component to any startups success; from both an operational and strategic perspective, adopting good governance practices during the early phases of a company’s development will serve as a cornerstone of the organization’s culture and reputation. And, while some of the research refers to how important the human capital and talent portions of the equation are to the success of the business, they don’t necessarily give it the attention it deserves.
Whether it be potential investors/VC’s, candidates for hire, a current employees or other interested parties, they will conduct their own due-diligence and seek out (and reward) a well-managed organization with a richly diverse culture; therefore, it would be extremely detrimental for any tech startup to ignore (or even delay) the importance of implementing sound governance practices – that include bringing on talented and experienced Directors and a highly functioning HR component – early on.
Furthermore, a thorough governance program will provide the Founders/CEO’s with a license to innovate within the proper framework of accountability which, inevitably, will provide them a strong ROI for many years; and, unlike Advisors, a Board of Directors shares real responsibility for company outcomes, and provides a level of accountability and transparency which, in light of recent corporate scandals, is critically important to potential investors and partners. A quality Board shows that your great idea has been vetted and endorsed by someone other than yourself, validating your vision and strategy and creating value in the company.
According to Albert C. Plant, Author of the guide to Establishing Governance: A Startup Guide for New Businesses and Non-profit Organizations, “A Board of Directors, with subset Audit and Finance Committees, demonstrates credibility and seriousness about building your business, which in turn instills confidence among stakeholders – especially if they plan to raise capital from outside investors to transform your entrepreneurial dreams into reality, it is never too soon to surround yourself with a good Board of Directors.”
Independent directors bring perspectives not visible to those with less or even different experience, improving strategic thinking at the top. As you face innumerable decisions about how to structure and grow your company, and especially how to spend the few precious resources you have, a good Board will help you navigate the terrain and increase your chances of success. As your company grows and the decision-making stakes become higher, making the correct decisions can literally make or break your company, sending you back to the drawing board or helping you turn that entrepreneurial vision into a fundable opportunity.
At a time when the competition for human and financial capital is global, and time-to-market windows are increasingly shorter, the need for honesty and integrity is great. Good corporate governance instills confidence among current and prospective stakeholders, enabling companies to command higher valuations, reduce perceived risks, minimize the cost of capital, and ultimately, pave the way to profitability and success.”
Best Practices for Determining What You Need in a Board:
In researching a variety of resources for how a board should be structured and what exactly should be their responsibilities, I compiled a list of the following best practices:
- The Board should include at least one independent director with experience in growing companies through the early stages and, during the very early stages, the Board she be no more than three people – including the Owner/CEO.
- The Board should meet monthly, and spend the majority of its time reviewing the CEO’s operations report which should include at a minimum the status of the development schedule, the sales funnel, and the next financing.
- The Board should also review the monthly financial statements and a report of the budget versus actual expenses.
- The Board should formally approve all issuances of shares and options, and approve any term sheets to raise financing.
- The Board should establish a materiality limit for contracts and other transactions and formally review and approve all contracts which exceed this limit.
- All Board decisions must be captured in formal minutes that are filed with the company lawyer in the Minute Book.
- Lastly, having been a VP of a startup, as well as an HR Consultant to over 100+ startups, the board should also, periodically, get a read on employee satisfaction/ morale – either informally or formally – so that they maintain a pulse on the overall stability of the workforce.
Best Practices for Board Development:
Given that the most vital issue relevant to governance must be Board development; the best practices for assembling a Board of Directors include the following:
- Board Composition
- Time Commitment
- Director Investment
- Board Management
- What are the expectations the CEO should expect from the board
- CEO Review Process (360) *
- Authorization Levels
- CEO Succession *
- Founder’s Syndrome
- Director Compensation *
- Risk Assessment *
- Strategic Planning *
- Whistle Blowing *
- Advisory Committees
- Holding Managers Accountable *
- Board Review *
- Directors Matrix of Skills *
- Governance Practices *
* Denotes those aspects that a skilled and seasoned Executive Coach/HR Business Partner can develop, manage and execute – which is why it’s so critical to have this person on staff early-on to ensure the long-term viability and strategic trajectory of the organization; it’s also essential that this person report directly to the CEO.
Typically, the ﬁrst board of directors consists of a minimum of three people. This usually includes the owner/founder or the ﬁrst president. It’s advisable that you check the appropriate governing legislation or accreditation guidelines to determine any regulations related to board size.
As the venture grows and becomes more complex, additional board members should be brought in that fill a need (or competency) and compliment the overall composition. Each addition to the Board will then bring a background that adds value to the total board. Key elements of the operation may require board members to have familiarity or expertise in areas such as research, marketing, HR, fundraising, law, and ﬁnance, as well as knowledge of the relevant industry. A pattern of backgrounds needs to be developed to ensure that the board is balanced and valuable.
According to all of the available research, the bylaws of any venture should set a maximum number of directors and the board must endeavor to maintain this level. Also, it’s recommended to ensure that the number of board positions is an uneven number, to avoid the problems that might arise from a tie vote.
When boards get too big, members ﬁnd it easier to miss meetings and become disengaged; it’s can also become quite difﬁcult to hold a reasonable discussion wherein everyone interacts. This results in the formation of sub-committees of the board where certain directors have greater expertise on a certain issue – which is often the reason for establishing an executive committee that includes a few key board members. It is easier to get this group together more often. Nevertheless, subcommittees have the potential of lessening the effectiveness of the board. So the general rule is to create few subcommittees, but to have them for at least audit and compensation, and to utilize there the independent (i.e., non-management) directors.
It’s quite simple: boards govern while management manages. Board members are stewards and good boards work on the premise that while accountability can be delegated, responsibility cannot. Boards are responsible to their members for the success and failure of the organization. They oversee the conduct of the business or the NPO, always through its leader, not around him or her. For this process to work, the business leader must report to the board, not be a member of it.
The Overriding Role of the Board:
The main role of the Board is Three-fold:
- Financial: This applies to both proﬁt and NPO ventures. It involves overseeing the ﬁnancial results, judging the forecasts, ensuring that lines of funding are available, seeing to the fair allocation of earnings, and guiding the leader to always focus on the right path to growth, ﬁnancial security and success. This sounds like a business but it equally applies to NPOs.
- Visionary: This means “doing the right things” as opposed to “doing things right.” While the strategic plan should come from the management, the board should provide insight, vision and focus on the rightness of strategic objectives and the way in which they can be achieved. Given their wider scope and experience, board members can bring ideas from their own backgrounds to assist with strategy and implementation.
- Reinforcement: This includes the strengthening of the skills of the board itself as well as the staff. It involves transparency, adding value to the day-to-day operations of the organization and ensuring that the many choices facing the organization are prioritized, while watching over the balance of compensation, authority and responsibility.
Best Practices for How the Board Should Function:
For-proﬁt corporations and NPOs are composed of members or shareholders. They elect directors who appoint ofﬁcers. The members also appoint the auditors. The directors govern the organization. Directors owe a ﬁduciary duty to their venture. They must act honestly, in good faith and in the best interests of the venture. Good governance is much more than just governance; however, the best practices for structuring the Board include:
- Vision–envisioning the future and developing a corporate mission.
- Direction–setting goals and policies for the venture.
- Transparency–maintaining open processes, shared information, effective communication standards, and regular and meaningful reports.
- Guidance–providing advice and direction.
- Due diligence–getting inside the metrics and judging the risks involved.
- Commitment–being engaged emotionally and intellectually to the venture’s course of action
Operating Model of a Board:
Much has been written on the subject of good governance. Essentially, it is the ability and willingness to ask the right questions at the right time and to provide good advice while demonstrating conﬁdence in the venture.
The chart/outline below summarizes the major themes and functions of the Board and provides a brief description of each aspect.
Exhibit 1 Illustrative governance operating model
· Committee structure and charter
· Organizational structure and reporting lines
· Control and support functions’ roles
|· Outlines board and management committees structures, mandates, memberships and charters
· Establish design of governance framework
· Delineates organizational structure, reporting lines and relationships
· Highlights role and independence of control and support functions from Owners
|· Committees authorities and responsibilities
· Management accountability and authority
· Board oversight responsibilities
· Reporting, escalation and veto rights
|· Outlines the type of committees and associated responsibilities
· Specific functional account-abilities for day-to-day management of business practices across the enterprise
· Delineates board and management approved policies supporting the delegation of authority
· Delineates board and management approved policies supporting decision making including reporting, escalation& voting rights
Talent & Culture:
· Business and operating principles
· Core beliefs and risk culture
· Leadership development and talent programs performance
· Management and incentives
|· Aligns governance with operating and business principles
· Articulates core beliefs, foundation for culture
· Highlights characterizations of risk culture
· Outlines leadership succession, assessment and development
· Aligns performance management, approach, measures and account-abilities as they relate to compensation and incentive plans
· Policies and procedures
· Reporting and communication
|· Establishes design and content of policy manuals and associated procedures
· Outlines type and frequency of internal reporting and communications
· Defines scorecards, measures and metrics to track performance
· Aligns technology and governance requirements
Second Priority: Human Capital Role:
Throughout the past two decades of consulting start-ups, it’s been my experience that many prospective clients know that they need assistance with their human capital function but lack consensus on where, and knowledge on how, they should start; therefore, whether the priority is seen as recruiting, hiring and on-boarding; compensations; or developing a best-in-class performance development tool, my job is to help them prioritize their goals by balancing the needs of the business with that of the people.
The first priority is always to ensure that the organization is in full compliance of all state and federal regulations; I feel strongly that my first priority should be to insulate the organization from potential liability BEFORE getting to on-boarding, compensation or other human capital initiative.
In order to accomplish this goal, I recommend that the first thing undertaken is a comprehensive HR audit; the audit report will not only show where there is a lack compliance but it will prioritize what needs to be accomplished and include a recommended project plan with tentative dates, estimated time and costs, and it will also list any other resources that may be needed. Then, depending upon the overall time-frame the client wants, we’ll begin to chip away at each of the initiatives.
Find out more about Organizational Development Solutions’ HR Audit (Click Here)
Human Capital: Real-Life Experiences & Insights:
Unfortunately, too many boards learn too late the costs of high turnover due to little to no accountability, poor (or no) on-boarding and the effects of untrained/poor performing front line leaders; therefore, by incorporating effective best practice mechanisms for on-boarding, staff retention, employee satisfaction and leadership development in the early stages, you’ve ensured that your most important resource (your talent) isn’t walking out the back door and making a bee line to your competitors.
While boards do, and should, empower their CEO/President to run things based upon how she/he sees fit, at the same time that shouldn’t mean burying their heads in the sand and finding themselves with a train wreck due to rampant claims of harassment, unfair treatment, hostile work environment or worse…
As a Consultant, I’ve seen this happen too many times; therefore, there should be some sort of mechanisms in place that will raise a red flag when/if there are things occurring within the workplace that are unprofessional, negatively impact productivity or morale and/or expose the organization to liability.
Case in point: I’ve been brought into several early stage companies to assist them in developing essentials aspects of their HR function (such as performance management); however, once I scratch the surface and start talking to the employees, I soon learn that there’s a hornets nest of harassing behavior, unqualified/untrained front line leaders and an abundant amount of exposure and potential liability for the organization; thus, my role quickly changes to that of tactical function as I take on the employee relations issues and a workplace culture of dissatisfaction with poor morale.
On those occasions, I have a treasure trove of options that generally resonate with the employees and help to modify behaviors fairly quickly; they include things such as:
- Updating (or writing) job descriptions;
- Performance objectives with clear accountability;
- Development of a sound leadership development curriculum;
- Improvements in the manner and ways communications is distributed;
- Creating exit strategies for those few folks that just need to go;
- Ensuring that everyone in a management role is doing regular one-on-one’s with their direct reports;
- Rolling out a Professional Code of Conduct, Guiding Principles and Co. Values Statement;
- And, enhancements in the management practices so that employees hear as much about what they’ve done right and/or great as they do about what’s been done wrong or needs improvement (always leaving employees with the sense that the glass is half full rather than half – or totally – empty).
Give Your HR Function Visibility and Credibility:
Too often, startups will align the HR Lead so that it reports to the CFO. Not only is this of no real value to the organization or the role of the Executive Coach/Business Partner, but by not having a seat at the table when discussions take place and decisions are made – particularly given that many of those discussions and decisions directly impact how and what the organization expect HR to be accountable for, you’re leaving your HR Lead to learn what was discussed and decided of second hand and it’s a disservice to the staff; it puts the HR lead at a distinct disadvantage when decisions impacting the employee population and culture don’t have any input from that person closets’ to both the staff and the culture.
It’s my personal belief that by having HR report to the CFO you’re setting up your HR Lead to fail due to the fact that information will be parceled out to them by different sources (i.e. marketing, IT etc.,) each with their own perceptions of what took place and, instinctively, each will have their own agenda with competing priorities from that of their peers leaving to the HR Lead to dissect the self-serving interpretations and form a conclusion that balances the needs of the business with that of the people.
Furthermore, this type of reporting relationship is, indirectly, telling the staff that this function is one of a bean counter and, thus, a tactical reactive function that, while supporting the human capital side of the equation, is not viewed important enough by the executive team to part of the decision making process. With HR contained in the finance/accounting arena, it also makes cooperation (and communication) between HR and the other departments appear somehow less important.
Lastly, give your organization a strategic advantage and competitive edge and empower your HR Lead to effectively manage and direct the human capital portions of your business!
Call me and let’s discuss: 773-807-8437
Organizational Development Solutions