One of the main issues unique to innovative companies is that there appears to be a discrepancy amongst investors about the importance of governance processes and procedures. Some investors feel very strongly about ensuring solid governance principles are in place while others—both newer and veteran investors—seem to either take a “check the box” approach to governance, or place a lower value on board structure and governance principles and practices (and therefore do not ask for them).
Some innovative companies, because they are so attractive to investors, seem to be able to get away (almost right up to an initial public offering) with having informal governance structures, processes, and procedures. However, even the most successful innovative companies are questioned about corporate governance from a very early stage.
Innovative companies recognize the importance of having boards for advice and—more importantly, for very specific areas of expertise—but they don’t always see value in the formalization and structure of boards. To be sure, the priority for a company is to have a high-value investor who can give advice. However, part of what makes their value high is a strong commitment to governance oversight as a formal structure.
The following perspectives illustrate the differing and sometimes conflicting perspectives and experiences on governance:
- Entrepreneur Perspective: “We meet once a quarter to solicit feedback on board agendas, and have a once-a-month call on key performance indicators. We’re sharing. What more do you want from us?”
- Investor Perspective: “We may be less concerned now with a formal board structure—at least with the earlier stage companies—but my assessment of the willingness of the CEO to be transparent and to share both good and bad news on a regular basis is key. A negative assessment of that transparency is enough for me to pass on an otherwise strong investment.”
The director and board are discussing the same topic: governance expectations. But while the entrepreneur is focused on outputs (making sure he/she has checked off all the tasks on a to-do list), the investor is thinking about the outcomes of these actions, i.e., looking for signs as to how transparent the company is.