Ownership vs. management – Should startups really care?
Is there a difference between ownership and management? Is it something really important for startups to get worried about?
Read on (guest post by Sanjay Anandaram):
The young founders of the young company looked happy. They had just finished a long meeting with a top class candidate for CEO of one of their soon-to-be-launched businesses. They had decided to bring on board seasoned professionals to help them achieve their long term goal of building a nationally admired and respected company. The CEO candidate too felt energized after the meeting with the founders and was excited by the passion and drive exhibited by the founders. He was impressed by their open style, frank assessments of themselves, their understanding of the market landscape and by their willingness to share financially.
Yet, he was a little uneasy. He called up the next day and wanted to meet the founders. He was concerned about “governance”. The founders were taken aback – what was this guy talking about?! They were taken aback only because of their lack of awareness about the intangible issue called governance. Sure, they had heard about it but hadn’t really worried about it enough to find out what it really meant. It was something, they thought, that only large public companies needed to bother about, that it was something bureaucratic that would only hamper their freedoms.
The above situation regarding governance related concerns is quite common in India. In an India that’s globalizing rapidly on multiple dimensions, Indian entrepreneurs too need to wake up to the important issue of governance. Especially in family owned companies. What is this thing called governance and why is it important for startups? A few sample concerns from the CEO candidate illustrate the types of issues that come under the umbrella of “governance”.
“Are the founders taking salaries or are they siphoning money out of the company?’
“Are all family members getting involved in the management of the company just because they happen to be shareholders?”
“Do family members report to each other in the hierarchy? How do they then do performance appraisals?”
“Does the company do business with related parties or persons?Is there a proper arms-length relationship”
“Is there a board that takes decisions or does the family decide?”
The delineation between ownership and management is an important aspect of governance. All too often, the distinction gets blurred and downright murky in India. It is important for a startup to seriously think of governance because good governance results in the creation of truly valuable, respected and admired companies. Professional executives tend to migrate to better governed companies. Investors feel very comfortable dealing with well-governed companies. Employees believe that their company will be fair not out of a patronizing attitude but out of respect for due process. Customers and partners trust a company that practices good governance. Stock markets reward well governed companies.
However governance, like many other things, isn’t a set of statements that’s written on a piece of paper, laminated and hung on a wall only to be forgotten. Governance is something that the company has to relentlessly demonstrate every day. There are multiple so-called “moment of truth” that will confront employees and management each and every day. It is through the execution of “well-governed” practices that the truly great company emerges.
The founders of the company have to practice it every day. It is hard work especially for a startup when cutting corners to achieve a short term goal seems very appropriate. But remember that there are others in the company who are watching and observing. And if the right company culture, namely one of a well governed company, is to be really brought into play, then each and every action has to be weighed against the yardstick of governance.
One of the critical issues relating to governance in a startup comes from the fact that the founders tend to identify themselves with the company. It takes emotional maturity to see that the company and the founders are two distinct entities with different interested stakeholders. What is therefore good for one might not always be good for the other. So, the realization that “what’s good for the company is almost always good for the founders” and that “what’s good for the founder isn’t usually good for the company” is what makes or breaks the governance issue.
What do you think?
Recommended Read: Tips on how to pitch to VCs | Should Startups hire a ceo?
The articles first appreared in FE07 edition and has been reproduced with author’s permission. img credit
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tags: indian startups
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About the author - Ashish Sinha is a Startup Mentor/Product Strategy Coach, and the founder/chief editor of pluGGd.in.
He has launched/managed couple of products (consumer as well as enterprise) in US and India, and now consults with startups/small businesses on their product/media strategy. He can be reached at: ashish (at) pluGGd.in [+91 98452 06443]
Hi Sanjay,
I think the points you have made are extremely valid and crucial. Most start ups in India are very heavily biased towards one side (either tech side or biz dev side or purchase side). There are very few companies that actually start out with a team that knows how to handle all facets of the company. The ones usually ignored or left out are:
a) HR – there usually are very few policies drafted (most often start up founders don’t even know what all this entails!)
b) Accounts – this is ignored until the company starts generating revenues (so if a company is a product company, in the period of product development and testing, the accounting goes for a toss.) Subsequently also, accounting for any funds raised is also not done that well.
c) Finances – Goes hand in hand with Accounts but startups (esp tech. have little idea about financing a company) and to lay out the financial plan for further rounds of funding
d) Decision making (i.e. management) – Often times as you said very well – owners identify the company with themselves. They automatically confer themselves with the rights to completely manage the company on their own (despite bringing more able people on board like a CEO).
You have really put things into perspective through this post Sanjay. A big thanks
This issue of governance vs ownership is what brought my current startup to a standstill( and still is unresolved) and created a huge rift among the founders. I think it’s really essential if you’re starting with a team of 2 or more people to identity and alienate the powers of governance given to each founder, and clearly outline the extent of their ownership in the company, and how that ownership translates into muscle when taking a collective decision.
It often happens that a good decision will be overridden just because the decision was proposed by someone who owned say 30% of the stake, and the one who owned 60% got his way. This can and should be avoided at any cost, as then you simply dilute the essence of the company, and it becomes more of a personal ego war in one sense.