Struktural design – Thought Splinters

1.    The issue

Governance is typically associated with larger organizations. The question here is whether Governance is needed also for the lone founder in the first generation. One can counter this proposal with arguments such as: the scope of activities is too small; and as the founder owns all the shares, he or she will be autonomous in their decision-making, anyway. The risk is to establish a rubber-stamp board only. Its task is merely to waive through the proposals of the CEO.

2.    The need

Governance serves to safeguard the quality of leadership. Modern theory emphasizes the potential deficiencies in the leadership in large, public enterprises by an agent who follows his or her own interests. Clearly, these risks are irrelevant when the owner serves as the CEO. However, this is just one risk. As a matter of fact, the first generation is phase with the highest risk of all. There is the “Liability of Smallness”: The small business entity can be shaken by shocks in the market or in the financial situation. There is the “Liability of Newness”: The acting managers simply do not yet have sufficient experience in coping with the manifold challenger. But even the extraordinarily successful owner and manager faces a very peculiar risk – causally linked to the experience of being successful: Overconfidence and hubris. Ownership might give the orientation for developing the business, but it does not by itself provide the competence to reach the targets. For all these reasons the failure rate during the first generation is remarkably high. Reading the second or third generation improves the sustainability significantly.

Important means of reducing the risk exposure and increasing the sustainability are – in most cases – not yet available for the first generation such as: financial reserves in the company or even some wealth outside the company or diversification of the business activities. Therefore, deploying the instruments of Governance is even more important to the securing of sustainability in this dangerous first generation.

3.    The implementation

Good Governance begins with the composition of the Executive Team. The typical founder is a businessperson, the executive for markets and operations. He or she then needs a counterpart for Controlling and Financial Management – normally comprising the Administration, too. This person should provide complementary know-how. The responsible person should also act as countervailing influence in analyzing the risks and opportunities of the business. It is in the best interest of the owner to have a person with autonomous judgement and the courage to defend this judgement in a discussion with opposing views.

This Top Management Team should then report to an “institution”. In the early phase of the development, this institution is – most likely – not a board with quite a few members. In this phase, we either find one person only to reports to or a small group of three individuals. Start with the “minimum” – design of a reporting relationship. “Reporting” might not be the best expression: “Shared reflection” might be a more illustrative term. There are basically two role models in professional activities which could provide a helpful analogy: The Coach and the Supervisor.

The Coach is a counterpart who takes care of the psychological, physical, and functional well-being of his or her client. There is a role of a Coach more oriented towards the psychical constitution of the client. But there is also a practice “Management Coaching” which focus as on the managerial performance. This is then, of course an ongoing relationship.

The other role is that of a “Supervisor”. Supervision is an established professional activity not only in the practice of psychotherapists. We see that in a wider context. Each profession has – most likely – an institution that can review the performance of its members in a specific case. For a long time (more than a century) companies must or may voluntarily engage Public Certified Auditors. Owners are well-advised the Statement of Accounts. Owners should ask the responsible partner in the Audit Firm to give his or her view from a “Supervision” perspective. This is an addition to the routine auditing work. An experienced partner in a qualified Audit Firm can cover an important range of evaluations of the business activity.

As the start-up grows to the size of an enterprise this initial structure of a sole persons develops into a board with several positions. To deploy the benefits of a board an intense and trusting communication among all participants is required. A small group provides advantageous conditions for communicating.

To deploy the benefits of a board a group of three non-executive board members seems appropriate. In a one-tire-board system this group would be complemented by the CEO and CFO as executive board members. In such a comparatively small group an intensive net of communication can develop.

4.    The role of the Chairman

Who should act as Chairperson in such a board? First question is whether a Chairperson is needed at all? This question is to be answered with “yes”. The sole owner is a powerful person anyway and Governance is therefore a delicate process. There is the risk that the board develops to a kind of talking shop, exchanging interesting points of view but without conclusions, decisions, and action programs. To prevent such a derailment a Chairperson is necessary with the responsibility to facilitate an efficient process. Process responsibility is the key word – the responsibility for the content of decision-making rest with the entire group. Often the managing owner is reluctant to assume the Chair even in a one-tier-system. From a Governance perspective it is better, anyway, to separate the Chair and the CEO-function. Thus, the natural design is to assign a non-executive board member to the Chair.

These design criteria may be different according to the specific persons involved. In addition, criteria might be adjusted fairly frequently over time. The important thing is to get started at all. Introducing Governance in the first generation is an important prerequisite for the successful transfer to the next generation.