Insights — Governance
Governance Beyond the Founder: How Growing Companies Make Decisions
Informal decision-making works well until it does not. This article examines what governance is genuinely for, why growing companies outgrow the founder's judgement, and the small disciplines that make a business easier to run, sell and invest in.
The company that runs on the founder's judgement
Most successful growing companies are governed by the instinct of one or two people. Decisions are made quickly, with full context, by somebody who knows the business intimately and cares about the outcome more than anybody else. This is not a weakness. It is frequently the reason the business exists at all.
The difficulty is that informal governance does not scale, and it fails gradually rather than suddenly. At twenty employees, one person can hold the whole picture. At sixty, nobody can. Decisions are made by people who lack the context the founder would have applied, and the founder discovers this only when something goes wrong.
The transition is uncomfortable because it requires giving up something that has worked. Governance is often presented as bureaucracy imposed on a business by lawyers and investors. In practice it is a set of arrangements that allow a business to make good decisions when the number of decisions exceeds the capacity of any individual to make them personally.
What governance is actually for
Governance is the set of arrangements that determine who decides what, on what information, and with what accountability. It includes the board, the delegation of authority, the reporting the business produces, and the records it keeps. It is not a committee structure. It is the machinery of decision-making.
Its purpose is threefold. It improves the quality of decisions by ensuring they are made with proper information and an appropriate challenge. It allocates responsibility so that somebody is accountable for outcomes. And it creates a record, so that the business can explain what it did and why, which matters to regulators, buyers, lenders and courts.
The third purpose is the one most often overlooked, and it is the one that costs the most to be without. A business that cannot demonstrate how a decision was reached is in a weak position when the decision is challenged, whether by a shareholder, a regulator or a claimant.
Decisions that should not be made alone
Some decisions are too consequential to be made by a single person acting informally. The disposal of a significant asset, entry into a long-term commitment, the appointment or removal of a director, the approval of accounts, the adoption of a borrowing facility and any transaction with a party connected to a director all fall into this category.
The principle behind the list is straightforward. Decisions that involve significant value, long duration, conflict or the interests of others should be made collectively, with proper information, and recorded. Everything else can be delegated.
A written schedule of matters reserved to the board, agreed by the directors and kept current, is the simplest way to make this concrete. It is a short document. Its value lies in the fact that it removes the question of who should decide from the moment of decision, when the answer is often influenced by who wants what.
The board that exists on paper
Many growing companies have a board that exists in the statutory sense and not in any practical one. There is a single director, or two directors who are also the owners, and the board never meets. Decisions are made by the people who would have made them anyway, and the board is a formality completed annually.
This works until it does not. Where there is more than one shareholder, the absence of a functioning board removes the forum in which their interests are represented. Where there is external investment, the investor expects a board that meets. Where there is a dispute, the absence of board minutes leaves the business unable to demonstrate how decisions were taken.
Establishing a functioning board does not require a large group of people. Two or three directors meeting quarterly, with an agenda, papers circulated in advance and minutes recorded, is sufficient for most businesses. The discipline is the point, not the number of participants.
Directors' duties in plain terms
Directors owe statutory duties to the company, and they are personal. They include acting within the company's constitution, promoting the success of the company for the benefit of its members as a whole, exercising independent judgement, exercising reasonable care, skill and diligence, avoiding conflicts of interest, and not accepting benefits from third parties.
The duty that catches growing companies most often is the duty to exercise reasonable care, skill and diligence. It requires a director to act with the knowledge and experience they actually have, and with the knowledge and experience a person in that role would reasonably be expected to have. A director cannot defend a decision by saying they did not know.
The second most common is the conflict duty. Where a director has an interest in a transaction, whether through another company, a family connection or a personal arrangement, the duty requires that the conflict be declared and managed. The absence of a declared conflict in the minutes is not evidence that there was none; it is evidence that the process was inadequate.
Conflict of interest and the related party question
Transactions with connected parties are common in growing companies and are not improper. A director's company may supply services, a family member may be employed, premises may be leased from a shareholder. What matters is that the arrangement is identified, approved properly and documented.
The risk arises in two directions. Where the business is sold, a buyer will examine related party transactions closely, because they are a route by which value leaves the company. Where the company encounters difficulty, an insolvency practitioner will look at the same transactions and ask whether the company received fair value.
The practical controls are a register of interests, a procedure requiring interested directors to withdraw from the relevant discussion, and contemporaneous minutes recording the declaration, the discussion and the decision. None of this is onerous. All of it is considerably easier to put in place before a transaction than during one.
Delegation and the limits of authority
As a business grows, authority must be delegated, and the question becomes how far and to whom. Without a clear answer, the business produces two opposite problems: decisions made by people without the standing to make them, and decisions escalated to the top that should never have reached it.
A delegation schedule addresses both. It sets out what each role may commit the business to, at what value, and what requires escalation. It covers purchasing, contracting, hiring, credit and the release of funds. Where the business operates through more than one entity, it should be clear which entity is committing.
The schedule also defines when a signature is not required, because an email accepting terms can bind the company as effectively as a signed document. Businesses that publish this guidance find that decisions move faster, because people know where the boundaries are and stop asking about matters that are plainly within their remit.
Records: what the company must be able to show
A company is required to keep adequate accounting records, to maintain a register of members and other statutory registers, and to retain minutes of board and shareholder decisions. Beyond the statutory minimum, the records that matter most in practice are those that show how significant decisions were reached.
Minutes are the most frequently neglected and the most valuable. A well-kept minute records the decision, the information before the board, the matters considered and the reasons for the conclusion. A minute that records only that the matter was discussed and approved provides very little protection when the decision is later questioned.
The test is simple. If the business had to explain a decision to a buyer, a regulator or a court three years from now, would the file support the explanation? Where the answer is no, the records are not adequate, and the deficiency is easy to correct while the matter is current.
The annual cycle and why it matters
Governance works best as a rhythm rather than a series of events. A predictable annual cycle allows the business to deal with recurring obligations on time, and prevents the accumulation of items that are deferred until they become urgent.
A workable cycle for most growing companies includes a board meeting each quarter, with the annual accounts, the budget and the strategy review attached to particular quarters. It includes an annual review of insurance, of the risk register, of the delegation schedule and of the registers of interests and members. It includes the confirmation statement and the accounts filing.
The benefit of the rhythm is that nothing depends on somebody remembering. Obligations are diarised, papers are prepared in advance, and decisions are made at the point in the year when they can be made well rather than at the point when a deadline forces them.
Shareholder agreements and the expectations behind them
Where a company has more than one shareholder, the relationship between them is governed partly by the articles and partly by a shareholders' agreement. The agreement deals with the matters the statutory framework does not: how shares are valued, how they may be transferred, what happens on death or departure, and how deadlock is resolved.
Growing companies often operate without one, relying on the goodwill of the parties and the fact that everybody gets on. That works while everybody gets on. It fails at precisely the moment the document would have been useful, which is when the relationship has broken down and there is no agreed process for resolving it.
The agreement is also the place to record expectations about participation, remuneration, dividends and exit. Writing those down is uncomfortable at the outset and considerably less uncomfortable than discovering, years later, that the shareholders held materially different understandings of the arrangement.
When investors arrive
External investment changes governance more than any other event in the life of a growing company. An investor will expect a board on which it is represented, information rights, reserved matters requiring its consent, and reporting against agreed measures.
Those requirements are reasonable, and they are also constraining. Reserved matters commonly include further borrowing, changes to share capital, the appointment and removal of directors, material disposals, and any change to the nature of the business. A founder who has not read the list carefully may find that decisions previously within their authority now require consent.
The time to consider the implications is before the investment is agreed. Investors negotiate terms because the terms protect their capital, and that is legitimate. It is equally legitimate for the founders to understand precisely what discretion they are giving up, and to negotiate the boundaries while they still have the leverage to do so.
The statutory filings nobody remembers
Every company has filing obligations, and the penalties for missing them are imposed on the company and on its directors. The confirmation statement, the annual accounts and any changes to directors, officers or share capital must be notified within the prescribed periods.
Beyond the routine filings, there are obligations that arise less often and are more easily missed: the notification of a change in the company's people with significant control, the registration of charges, the notification of certain resolutions, and the reporting obligations that arise on the allotment of shares.
The consequence of a missed filing is rarely dramatic in itself, and the cumulative effect is not. Lenders, buyers and banks review the public record as part of their assessment. A file of late filings and amended returns suggests a business that does not attend to its obligations, which is exactly the impression a growing company should avoid.
Governance as a commercial asset
Governance is usually discussed as a matter of compliance, which understates its commercial value. A business that can demonstrate a functioning board, clear delegation, proper records and a clean statutory position is easier to sell, easier to finance and easier to insure.
The effect on a transaction is the most visible. Due diligence on a well-governed company is a process of confirmation; on a poorly governed one it is a process of discovery. Discovery consumes time, creates leverage for the buyer, and typically produces a price adjustment, a warranty or an indemnity that the seller had not anticipated.
There is also an internal benefit that is easy to overlook. Clear governance allows a business to delegate with confidence, which allows the leadership team to focus on the matters that genuinely require their attention. A founder who is the sole decision-maker in a business of any size is a bottleneck, and bottlenecks limit growth.
Common failures and how they begin
Governance failures rarely begin with dishonesty. They begin with informality that was appropriate at an earlier stage and was never revised. A decision taken by one director because it was quicker. A transaction with a connected company because it was convenient. A board meeting not held because everybody already knew what was agreed.
The second common pattern is the deferred document. The shareholders' agreement that was never finalised. The delegation schedule that was drafted and not adopted. The register of interests that was never created. Each is a small omission that leaves the business dependent on memory and goodwill.
The third is the absence of challenge. Where a board consists of people who agree with each other, or of people whose positions depend on the founder, decisions are not tested. Good governance requires somebody in the room whose role includes asking the difficult question, and that is one of the quieter functions a general counsel performs.
The advisory board as a first step
Some businesses are not ready for a statutory board but have outgrown purely informal decision-making. An advisory board offers a middle path: a small group of experienced people who meet periodically, provide challenge and perspective, and carry no formal authority within the company.
The advantages are considerable. The founder retains discretion over every decision. The cost is limited to fees and time. And the business gains access to experience it could not otherwise afford, whether commercial, sector-specific or financial. Many businesses describe the first advisory board meeting as the most useful three hours they have spent that year.
The limitations should also be understood clearly. An advisory board cannot bind the company, does not carry the accountability of a director, and cannot substitute for proper governance where that is required by an investor or a regulator. It is a step towards better decision-making rather than a replacement for the structures the business will eventually need.
The information the board needs
The quality of a board's decisions is determined by the quality of the information it receives. Where directors are handed a set of management accounts an hour before the meeting, the discussion will be limited to the numbers rather than to the business behind them.
A useful board pack is short and consistent. Management accounts against budget, with a commentary on the significant variances. A cash position and a forecast. An update on trading, customers and people. A review of the risk register. And a note of the decisions required, with the information needed to make them. Anything that does not help the board decide something does not need to be in the pack.
The discipline of producing the pack is valuable in itself. Preparing a clear summary of the business each quarter forces the leadership team to understand its own position, and the questions that arise while writing the pack are frequently more useful than the questions asked at the meeting. Consistency matters as much as content, because a board can only identify a trend if it is shown comparable information over time.
Family businesses and the generational question
Family businesses carry governance questions that companies with unrelated shareholders do not. The relationship between ownership and management, the expectations of family members who work in the business and those who do not, and the arrangements for succession all require decisions that are difficult to make informally.
The most common failure is deferral. Succession is postponed because the conversation is uncomfortable. Remuneration for family members is set informally and becomes inconsistent over time. Roles are allocated by relationship rather than capability. None of these problems announces itself, and all of them become acute at the moment of a death, an illness or a dispute.
The remedies are familiar from ordinary governance and simply need to be applied deliberately. A shareholders' agreement that deals with succession and transfer. A clear statement of who holds which role and on what terms. A family forum where the interests of owners are discussed separately from the management of the business. Difficult conversations are considerably easier when they are scheduled rather than triggered by an event.
Governance during difficulty
Governance is most severely tested when a business is under pressure. Trading deteriorates, cash tightens, and the temptation is to concentrate decisions in fewer hands and to defer the formalities that seem irrelevant to survival.
That instinct is understandable and dangerous. Where a company is approaching insolvency, the directors' duties shift towards the interests of creditors, and the decisions taken during that period are examined closely afterwards. A board that stopped meeting, took payments it should not have taken, or transferred assets to connected parties without proper consideration will find each of those decisions scrutinised in detail.
The businesses that come through difficulty best are usually those that increase their governance rather than reduce it. More frequent board meetings, better records, proper minutes, an honest assessment of the position and professional advice taken early. Those steps do not guarantee a good outcome, and they materially improve the position of the directors and the prospects of the business.
The position stated plainly
Governance is not a structure imposed on a business from outside. It is the set of arrangements that allows a business to make decisions well when the number and complexity of those decisions exceed what any individual can hold.
The requirements for most growing companies are modest: a board that meets, a schedule of matters reserved to it, a delegation of authority, minutes that record the reasoning, a register of interests, and a shareholders' agreement where there is more than one shareholder. None of it is expensive, and all of it is easier to put in place now than at the point it is needed.
The businesses that adopt these disciplines describe the same result. Decisions are made faster, because the route is clear. The leadership team is less consumed by matters that should never have reached it. And when an investor, a buyer or a lender looks closely at the company, what they find confirms rather than undermines the value the owners believe they have built.
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