Get Your Corporate Governance Groove On: Why social entrepreneurs need get in step with reality
So, it’s your big moment.
You started out with just an idea for a social enterprise, and you’ve worked hard to get the right pieces in place to put it into action. You’ve honed your business plan and your elevator pitch. You’ve thought about measuring impact. To get the word out and to pick up a little pro-bono consulting feedback, you’ve blogged, guest blogged, reblogged, Tweeted, pinned, and shared like the unreasonable innovator you are, gaining early stage funding from Kickstarter and some friends and family. You walked into that venture capital firm’s boardroom and knocked the argyle off their socks. They’re this close to showing you the money. There’s just one more question:
Who’s going to be your CEO?
If you’re not ready for that question yet, you should be. You may think the answer is obvious: YOU. But chances are you will need to guess again. A recent Harvard Business Review blog post explored venture capitalists’ “strange, instinctual need to replace founders.” You’ll have to make a case for yourself or at least a case for someone you’d prefer, because they’ll have reasons why it shouldn’t be you and a few other candidates in mind, if not in dossiers they’ve prepared for the meeting.
The CEO question is just the first decision you’ll have to make together, as the venture capitalists will join the rest of your board of directors (you already have one, right?). The rest of your executive or “C-suite” is up for discussion. Chief financial officer. Chief marketing officer. Chief operating officer. And those big strategic decisions about marketing direction and monetizing models? All that and more are up for discussion as part of the delicate dance called corporate governance. And if you want to attract investors to scale up your enterprise, you have to learn how to dance.
“Weak governance – which we see in both for-profit and non-profit organizations – can be a significant deterrent to investors in any market,” says Patrick Davis, director of strategic initiatives at the impact investing firm Calvert Foundation. “When investing in social enterprises, governance can sometimes constitute an even greater concern, because the organization may be also trying to prove an unproven business model or it may be operating in a world with razor-thin margins, so multiple risk factors are already heightened.”
Davis listed some common corporate governance issues Calvert has encountered, such as related party transactions, a lack of board member terms, too few board members with requisite experience, and no dedicated executive financial function such as a CFO and a board committee tasked with financial oversight.
Potential investors like Calvert are definitely willing to discuss corporate governance best practices with prospective investees. It’s likely you can stand out as a candidate for investment by showing how serious you take an otherwise dull topic of conversation. You can also brush up on good corporate governance practices by checking out toolkits and case studies from the IFC’s Global Corporate Governance Forum. The Aspen Network of Development Entrepreneurs also published a corporate governance toolkit for small- and medium-sized enterprises (SMEs) in East Africa, which has plenty of lessons for SMEs in other contexts. The Schwab Foundation for Social Entrepreneurship recently published a report on creating an effective board, specifically for social entrepreneurs. (Check out a NextBillion post on it here). And of course there’s the #corpgov hashtag on Twitter, which is how I found these two resources in the first place.
Not every social enterprise is destined be big enough to warrant the attention of venture capitalists, but those that do have the power to create value and create jobs for one or many communities at the same time. To those that have the potential to get there someday, please empower yourself with good corporate governance principles and practices now, and know how to handle the responsibility that comes with taking on later-stage investors. We’re counting on you.