Governance, the Entrepreneur, and the Good Old Hockey Game
Entrepreneurs are the driving force behind the creation and sustenance of value within a company. Through their innovative thinking, risk-taking, and vision, entrepreneurs play a pivotal role in shaping businesses and driving economic growth.
Great entrepreneurs create value by identifying and seizing opportunities that others may overlook. Great entrepreneurs possess a keen sense of market gaps, unmet needs, or emerging trends. They are quick to spot niches where they can introduce new products, services, or business models. By recognizing these opportunities, entrepreneurs can capitalize on them, potentially gaining a competitive edge and establishing a strong market presence.
Entrepreneurs are natural disruptors. They constantly seek better ways of doing things. Through creativity and ingenuity, they develop new solutions, products, or processes that differentiate their companies from competitors.
Entrepreneurs are known for their willingness to take calculated risks. While not all risks lead to success, the ability to identify which risks are worth taking is a critical factor in value creation. Entrepreneurs understand that innovation and growth often require venturing into uncharted territory. Whether it's investing in research and development, entering new markets, or exploring novel business models, entrepreneurs are willing to take the necessary risks to achieve their vision.
Great entrepreneurs foster a culture of creativity and growth within their companies. They inspire their teams to think outside the box, challenge the status quo, and embrace change. This culture of innovation not only enhances the company's ability to adapt to market dynamics but also attracts top talent. They build strong relationships with all stakeholders, such as investors, customers, and suppliers.
In most cases, the entrepreneur is also the Chief Executive Officer (CEO) of the company she or he founded. Using hockey (of course, the Canadian guy uses hockey), as the metaphor, the CEO is the Captain surrounded by a team playing their respective positions. Just as the CEO typically reports to the Chair of the Board on behalf of the entire Board (assuming of course there is a proper board framework), let’s analogize the Board Chair as the Coach on the bench and the General Manager of the team as the Board of the company. While the analogy is not perfect, we will tweak it a bit such that assume that the Captain can select all their team players.
Like any great team, there is a game plan to win against the competition. The Coach and General Manager establishes the vision, goals, and values for the team. They are responsible for setting the strategy and are ultimately held accountable to the President of the team representing the team ownership. They delegate the playing of the game to the team under the leadership of the Captain.
But there are rules and guidelines to play by. These rules and guidelines should be designed such that the team members could play to their maximum potential. This is no different with the role of the Board in which governance serves as the cornerstone of accountability.
First and foremost, governance mechanisms are instrumental in ensuring transparency and accountability within a company. They define the rules, procedures, and standards that guide decision-making and conduct at all levels of the organization. With a robust governance framework in place, companies are compelled to disclose accurate financial information, adhere to ethical practices, and act in the best interests of their stakeholders. Transparency not only enhances a company's reputation but also enables investors and the public to assess its performance and integrity.
Moreover, governance acts as a safeguard against unethical behavior and corporate misconduct. It establishes checks and balances that deter executives and employees from engaging in fraudulent activities or pursuing short-term gains at the expense of the company's long-term viability. Board oversight, independent audits, and compliance with legal and regulatory requirements are critical components of this preventive function. By enforcing ethical conduct and adherence to the law, governance helps companies avoid legal liabilities and reputational damage.
Governance also plays a pivotal role in maintaining stakeholder trust. Companies are interconnected with a web of stakeholders, including shareholders, employees, customers, suppliers, and communities. Effective governance ensures that the interests of these diverse groups are considered and balanced. By doing so, it fosters trust among stakeholders who rely on the company to act responsibly and create value over time. When stakeholders believe in the company's commitment to ethical practices and fair treatment, they are more likely to invest, engage, and collaborate, which ultimately contributes to the company's growth and stability.
Good governance is essential for long-term success. Companies that prioritize good governance are more likely to have a clear strategic direction, efficient operations, and the ability to weather economic downturns. Strong governance practices are often associated with better financial performance and sustainable growth, as they enable companies to make sound decisions, attract top talent, and access capital at favorable terms.
What happens to the team when the Captain comes into increasing conflict with the players, Coach or General Manager? Probably not a good outcome. But what happens when the Captain, and particularly a star or celebrity Captain, is also the Coach and/or General Manager? Is it the same outcome? In the business world, we have witnessed an increase in the last decade of situations particularly in the technology industry in which the CEO has held power greater than perhaps expected, leading to unfortunate results.
In several cases, we have witnessed a number of celebrity CEO-Entrepreneurs who held sway over their board by virtue of their charisma and perceived celebrity. Read for instance https://hbr.org/2002/09/the-curse-of-the-superstar-ceo. Recent examples include Adam Neumann (WeWork), Elizabeth Holmes (Theranos), and Sam Bankman-Fried (FTX). (I left Elon Musk out because although he exhibits this behaviour, he has created extraordinary shareholder value thus far, perhaps with the exception of X.) In those cases and many like them, the board was asleep at the wheel. They either ignored obvious red flags, they felt uncomfortable challenging the celebrity CEO, or in the case of FTX, no formal board was even put in place! Furthermore, the celebrity CEO might not solicit ideas that challenge their own views or take great offense if you do so. In an ironic twist, it is the board member that often leaves the organization despite their single most important role on the Board is to hire or fire the CEO.
We have also seen many situations in which the governance issue might be rooted not with the CEO, but with the Board Chair. In particular, where the Board Chair is an Executive Chair (meaning they are also employed by the company and therefore not independent of management) it can be difficult to delineate the dividing line between management and governance. Using the hockey analogy, if the Coach keeps coming off the bench because they still want to shoot the puck, they will cause enormous grief to the Captain and team on the ice. Sometimes the situation is exasperated if the Coach was once a hockey player themselves and maybe was previously the Captain. Recent examples of this behaviour include Bob Iger (Disney), Howard Schulz (Starbucks), and Heather Reisman (Indigo). In many of these cases and other cases, the Executive Chair role might threaten the independence of the CEO and call into question business strategies just because they are not their own. The problem is particularly acute when the Executive Chairs used to run the company as CEO. The central problem with many of the Executive Chairs is that when the board is trying to discharge their duties and challenge management, exactly whose side is the Executive Chair on?
As a third and final example where good governance can be compromised involves the use of multiple voting shares (MVS). These are a class of shares that carries disproportionately more votes and influence than other shares. The use of MVS have been in the press recently, both positively and negatively.
The positive power of MVS lies in their ability to help companies bridge across the growth gap – and to reduce the probability of an early sale before the critical value creation phase has been completed. Examples of companies that did this include Facebook, Shopify, and Google. But what happens when the companies are either past their early growth phase such as the companies above or are clearly in their mature phase such as Rogers Communications, Newscorp, and Paramount Global? Should there be limitations on the use of MVS especially when the original purpose of such use might no longer be applicable?
As a solution, sunset provisions can be inserted. For example, the MVS would not be transferable (and therefore not attract a premium) and should convert into commons when the Entrepreneur ceases to be active or ceases to hold a sufficiently material economic interest that aligns with this governance power. Perhaps the MVS automatically sunset after a period of time and then convert into common shares with the rest of shareholder base.
In the immortal words of Wayne Gretzky, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” And a great Coach and General Manager stays the hell off the ice so the team can play their best game.
John Ruffolo
Founder & Managing Partner, Maverix Private Equity