Why Corporate Governance Matters for Your Startup's Future

Corporate governance describes the internal management of a company and the system of checks and balances between a company’s key internal players (the board, founders and shareholders). It is also used by external parties as a measure of the integrity and efficiency of the company, as well as its ability to ensure regulatory compliance. 

This all means good corporate governance can directly affect investor confidence in the company.

Startups, at least those with a growth mindset, will be aiming to look ahead from the get-go. You won’t be in the early stages for long. Setting up your corporate governance early allows you to keep focused on the complexities that come with scaling up a fast growing company. 

Moreover, with increasingly sophisticated players in the startup-ecosystem, Australia is seeing increasing levels of scrutiny between shareholders and investors, primarily around issues of corporate governance.  

At a basic level, good corporate governance involves some basic housekeeping such as:

1. making ASIC filings – always boring, never sexy, but required after 28 days of making a change to shareholders, directorships, etc;
2. getting all of your corporate, board documents together in the one place — especially useful for future due diligence or cap raises; 
3. getting all of your company contracts together in the one place — for the same reason
4. making sure employees with shares or options have paperwork issued, and appropriate filings have been made; and
5. updating cap tables, share registers, option registers, or better yet, migrating to electronic share registers.

And other measures you can read about in more detail in our article on housekeeping. 

But what else?  There are generally two sources for corporate governance rules. These can be found in the company’s Constitution and the Shareholder Agreement. 

What your Constitution and Shareholder Agreement should include

Your Constitution and Shareholder Agreement (the ‘governance documents’) set out the foundations of your company’s internal management systems. They should be drafted to specifically cater to your corporate structure, business requirements and goals. They should also account for any plans for expansion, growth or sale because the governance documents will deal with the rules regarding:

• The company’s share capital;
• Member (shareholder) rights;
• Voting rights;
• Meetings;
• Profit distribution, and
• The powers, appointment and remuneration of directors.

These are all the things that would concern an investor because it directly relates to the wellbeing and profitability of the company and their potential shareholding and rights.

Without adopting a Constitution, the CA 2001’s Replaceable Rules will kick into effect. This means that the Board of Directors will not have as much power of administration that they could, and although unlikely, makes them subject to any amendments or changes to the CA 2001.

Replaceable Rules apply when you don’t have a Company Constitution!

If your company does not have a Constitution or if your Constitution does not modify or expressly exclude them, then the Replaceable Rules will be in effect. These rules deal with:

• Company officers and employees;
• Management and inspection of books;
• Meetings; and
• Rights attaching to shares and the transfer of shares.

ASIC provides an outline of the Replaceable Rules on their site. All of these rules will apply to a proprietary company unless a Constitution specifically modifies or excludes them, or if you are a sole director and sole shareholder. Consider whether these rules are appropriate for your company or work in your favour.

The Board and the extent of the Directors’ powers

Private companies must have at least one director who ordinarily resides in Australia. Generally, directors can be appointed through a shareholder’s resolution at a general meeting or with a directors resolution and confirmed by shareholders. Likewise, a director can be removed through a shareholder resolution at a general meeting.

Directors are able to exercise all the powers of a company, unless the governance documents or CA 2001 states otherwise. The power to wind up the company and the power to amend or replace the Constitution is specifically reserved for shareholders and cannot be varied or excluded from the Constitution.

At an early stage, this might not seem very relevant to you. You will most likely be a sole director-shareholder.  If not, your other company’s directors are likely co-founders that you trust. However, later down the line, you might face investors who want to appoint someone else as a director, or as sadly happens too often, you could have a falling out with your co-founders.

Too little shareholder power and you’ll drive off potential investors. Too little director power and you might back yourself up into a corner. When it comes to governing documents, you want to make sure that you’re always forward-thinking and managing a delicate balance of power. 

Director’s Duties

Now, as the saying goes, with great power comes great responsibility. As a result of their broad management powers, directors are bound to Director’s Duties and have several liabilities which are owed to the company as a whole (as opposed to a single shareholder). As a brief summary, the four overarching duties are:

• to act with due care and diligence;
• to act in good faith, for the benefit of the company as a whole and for a proper purpose;
• to not use their position to improperly advantage themselves or someone else, or to cause detriment to the company; and
• to not improperly use information obtained from their position to advantage themselves or someone else, or to cause detriment to the company. 

Isn’t it too early to be thinking about this?

Never! While the pressure is generally on large companies, your corporate governance sets the stage for company culture and future decisions. Any company that envisions growth and expansion should be concerned with corporate governance from the beginning.

VC’s, sophisticated investors and angel investors will be extremely concerned with corporate governance. This means that if you think your business will need funding at some stage, you should be extremely concerned about corporate governance.

Let us help guide you through this process with efficiency and speed so you can get back to what you do best knowing you have the right corporate governance structures in place! Chat to us now.