The world has a fundamental problem with corporate governance
Business organizations are the fuel of our economy and the most fruitful wealth creators of our times. Despite legislations and industry regulations, trade relationships involve formed entities that each have their own rules, corporate culture, documentation principles and methodologies. Yet, in almost every country of the world, the fundamental principles of corporate governance — the way business organizations are created, run and liquidated — are a remainder of a pre-technology era, deeply misaligned with today’s world.
Incorporating and managing a company
If tremendous progress have been made in many developed countries, forming and managing a company is an administrative maze that nobody seems to challenge, as such habits are rooted in our minds and engraved in law. Nevertheless, when the praxis is shelled with a new perspective, it appears that most of the practice, documentation, requirements and tools are simply outdated and refer to times where no technology existed, not even a telephone — it was a remote-less business, requiring meetings and regular reports. Today, companies still hold board meetings, file annual accounts and intermediary situations, and in many countries maintain a paper-based shareholders registry. When no communication, hence no governance decision, was possible without a physical encounter, it was natural to design time-sensitive principles (meetings, periods, situations, status, reports, minutes — you name it). Telegraph, phone, telegram, internet, e-mail and videoconference have not undermined those principles with one bit. Doing business today requires ubiquity, real-time information, agile decision-making processes, flexibility and transparency. The discrepancy is obvious.
In emerging countries, forming a company is even close to impossible because of inextricable administration and rampant corruption. Business runs with no official deeds; in other words there is a lot of business but few companies. As Hernando de Soto brilliantly explains, running an unofficial business prevents people to put capital in motion and foster prosperity. “The poor of the world — five-sixths of humanity — have things, but they lack the process to represent their property and create capital. They have houses but not titles; lands but not deeds; businesses but not statutes of incorporation.” [1]
Facilitating the incorporation of companies is therefore a critical way to unlock value creation and business florescence in those countries, because formal titles of property are the fuel of business dynamics. “Without formal property, no matter how many assets the excluded accumulate or how hard they work, most people will not be able to prosper in a capitalist society. They will continue to be beyond the range of policymakers, of the reach of official records, and thus economically invisible.” [2]
The missed audience
On top of being obsolete and an inescapable burden to business, existing corporate governance requirements are also missing the most important audience: entrepreneurs, start-ups and small companies. Some studies show that the vast majority of reasons why new ventures crash in the first years of existence may be found into absence or failure of governance, or into events that would have been avoided or anticipated with a proper governance in place. Moreover, in the uncommon case where a startup survive and grow, corporate governance is not always ensured either, and all stakeholders progress blind. Very likely will the first governance requirements come along with the first external stakeholder (first investor, bank debt, independent director).
This is a fundamental problem in business since decades, and it genuinely startles me that no serious initiative has yet emerged to tackle that issue. I understand that putting law and states in motion takes time, and yes, incubators, accelerators and startup coaches are working with entrepreneurs — more focused on ideas and models than on governance though. Honestly, and knowing the startup death ratio, how is it still possible for young people to commit with partners in a venture that will shape the next years of their life — if not the entire existence in best cases — with no written agreement on the rules of engagement? How can small companies still be run with no proper resolution management nor decision-making processes producing forensically-auditable records? That is truly beyond belief.
Let’s go on. In the entrepreneurial process, most of the creative value is generated before the company’s incorporation. The entrepreneur has an idea, and partners (if any, but it should) discuss, brainstorm, challenge, design, conceive — and often prototype. These are the most critical steps in value creation. Medical assistance during a child pregnancy is prominent — yet governance is non-existent during a startup gestation. I strongly advocate that pre-incorporation phases should be run just like if the company already existed, but without. Lots of methodologies exist about business model generation, value proposition, product/market fit, MVPs, lean development, etc. Who’s taking care of governance? I am convinced that a large portion of the fundamental reasons for failure can be connected with a neglect of basic governance principles — that we think usually reserved for later stages, or bigger companies.
A climatic issue
Like the climate change, effects of the disregard for early governance are not immediate and appear later. They become a pain only when the company faces a situation where it would have been useful to have the right tools to avoid problems, delays or conflicts (liquidity events, misalignment, cash shortage, and so on). In that sense, it is a global, collective question and it must be solved accordingly.
The GTI
The same assumptions can be extended to the global trust issue in business — we call it GTI. The lack of trust within and between businesses explains and requires an army of third-party stakeholders that capture a huge slice of the value created. When there is trust, there is no need for accounting, audits, risk credit, due diligence, notaries, lawyers, mediators, regulators, contracts. And I am not talking about law. A huge part of value is wasted into finding alternatives to trust.
Paths to a solution
Where previous technology leaps did not succeed in updating stone-engraved habits in corporate governance, distributed ledgers may be the winning attempt. The blockchain, discretely left on our table by an unidentified future, holds the promise to leapfrog in the next-generation world with an unprecedented velocity. It goes actually faster than mankind intelligence, and we need time to adapt, as finite human beings — we are no robot yet.
The journey is worth it though, and we must try to bring solutions, with both ambition and humility. First steps to bringing business into this century will be revealed very soon.
[1] de Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs In the West and Fails Everywhere Else, New York, NY: Basic Books, 2000. pp6,7.
[2] de Althaus, Jaime. La Revolución Capitalista en el Perú, Fondo de Cultura Económica del Perú, Lima, Peru, 2007. p64.
