On Friday, March 10, 2023, Silicon Valley Bank (SVB), failed after a bank run, marking the largest bank failure since the 2007-2008 financial crisis. The collapse of SVB, a major player in the startup ecosystem, sent shockwaves through the startup community, as many startups rely on the bank for depositing funds, financing, cash management and other services. At its core, SVB's downfall was a result of:
- a series of poor investment decisions (deposits were invested in long-term treasury bonds as the bank sought a higher return on investment than was available on shorter-term bonds);
- high volume of uninsured deposits (about 93.9% of the deposits in the bank were uninsured); and
- lack of oversight (the Chief Risk Officer of the bank stepped down in April 2022, and a successor was not named until January 2023).
Following the significant losses incurred by investors in the wake of the SVB collapse, the importance of strong corporate governance and effective risk management in startups cannot be overstated. Investors will now place even greater emphasis on these factors when considering potential investments. Startups with solid governance structures and sound risk management systems are more likely to attract investment and succeed in the current investment climate. Therefore, it is crucial for startups to prioritize these practices to instill investor confidence and ensure long-term sustainability.
In this newsletter, we will provide actionable tips and best practices for improving corporate governance. Whether you are a founder, investor, or just interested in the world of startups, we hope you will find this newsletter informative.
CORPORATE GOVERNANCE AND STARTUPS
Effective corporate governance is critical to the success of any startup. In Nigeria, several codes of corporate governance have been developed to provide guidance for companies, including the Nigeria Code of Corporate Governance 2018, the Code of Corporate Governance for Public Companies 2015, and the Corporate Governance Code for Banks and Discount Houses issued by the Central Bank of Nigeria. These codes set out principles and practices for good corporate governance, such as transparency, accountability, and ethical behavior. It's important for startups to consider these codes when developing their own governance framework.
In addition to local codes, startups can also look to international best practices for guidance. For example, the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance provide guidance on best practices in corporate governance. These guidelines emphasize the importance of board independence, risk management, and transparency.
Here are some best practices that startups can implement to build a strong and effective governance structure:
- Develop a Clear Governance Framework: Startups should develop a clear governance framework that outlines the roles and responsibilities of the board of directors, management team, and shareholders. This framework should incorporate the principles set out in the respective codes of corporate governance.
- Build a Diverse and Experienced Board: Building a diverse and experienced board is critical for effective corporate governance. Startups should seek out board members who bring a range of skills, experiences, and perspectives to the table. This diversity can help ensure that the company is well-governed and that decisions are made in the best interests of the company and its stakeholders. The Nigerian Code of Corporate Governance emphasizes the importance of this diversity and dynamism on boards. For a further guide on setting up the board of a company, see our newsletter titled "A GUIDE TO SETTING UP THE BOARD OF A COMPANY" (available at https://pavestoneslegal.com/a-guide-to-setting-up-the-board-of-a-company-including-startups-in-nigeria/ ).
- Establish Internal Controls and Monitoring Processes: Establishing internal controls and monitoring processes is critical for effective corporate governance. Startups should develop policies and procedures that ensure transparency and accountability at all levels of the organization. Regular monitoring and reporting can help identify and mitigate risks before they become serious issues.
- Conduct Regular Risk Assessments: Conducting regular risk assessments is critical for effective corporate governance. Startups should conduct regular assessments of their risks, including financial, operational, and regulatory risks, to identify potential areas of vulnerability and develop strategies to mitigate those risks. The Nigerian Code of Corporate Governance requires companies to conduct regular risk assessments and establish risk management committees. The collapse of SVB also highlights the importance of having effective risk management practices in place, including the appointment of a Chief Risk Officer.
- Effective Finance Management: Startups must adopt effective finance management practices to ensure that their financial transactions are well recorded, monitored, and controlled. This includes creating a system of checks and balances to prevent unauthorized transactions and implementing robust risk management strategies. Startups should also consider establishing relationships with multiple banks and financial institutions to reduce concentration risk and ensure access to alternative funding sources in case of unforeseen circumstances, such as the collapse of a key financial institution like SVB. One of the basic principles of finance is that diversification reduces idiosyncratic risk. Startups should establish a finance committee to oversee the management of their finances and help make informed financial decisions. As noted earlier, one of the reasons for the collapse of SVB is poor investment decisions.
- Foster a Culture of Ethics and Compliance: Finally, startups should foster a culture of ethics and compliance throughout the organization. This includes establishing a code of conduct, providing training to employees, and promoting a culture of transparency and accountability. The Nigerian Code of Corporate Governance also emphasizes the importance of ethical behavior and compliance.
By implementing these best practices and incorporating local codes of corporate governance and international best practices, startups can build strong, effective corporate governance structures that promote transparency, accountability, and success.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.