Governance may not be the most critical element on the minds of many entrepreneurs, especially when they are starting out, but this could be an expensive mistake as companies scale.

As Stanislav Shekshnia, Senior Affiliate Professor of Entrepreneurship and Family Enterprise, says in the latest INSEAD Explains Entrepreneurship series, ventures inevitably reach a stage where organisations grow too complex for owners to manage alone. 

Governance serves multiple critical functions, Shekshnia explains. It enhances transparency, making companies more attractive to investors, employees and customers, while establishing accountability. Additionally, governance enables founders to access independent advice and mentoring, as seen in successful companies like Airbnb, Patagonia and Netflix.

Balancing structure with agility

Governance in entrepreneurial ventures requires a delicate balance between sustainability and the speed, creativity and flexibility that define start-up culture. Shekshnia advocates for "living documents" in governance policies that are revised quarterly and lightweight risk assessment processes such as quarterly risk sprints. Rather than rigid board meetings, he recommends shorter, frequent check-ins supported by digital tools like Slack and Asana for real-time updates.

Pillars and pitfalls

Shekshnia identifies three essential elements for effective governance. First, a balanced approach where founders clearly define objectives and commit to effectiveness, as demonstrated by Netflix's founders who structured their board as a strategic partner. 

Second, a mindset shift where founders respect governance rules that are equally applicable to all stakeholders. Third, agility in governance systems as companies grow, ensuring frameworks remain relevant to business realities.

Unfortunately, many entrepreneurs stumble in trying to implement governance. First, founders may equate boards with effective governance and create a board prematurely. Shekshnia cites a biotech founder who created a six-member board for a five-employee company, ultimately requiring additional staff just to manage board requests.

Second, prioritising prestigious names over necessary competencies can result in dysfunctional boards. Finally, founders appointing themselves as board chairs often struggle with the collaborative leadership style required, as chairs must guide from behind rather than lead from the front.