Corporate Governance

Masterclass on Effective Corporate Governance

There comes a time in every company’s journey when leaders need to formalize systems and structures to support growth.

May 10, 2022

Welcome to Grit & Growth’s masterclass on corporate governance, featuring Alexey Volynets of International Finance Corporation. From what structures make sense to employ, and when in the life cycle of your business you should use them, Volynets provides advice and insights on how corporate governance can be a powerful tool for your business.

While many entrepreneurs fear corporate governance because they believe it means more legal constraints and less control, Volynets wants to change the way founders of small to medium-size enterprises think about governance. He has been researching and teaching companies about the ins and outs of corporate governance for years and understands why it’s so challenging. “It’s really hard to let go. It’s hard to delegate. It’s hard to allow people from outside the company to make huge strategic decisions on what it should do,” he acknowledges. But Volynets believes there comes a time in every company’s journey when leaders have to delegate and formalize systems and structures to support growth.

Top Six Masterclass Takeaways

  1. Corporate governance goes beyond boards. Volynets defines it quite simply: it’s about how companies are directed and controlled. And second, it’s when companies have created structured policies that “mean you can take a vacation for three weeks and not be afraid your business will fall apart while you’re away.”

  2. The stage of your business makes a difference. You don’t have to have all your corporate governance structures done on day one. What makes sense for a mature, expanding business is far different than an early stage startup.

  3. Don’t be afraid to ask for external advice. And the earlier you start thinking about it, the better. It can be formal or informal, but relying on others with expertise you don’t have in-house is essential.

  4. Build a good management team, too. A good board of directors needs to have a partner in the company beyond the CEO. And realistically, in the early days when resources are strapped, your management team can perform many of the functions you’ll later assign to a board.

  5. Don’t wait to create an organizational chart. While you’re focusing on growth, adding people and units, you need to start formalizing your organization’s key functions, and what those key functions actually do. And it might just come in handy for succession if one of your key people suddenly leaves.

  6. Ease into corporate governance with an advisory board. It can be a great stepping-stone as you formalize governance structures.

Listen to Volynets’ insights, advice, timing, and strategies for how you can ease into and ultimately formalize and manage a board when the time is right.

Grit & Growth is a podcast produced by Stanford Seed, an institute at Stanford Graduate School of Business which partners with entrepreneurs in emerging markets to build thriving enterprises that transform lives.

Hear these entrepreneurs’ stories of trial and triumph, and gain insights and guidance from Stanford University faculty and global business experts on how to transform today’s challenges into tomorrow’s opportunities.

Full Transcript

Alexey Volynets: Very often, the reason why people don’t do corporate governance is not necessarily that they don’t see a business case, because consultants can come to you and show you a lot of numbers that show how good governance is, corporate governance, but it’s psychological.

Darius Teter: When entrepreneurs hear the phrase “corporate governance,” they may worry about unnecessary constraints, legal jeopardy, and loss of control. But if you can overcome those fears, corporate governance can be incredibly powerful for your business.

Alexey Volynets: It’s really hard to let go, it’s hard to delegate, it’s hard to allow people from outside the company to make huge strategic decisions on what it should do.

Darius Teter: Welcome to the second season of Grit & Growth from Stanford Seed, the show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs, with insights from Stanford faculty on how to tackle challenges and grow your business.

In our last episode we explored the underutilized power of advisory boards, but advisory boards are just one facet of corporate governance. So, we’ve brought back Alexey Volynets for a deeper dive on the ins and outs of governance. What structures are available to you, and when in your business life cycles should you employ them?

All that and more in this master class on corporate governance. In case you haven’t listened to the previous episode, let me reintroduce Alexey.

Alexey Volynets: My name is Alexey Volynets. I lead the SME practice area in the Environmental, Social, and Governance Knowledge and Learning team of the International Finance Corporation.

Darius Teter: Last episode, we shared a brief definition of corporate governance to give some context to our discussion of advisory boards, but to Alexey and those who study it, corporate governance actually encompasses so much more than just boards. Can you give me just a working definition of “corporate governance”? That term is used so broadly.

Alexey Volynets: There are two that I personally like the most. One is the simplest: it’s “corporate governance is about how companies are directed and controlled.” And I like it because it focuses on functions, not on specific institutions like a lot of definitions include, for example, “board of directors” as a key player in it. Whereas, in the context of small and medium enterprises, that is not often a relevant institution, a board of directors, or at least not up to a point in their growth. So, a definition that focuses on functions, I think, is much more important. It makes it easier to communicate with entrepreneurs.

And the second definition we got from one of our clients when we were working with them. She said, “Oh, fine, I get it. ’Governance’ is when the company can run itself.” I really like that. Again, in the context of SMEs, that just means that you’re creating certain structured policies and practices that — you can take vacation for three weeks and not be afraid that your business will fall apart while you’re away. So, I really like that second definition.

Darius Teter: I like the vacation test, too, because in the Seed transformation network, one of the things that we do is we ask the leaders, “How many of you have delegated authority to sign a $10,000 payment?” And nobody raises their hand. Then, we lower it to $1,000, and maybe five people raise their hand. And this is a room with 60 people. Some of these companies have revenue of $5 million. Then, “How many of you have delegated authority to sign a $500 check?” And maybe 10 people raise their hands.

Then, you say, “And now I understand why you guys are all on your phone instead of listening in class, because you do not have a control environment that you trust. You have not delegated authority. Your thing is broken and you don’t even know it.” When we talk about the various systems within governance, are we talking about things like decision making, the control environment, like audit function and risk governance, stuff like that, disclosure transparency? Is that when you say, “running a business that can run itself”?

Alexey Volynets: Yes. Essentially that. In training, we run this exercise that helps the entrepreneur better understand that. I say, “Imagine I’m actually coming to you personally with a business proposition,” and I explain it, it looks really great. “What would you want to know before you give me your money?” “Well, we want to make sure that our money is going to be used for the purposes it is used. We want to make sure that your books actually show the true picture of the company. We want to know what capacity you have internally to develop and deliver on this strategy,” and so forth. And I’m saying, at the end of all that, “Everything you say is governance.” That’s what corporate governance has to deal with.

Darius Teter: You don’t need to have all the necessary structures in place on day one of your company’s journey. So, how do you know what to implement and when? Well, Alexey and his team have been researching this question for years, and they’ve come up with a set of recommendations based on the stage of your enterprise, from early startup to mature, expanding business.

Alexey Volynets: Let’s start a bit at the beginning. When a company is in the startup stage, it’s highly dependent on the founders. And that’s a normal situation. Founders decide everything, all the major functions, or at least control them. As companies start to grow, you see that at some point — and it differs by industry and sector and so forth — but at some point it becomes too big to be run in the same way like it was at the startup.

And very often that realization comes through some crisis or a problem. For example, business just stops growing and people try to figure out, why is that? And as in your example, they realize that they have not even delegated basic functions. Then, if that happens, then the next stage in a company’s development is normally a shift to more collaborative decision making, including at the strategic level.

Then, the next normal progression is to actually start utilizing them more as a team that helps you to make bigger and bigger decisions, including on strategic direction of the company. And that’s where we enter more into the governance field, because it’s about strategic direction of the company and you are not deciding it alone.

Darius Teter: I love that because, in my inexperienced view, governance is about audit and financial controls and all that stuff, corruption. But what you’re saying is, actually, it’s also about strategy and how the team works together. That tracks very well with what we do at Stanford, because one of our hypotheses, a theory of change, is that a lot of business growth, it’s not just exogenous factors or external factors that are determining a business’s success.

And a lot of people come out of our program saying something really interesting. They say, “I realize now that the biggest problem at my company is me.” And that’s a really interesting observation. You have this framework of “company stage of development” and how the governance requirements escalate as the company grows. So, going back to the earlier-stage company where managers and owners are the same people, should they be thinking about external boards or advisory boards? Is there any reason why they may not want that at that stage or it may not be appropriate?

Alexey Volynets: It’s not an official position, so to speak, but because there is quite a bit of controversy and debates of that, because there is one school of thought that says, you need to provide companies with best practice, explain what it is and why, and every company has to rush there as soon as they can. Most of our people in our group don’t believe that this is the case, because in reality, when the company is at a startup stage — and we know there are exceptions, there are high tech startups that have a lot of money and all that — but in reality of our emerging markets, in almost all cases, these startups are cash-strapped. They have very limited human resources.

And in reality, very often their founders are by far the most competent people in this particular area. So, the fact that they don’t delegate much is not necessarily even bad, because they have the best expertise available in the company. So, in that case, we even sometimes jokingly compare entrepreneurs to French King Louis XIV, who used to say, “I am the state,” and in the same way they can say, “I am the company.” So, at that stage, the reality of business, the limitations are such that not thinking about corporate governance, boards and such, is okay, because you have other problems. You have to develop your product and service and things like that.

But again, at some point when the company becomes big enough, that becomes an issue. But what we want to do is to ask people very early on, even at a startup stage, to think of external advice. And it sounds like a very, very simple thing, because for many people it is. They intuitively will understand that there are people out there that are more successful than them that they want to learn from, and they get formal or informal advisers. And that’s actually at startup stage. If you do that, that often is good enough, given all the limitations.

Darius Teter: So, depending on the stage of the business, a board, whether it’s advisory or fiduciary, is not necessarily required to practice good governance. What other actions could a founder CEO take to get some of the benefits of good governance without the formal structure of a board?

Alexey Volynets: We actually sometimes observe the following negative trend, which is that people involve a lot of advisers at the beginning of the business, but then in the second stage of the initial growth, if the business actually turns out to be successful, product is good, service is good, that at that stage they feel they are on top of the world and they stop engaging advisers.

So, one advice is to institutionalize use of advisers, have a schedule, have a purpose for the meeting and so forth, so even if it’s not a formal advisory board, you have a continuous engagement with external advisers. Then, second mechanism is actually start building a management team.

A good board of directors needs to have a partner in the company, and then not just CEO. It actually is the management team. So, one thing you need to start doing as the company continues to grow is to start building not only individual competent managers, but actually start bringing them together for discussion.

And we often even advise that for those strategic meetings, get out of your office. You can have it somewhere outside, call it “a strategic retreat.” You might even invite one of your advisers to run that meeting. You are thinking not as a day-to-day manager of a unit, you are thinking for the company as a whole.

My main point is that, in a context of small and medium enterprises, that arrangement of management team can be very, very effective and does perform some of the functions that are normally assigned to the board.

Again, from an academic perspective, all of it is not correct. You can criticize it from a standpoint of governance, theory, a lot. But from a realistic perspective of companies in emerging markets, that’s often a workable solution, especially in a resource crunch.

Darius Teter: The next stage of the company’s development is what Alexey calls “active growth.” And it’s here that the need for formal governance tools begins to emerge.

Alexey Volynets: Then, on stage two, if startup has been successful, the company is focusing on sales, sales, sales. It’s essentially that simple. They are capturing their market share. And what is typically characteristic is, the company’s growing fast but organically, so to speak. New units appear, new people are hired, and it’s not always done in a systemic manner. So, at some point the company becomes quite big, but in many ways it’s still run as a startup. And that’s a crisis point.

Darius Teter: Yeah. So, this is super-important. Things are growing, people are being hired, units are being created, maybe ad hoc, and now it’s time to start to formalize the business. Can you give me a couple of key examples of what needs to be formalized?

Alexey Volynets: Well, it sounds very simple, but organizational structure. You’d be surprised how often even with … I see as investors, we actually, if we deal with SMEs, we deal with a much larger end of that. So, you come to pretty sophisticated companies, 250 people or so, and you ask for an org chart and it doesn’t exist. It’s somewhere in their mind. There are some processes. Some way it’s path-dependent, “here is how we do business,” but there are actually quite a lot of gray areas as to whose responsibility a particular task is. And, again, we see it again and again.

So, one of the basic things, you actually create an organizational chart, you create terms of references, fill key functions, you document those functions. And it’s not just needed for formalization, it’s needed, for example, for succession. If suddenly one of your key people leaves, there is what describes exactly what needs to be done and how that process is being done.

So, that basic formalization needs to happen at the end of stage two, just because there was too much growth and too many things happening, just because “that’s how we do business here.” That path-dependence at some point needs to be analyzed. And very often companies see that they’re doing things in really suboptimal ways.

Darius Teter: What’s fascinating about that for me is, you have key-person risk. So much of the business is in the mind of one person, it’s not documented, that person leaves, particularly in the tech sector they might leave in six months, and nobody knows what the hell they were doing. The files —

Alexey Volynets: Exactly.

Darius Teter: … No one knows where the files are. So, organizational structure is about the definition of specific roles and responsibilities. It’s also about who reports to who, but it’s also about who owns which projects or who owns which tasks. And sometimes I find some of the biggest problems within companies is lack of clarity around who’s actually accountable for what, apart from the job description.

Sometimes people write job descriptions, but then you find out that all the power is actually over here with this other person and it’s not even in their job description. And it’s not just org charts that need to be formally documented. I’m interested in formalization around strategy. And I came to this because I went to a bunch of meetings with SMEs. We’re talking about $2 million, $3 million turnover companies.

We brought the management team in with the CEO and we asked the question, “Does the company have a strategy, like a three-year vision and strategy?” And I was stunned at how many managers, not CEOs, but managers said, “I know there is one, but I don’t know what it is,” or, “I’m sure that he,” or “she,” pointing to the founder, “I’m sure she has a strategy, but I’m not really sure what it is.” It’s not actually written down.

So, it strikes me that in this progress path of startup to growing business to whatever the next step is, formalizing what your strategy is must also be an important element.

Alexey Volynets: Exactly. And we have very similar experience to yours in this regard when we do company assessments. One of the typical questions you ask is, “What is your vision, what is the strategy of the company?” And the owner always has an answer. They thought it through. But you go just one level down and you suddenly see that some people have no idea where the company is going, not to speak of the rest of the staff. It’s just not there. It has never been articulated, never been communicated.

And obviously, especially if you want your management to function as a team, it is absolutely essential that everybody knows where they go. I know it sounds very simple, almost primitive, but I guess there is just so much going on in an entrepreneur’s life that they don’t have time to stop and ask themselves this question, “Do my people even know where we’re going?”

Darius Teter: As your company grows and you spend more time at the 30,000-foot level rather than down in the trenches, the channels you create can keep you connected to your core services.

Alexey Volynets: Especially now when we are looking at sustainability of growing companies, people who are most connected to your customers are normally people at the lowest level of hierarchy. These are your sales people, your repair people, whatever. And those people in normal companies have the least to say, meaning, their channel of communication with you is usually very clogged.

So, one of the advice we give is that you create this collaborative open environment, starting at the top, make sure it trickles down, and those people will help you really feel what’s happening in the company and make sure your signals from the very lowest level come to you as well. So, get advice not only from top, but be open to your staff.

Darius Teter: It’s worth pointing out that these phases don’t come with flashing neon signs. Nobody calls you and says, “Hey, congratulations. Your business has now entered stage three.” Sometimes the only signal that it’s time to evolve your business structures is when things go wrong.

Alexey Volynets: So, it’s a little bit of a murky territory because ideally we want to, at some point in the growth, to start thinking about formalizing business processes and structures. But in reality, while things are going really well, very few businesses pause and start building the structures. What normally happens is that growth starts to slow or completely stops. And that’s when they start thinking, “Okay, something isn’t going quite right.”

So, they realize that, okay, we have developed a really good product and service, stage one. We learned how to sell it, stage two. But now it’s time to actually look inwards to start building capacity of the business itself if we want to continue to grow. And a lot of things need to happen here. Obviously, revising your own structures, looking at the people, have you hired the right people as you were growing very fast and so forth?

So, as we’re saying, at some point in the growth, so it’s between stage two and three, is when the focus has to shift, at least to some extent, to the organizational development. That’s stage three.

Darius Teter: So, the big important lesson here is, don’t wait until there’s a problem. Think ahead about what your business will need to grow, including its internal formalization, but also its strategy and how it’s building itself for the future. This period between stages two and three is a great time to try and implement some kind of advisory board, like we discussed at length in our previous episode. And as we mentioned then, advisory boards are a great stepping-stone as you formalize your governance structures.

Alexey Volynets: We recommend that you look at an advisory board as a transitional mechanism. And I think there is a lot of potential for a lot of companies in that kind of arrangement, because very often the reason why people don’t do corporate governance is not necessarily that they don’t see a business case, because consultants can come to you and show you a lot of numbers that show how good corporate governance is. Corporate governance is associated with better financial returns, long-term, all these peaches out there. But it’s psychological.

It’s really hard to let go, it’s hard to delegate, it’s hard to allow people from outside the company make huge strategic decisions on what it should do. So, it’s a gradual process. An advisory board can help you ease into corporate governance. It’s a very effective mechanism tool.

Darius Teter: It’s about giving the CEO or the founder emotional and psychological security in thinking of this as a learning journey for them. When a company needs external funding for its growth, they will often find that investors require a fiduciary board. But that’s not the only reason to implement one as you grow. We understand that if you have secured or would like to secure external capital, you’re going to need a fiduciary board. What other reasons might you go for, for a formal fiduciary statutory board, even without seeking external investment?

Alexey Volynets: The investor is a big thing, obviously. Then, second is variations on that. It’s a change in ownership structure one way or the other, for example, passing to the next generation, similar to that, or exit of some of the original founders from the business. We see it very often. So, a business can be typically started by two, three people, they run it, run it, but then one of them gets a different interest. He or she is leaving the business, and then they realize, yeah, trust is good, but it’s better to have some sort of formal mechanism of influencing the company and getting information. So, that’s happened very often.

So, broadly defined, “change in ownership.” And that can be family, external investors, internal investors, and so forth. We also see some companies increasingly doing it for supply chain purposes. As you probably know, there is this huge movement for large multinational corporations to clean up their supply chain to make sure that they are taking environmental, social, and governance [ESG] considerations in their work.

So, some companies that want to be good citizens and ESG-compliant and so forth, they’re actually acting proactively and building their capacity. So, they want to show their potential supply chain partners that they are a “serious company,” well-run and so forth. It’s a good sign.

Darius Teter: So, environmental and social ESG considerations could be driving this as well.

Alexey Volynets: Exactly. So, those who are interested in international markets often act proactively and establish a board of directors.

Darius Teter: So, this could be all sorts of things … I’m thinking about clothing made in Bangladesh, fishing in the Gulf of Thailand, tuna, all these things, right?

Alexey Volynets: Exactly. That’s increasingly important. There is a lot of work done in supply chains now. I can tell you from IFC’s perspective, we do a lot of work in setting new standards and helping companies to manage supply chain, and I think this directional work will only increase.

Darius Teter: What does it mean “to run it like a fiduciary board”? I’m getting ready for my very first meeting or my fifth or whatever. And how often are these meetings happening? How should I be preparing them? What should they expect from me so that we can be productive?

Alexey Volynets: Typically, they would expect from you good information on where the company is. So, most board meetings will start with a look at the past to review company performance. So, they would request documentation on your finances, on your company, whatever metrics you agree with them on where the company is, how well the previous decisions are being implemented, and so forth.

So, normally you first create an agenda for the meeting, and that agenda, you would be in touch with different members, checking if they want to add an item. So, it’s already, from the point of creating an agenda, it would be a collaborative document. Then, you prepare an information that people have to get information at least a week before the meeting, and that information package has to be very clear, “This we want you to decide on,” very clear what the question is, what the proposed solution is, and why, and so forth.

So, a normal board probably most of the time would spend the meeting looking at the company’s past performance, and the rest to think about strategy in the future. But we’ve also seen other arrangements. We’ve even seen arrangements where advisers would meet without the entrepreneur. Just together to discuss some things, because again, they all know parts of the business and they want to talk to each other. So, all of it happens. But it’s better if you run the meeting.

Darius Teter: Ideally, meetings with your board are a healthy dialogue with plenty of discussion and debate. If someone is taking up too much of the time, that can be a big red flag. So, one thing I’ve noticed in fiduciary boards, they do these really long presentations to have shorter discussions. But presumably it’s the opposite. You want to spend most of your time discussing, not presenting.

Alexey Volynets: Usually, if you see those things, that executives do long presentations, it can be a straight-up sign that they’re trying to manipulate the board. They don’t want you to decide much. They already made a decision. They actually eat up all the board’s time with presentations and reports and they will actually supply you too much information of the company. So, you spend most of the time looking backwards, and then they say, “And here’s a proposed decision,” and you have 10 minutes to discuss. That’s usually a really, really bad sign. So, if you see that on your board, be wary about it.

Darius Teter: It’s called “running the clock.” My kids do it to me all the time.

Alexey Volynets: It works, it works. That’s why people do it, right? Also, one thing in terms of the psychology and how the meetings are run, especially the board, one of the difficult things for the people on the advisory and normal boards is this, that when you are seeking out expertise, very often the people will come from an executive background. You will invite other successful entrepreneurs or managers and so forth.

And those people who are coming with this background, they used to be bosses of their domain in their companies, and so forth. And it’s a certain mode of operation being a boss. On the board and on an advisory board you are just one of the peers. You are in a group of absolutely equal people. Even chairman, technically speaking, is first among equals. So, that’s a very different mode of communication. So, that’s why you have to learn new skills of operation not to be the boss, but to be a good peer.

Darius Teter: Organizing and managing a board yourself can seem intimidating, but there are people specially trained to handle all the legalities and logistics. If I’m thinking about setting up a formal fiduciary, statutory board, I know there’s a lot of consultants out there that can help you do that. Is that a good route to take, to hire someone to help you put together your board?

Alexey Volynets: For a regular board of directors, absolutely, because there are a lot of even compliance requirements. It would be highly advisable for a fiduciary board that you get either some sort of consultants, or, in many markets we see that the profession of corporate secretary is taking off. Corporate secretary, or corporate officer it’s sometimes called, is a hard-to-define role, but it’s basically a person who is responsible for making sure that the board runs smoothly.

They’re working with the chair of the board, and are arranging meetings, agendas, documents, all of that, that is sort of a behind-the-scenes person. And those people can be extremely knowledgeable in terms of how the boards actually work in a specific cultural context and legal context. So, you can hire a good corporate secretary to help you set up the board.

Darius Teter: The elephant in the room when it comes to fiduciary boards, and corporate governance in general, is control. Many entrepreneurs put off creating a board because they think they’re handing over the reins to the company. One of the reasons why some entrepreneurs worry about taking on private equity investors is losing some control of the company. And one of the ways in which that’s expressed is, “I’m gonna create this fiduciary board. There’s gonna be these people representing the investors on the board. They’re gonna get into my business, and they’re gonna try to be operators.” Does that resonate with you?

Alexey Volynets: Yeah. That’s a very typical situation. I think the most important thing here is alignment of interest. When we see really bad things happening is when the interests are actually different at the beginning, but they haven’t been articulated. For example, when, say, some private equity fund looks at three years’ investment horizon, they’re going to be out. You have a family business, your horizon is 50, a 100 years or something. So, when they enter, they start maximizing their returns for three years. This is everything.

And of course, as we all know, that can create conflicts with more long-term investors. So, that will inevitably kick in and becomes a reason for a quite serious conflict between different investors. The main advice here is to be really clear on the purpose. Why do you want those investors? Do you have the same horizon, same understanding, same strategy? So, the more discussions you have upfront the better.

Also, entrepreneurs need to understand that a lot of funds increasingly bring not only capital, but they bring expertise. They see that this is their differentiating competitive advantage. So, they can be really good to have on the board. That’s where they can add a lot of value, because — especially if their interests are aligned — they’re clearly understanding when they are entering, when they are exiting, how and what will be done in the process.

Darius Teter: You may think that corporate governance is only useful for big multinationals or fast-growing startups, but it’s also necessary for smooth exit planning and CEO succession, periods that can be especially difficult for family-run businesses.

So, let’s pivot a bit and talk about family businesses. In the markets that we work in, I would say the majority of businesses are family-owned, sometimes second-generation. So, there’s family members all over the place. They’re running HR, they’re owners. Should family businesses approach governance differently?

Alexey Volynets: Yes. I would say the first issue we deal with is that not all family businesses admit to themselves that they are family businesses. This was a very strange realization to us, and we started seeing the same problem. You ask, “Who are the family businesses here,” and few hands are raised. Then, start talking to those people and you realize, well, their cousin works in accounting, their wife is chief technology officer, and so forth. So, the entire family is there, but they don’t see it as a family business.

And what is the reason? The reason often, in some cultures there is association of family business as something not very serious, so that some people would even tell us, “No, no, we are not a family business, we are a serious business here.” So, again, it’s culture by culture. And for family business, the main issue is succession.

Darius Teter: Is there a role for advisory boards or fiduciary boards in supporting family succession planning?

Alexey Volynets: Succession is a big issue in any business, as we know, even for a very large corporation. And for family businesses it’s much worse just because usually you add family emotions and dynamic on top of the business considerations. One of the biggest issues, from our perspective, is that early on the owner-manager associates himself or herself with the business. And even if, at some point, they start building proper management mechanisms, governance mechanisms, and so forth, it’s still really hard to step away from the business. They look at it as a baby, basically forever, in some form.

So, what we advocate often is that a formal corporate governance board is a really good succession mechanism because it allows you to not just throw away the key or pass it to the next manager, but you actually first migrate, so to speak, to become board chair. And only at that point, if you are comfortable with how things are working out, then you can move away out of the company completely.

It has its own issues, because obviously there are a lot of stories where people who get to be board chair still try to run day-to-day operations of the business. So, that’s why it’s essential that you establish the board and all the processes really well, and then you do the transition.

Darius Teter: Don’t expect to construct your governance perfectly on the first try. It’s important to be able to evaluate your setup and make changes if necessary. So, how will I know … Maybe this question seems too obvious, but how will an entrepreneur know if their advisory board is effective?

Alexey Volynets: If it helps you to achieve objectives that you set it up so that we’re going to the beginning of having a clear objective for the board. Clear objective overall, long-term, as we discussed. You need the sounding board or you need expertise gaps or combination of the two. And that, in every year, or whatever other period, you have a clear objective of what the company wants to achieve, and whether or not you are getting there.

Darius Teter: So, you have your own internal KPIs [key performance indicators] or metrics?

Alexey Volynets: Yes. In theory, it’s generally advisable that you have clear vision and understanding and some metrics as to whether or not you are getting there or not. So, the board has to be purpose-driven. And if you are achieving that objective, then you probably have a board that helps you to get there.

Darius Teter: I’ve begun to think of corporate governance as something like glue. When you apply it, it’s malleable. You can wipe it away, you can start over. Once it solidifies, it can be harder to rearrange. So, incorporate it slowly. Let it become the scaffolding for future growth so you can build a bigger and stronger enterprise than you could before.

If you want to know more about which governance structures are appropriate for your business, we’ve got a link to the International Finance Corporation’s SME Governance Guidebook in our show notes. The guidebook gives detailed advice and best practices gleaned from years of hands-on experience and research.

I want to thank Alexey Volynets for his contributions to both this episode and our previous one. He’s been generous with his time and his expertise, and we appreciate both.

This has been Grit & Growth with Stanford Graduate School of Business. And I’m your host, Darius Teter. If you like this episode, leave us a review on your podcast app. It really helps us to share the stories of these incredible entrepreneurs with as many people as possible.

To learn how Stanford Graduate School of Business is partnering with entrepreneurs in Africa and Asia, head over to the Stanford Seed website at Grid & Growth is a podcast by Stanford Seed.

Laurie Fuller and Erika Amoako-Agyei researched and developed content for this episode. Kendra Gladych is our production coordinator, and our executive producer is Tiffany Steves, with writing and production from Andrew Ganem and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll see you next time.

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