Governance

Question 1

What is Corporate Governance and how is it useful?

Answer 1

it’s the way investors ensure a return from their investment.

Governance rules are defined in the charter of the company and other contractual agreements.

Consists of mainly of:

1. Voting Rights
2. Board of Directors
3. Informal Control

Question 2

What are Voting Rights?

Answer 2

Some decisions, defined in the charter and by-laws, are to be taken by voting.

Voting mechanisms:

1. One share, one vote.
2. By share class. All classes need to register a majority in support.
3. Dual class shares. Multiple votes to certain shares, or having some nonvoting shares.

Simple majority, Supermajority.

Question 3

What is the Board of Directors?

Answer 3

It’s a board composed of Entrepreneurs/Executives, Investors and Independent directors.

It plays the role of “the boss”, “the monitor”, “the coach” and “the promoter”.

Usually takes the strategic decisions (which products, market to enter, executive to hire….)
Majority, Supermajority, Unanimity.

Some can have “observer status”.
Structure of the board evolves over time according to the company’s needs and new investors.

As company grows, the board becomes more formal and formalises key committees: compensation committee, audit committees.

Question 4

What is Informal Control?

Answer 4

The control that is not dictated by term sheet, in-laws, company’s charter or other legal agreements.

1. Power of the purse.
2. Power of personality (trusted and respected)
3. Power of persuasion (social status, reputation, argument).

Question 5

What is Granger causality and how do you untangle phenomena?

Answer 5

Granger causality is saying “this” causes “that”. Whilst it might be the other way round.

Heckman distinguishes two effects: the “selection” effect (only successful startups get VC funding), and the “treatment” effect (only VC-backed startups are successful).

To disentangle the two and understand true causality one needs to randomise the treatment groups, so that eliminate the selection effect. (Not always feasible, “quasi-experiment”

Question 6

Where do investors add value? What factors influence Corporate Governance?

Answer 6

VEM row 3: Strategy. Sales, Production, Organisation.
To assess Value Adding Fit, look at the entrepreneurs’ skills.

Local legal system (employee-protective VS business-protective)