The importance of good governance in capital raising
- Written by Sophie McLernon
- Published on
We all know that good governance plays a pivotal role in the overall success of a business. However, it can also be critical in the context of raising capital. Snowball Effect's Director of Growth, Sophie McLernon, looks at how good governance can help a company grow as well as enhance investor confidence helping it to raise capital on more favourable terms.
The board of directors and management play distinct roles in an organisation. A board of directors is responsible for managing a company on behalf of its shareholders, while management ensures the execution and operational success of the organisation. The fundamental duty of directors is to act in good faith and in what they believe to be the company's best interest. The board collaborates with management to lead the development of the company's purpose, goals, and strategy. They also set the rules and rails for how the company operates, make critical decisions, and guide the company through tough times. Because they work on, not in, the business, a good board is often critical to a company's success!
As companies grow and raise external capital, they become responsible for allocating other people's money. By acting in the best interests of the company, the board ensures that decisions align with shareholder expectations usually focused on growing enterprise value.
There are three key areas where we at Snowball Effect have seen governance add real value:
One of the key aspects of good governance after raising capital is accountability. Companies must be accountable to their shareholders and stakeholders and must ensure that their decisions are in line with their stated goals and objectives. The board will help set the company's strategic direction and ensure they stay on course. Good governance practices such as regular reporting and transparent communication, whether it be positive or negative, can help build trust and confidence with shareholders, leading to long-term support and growth.
In this current market, where it is anticipated companies may need to raise further capital, investors are more likely to provide additional funding if they have confidence in the company's management and its ability to keep them regularly updated with what is going on with the business, ensuring there are no surprises.
At Snowball Effect, we help companies comply with their investor reporting obligations. We want to support our companies to quickly adopt good habits regarding investor communication and cadence so everyone has a high-quality experience. Our Quarterly Report template can be found here.
When it comes to the board's role in culture, good governance means that the board is actively engaged in promoting a positive and inclusive workplace culture and ensuring that the organisation's values and behaviours align with its mission and goals. Companies that prioritise diversity and inclusion are more likely to create new ideas, innovative solutions and ultimately drive growth.
The board should promote and value diversity of thought (beyond what you see in a photograph), at every level in the company, but particularly at the board table itself. A diverse board brings a wide range of skills, knowledge, and experience. This diverse expertise can fill gaps in the company's management team and provide valuable insights across various areas, enabling more well-rounded decision-making. Investors see this as a strength, as it demonstrates that the company has access to a diverse pool of talent and can effectively address complex and potentially uncertain challenges. This can also lead to a higher degree of confidence in the business and the company being able to command a higher valuation due to the credibility and connections that board members can bring.
By establishing clear policies and procedures, boards can ensure the company remains compliant with relevant laws, regulations, and standards.
Good governance practices should also help companies take appropriate risks to achieve their growth objectives. This generally takes the form of a strategic discussion leading to informed decisions based on a risk assessment framework and weighing the potential benefits and drawbacks of different options.
This can be particularly important when making decisions around raising capital and assessing what options are available to you.
Having an independent and diverse board provides numerous advantages for your company's growth. It helps to set the strategic direction, ensures greater accountability, builds a diverse and inclusive culture, and establishes appropriate risk levels. It also serves as a key influencer in raising capital, setting terms and increasing attractiveness to potential investors. By having such a board, your company not only benefits from their expertise and guidance but also enhances its overall performance and potential for success.
Are you interested in learning more about raising capital for your business? Our team are happy to answer any questions and can be contacted at [email protected] or by calling 0800 SNOWBALL.
