Board Governance: Taming the Unicorn

I was interviewed recently about “Unicorns” and board governance for the San Francisco Chronicle. As I reflected beforehand to organize my thoughts, I realized I had a blog post, and this is it.

“Unicorns” are private companies with a $1B+ valuation based on fundraising. There are over 100 of them “backed by a bull market … (and) a new generation of disruptive technology.” According to Fortune, they are “America’s largest and most powerful private companies” and “might be the most exclusive boy’s club of all.”

Unicorns are not exclusive to America. Three of the top 10 are based in China and India.

Unicorns include rapidly growing household-recognized brands such as Uber, Airbnb, Snapchat, Pinterest and Spotify, to name a few. Some are profitable, some are not, as their cash burn can be excessive. Many expect revenues to surge. The digital world invariably contributes to their rapid growth in both valuation and visibility.

While unicorns’ valuations are high, many are still start-ups in the early stages of their growth– and they are private. In itself, this creates a whole new playing field in the business ecosystem. We can’t underestimate the consequences these companies will bring to leadership dynamics challenges for leaders and boards, and for our communities at large. In some cases, this trend is perceived to fuel “disruptive” attitudes amongst venture capitalists and within the start-ups themselves.

While disruptive innovation can be beneficial to the business world overall, it can’t mean loose governance. Given their sizeable valuations, it is important to ensure sound governance in the early stages of any company, which may not be obvious to some of these start-ups.

These private, valuable companies are larger and more powerful than many public companies and currently escape scrutiny that public companies face. It is time to tame the unicorn—not suffocate it, but give it a strong and disciplined foundation upon which to grow.

We need to be proactive, diligent and vigilant about the governance practices to be instilled for these unicorns, as their success (or lack thereof) can have powerful and devastating effects on our economy, affecting thousands of employees across geographies and generations. New leadership thinking is needed to instill solid and consistent governance practices for these “start-ups on steroids.”

Unlike public companies:

• their boards are smaller, which is typical for start-ups. The number of board directors tends to be substantially lower than public companies with similar valuations.
• insider directors are more common. Fewer bring in independent board members. Few have non-voting board observers, particularly women.
• the make-up of their boards is not diverse, as they are primarily composed of investors and founders, which implies that diversity of experience, skills and talent is potentially not optimal for the significant accelerated growth and scaling of these companies. According to Fortune, most have no women on their boards: “Just 6.2% of board seats are held by women within U.S-based ‘unicorn companies,’ … In fact, the vast majority of venture capitalists – more than 95 percent – are male.”
• these companies have significant equity ownership by board members and management, which is not uncommon for high-tech companies.
• there are fewer executive officers than in the typical public company. Fast growing start-ups have a limited number of leaders within their Pivotal Leadership Trio^TM (Board, CEO, Executives), which is typical for start-ups, but atypical for powerful, fast-growing companies. 
• while their board composition need not be disclosed, given the sheer size of their boards, it is doubtful that they have board committees, infrastructure and clear roles and responsibilities to ensure governance with minimal requirements.

Under these circumstances, discussions in the boardroom are likely not focused on proactivity regarding regulations, oversight or risk minimization, but are rather skewed towards huge growth, quickly. Considering the fact that investors are perceived to be sitting on too many boards, how can they effectively take the reign to ensure that these unicorns are properly governed? Can they really allocate enough time?

Today, Fenwick says that “Corporate governance practices vary significantly among public companies…corporate governance practices that are appropriate for large, long-established public companies can be meaningfully different than those for newer, smaller companies.”

How do we then optimally govern our billion-dollar start-ups to benefit us all in the short and long-term? Is it time for a new norm for the unicorns? What are the needed guidelines for these boards to encourage adoption of and adherence to stronger board and corporate governance while these young companies are still growing?

Here are some questions leaders within unicorn boards should be asking themselves:

• What is the impact of insider dominance on board leadership?
  • Is there a need for an independent/non-insider Chair for these mega start-ups to enforce strong board and company leadership?
  • How soon do we need to ensure that the Chair and CEO are different individuals if these roles are not combined?
  • If there is an insider Chair, how can there not be a lead director?
• How do the current equity ownership and distribution of voting power affect good governance in the early stages of growth?
• How soon should these boards be inclusive of independent directors to increase the breadth of needed skills, experience and talent, given their accelerated growth worldwide?
• How can the current board size possibly ascertain good governance with the known complexity of building, growing and scaling such a start-up?
  • How can they be valued $1B with no audit committees, compensation and nominating/governance committees?
• How vulnerable are these organizations without CEO/board succession planning?
• How do we empower younger entrepreneurs who sit at the board table with minimal or nonexistent board education and knowledge?
• How do we ensure optimal board and company leadership without the burden of corporate politics, procedures and auditing, which can suffocate the innovation?

Will taming these unicorns help maximize their long-term success and the impact that they can and should have on our business and economic environments, while still fueling the spirit of entrepreneurship and innovation? I believe so.