Good Corporate Governance Policies and Disclosure Mechanisms in Startup Companies

In the past decades, particularly following the collapse of huge corporation such as WorldCom and Enron due to dubious or illegal financial management, countries began gradually increasing the oversight of publicly traded companies with few jurisdictions conjuring recommended corporate governance codes (RCGC) to ensure sufficient oversight, reduce manager’s ability to loot their companies, and ensure that shareholders’ and stakeholders’ interests are monitored effectively by companies. While RCGC was intended namely for public company, several organizations called for the adoption of RCGC in startup companies. Startup companies suffer from various failures which the classic corporate laws are not equipped to address significant conflicts of interest throughout their financing process, interested parties’ transactions, and rapid change in ownership and board composition. Among the proposed solutions for such failures, as regulated in recent years for public companies, is the implementation of such RCGC. This article presents the fundamental issues in startups which call for adoption of RCGC: the principal-agent problem, numerous conflicts of interest and misalignment of interest between the founders and the investors (and amongst the investors) regarding the company’s management and future. This article reviews the possible application of RCGC doctrines to startups; with respect to empirical and economical researchers that examine the benefit of RCGC on the value of startups and reducing the cost of raising capital, and researches and position papers which call for the adoption of RCGC in startup companies. This article also analyzes the clashes between the startups need for flexibility with the benefits and importance of adoption of RCGC. Lastly, the article presents various RCGC models, which have not yet been introduces in academic papers, which can be adopted in startups, inter alia, increasing the number of outside directors (both as a casting vote in even of founders-investors dead-locks as well as an impartial mentor for the founders), adopting procedures for board meetings and increasing their frequency, and amending the controlling and management rights in the company as a factor of the expected return on investment