Cermain Cheung, Consultant, Oldham, Li & Nie, discusses the importance of responsibility and strategic frameworks that ensure accountability, transparency and sustainable growth for startups in Hong Kong.

Corporate governance is commonly defined as the system of rules and practices that directs and controls a company. For startups, however, this definition often evokes images of bureaucratic red tape – an unnecessary burden in a world driven by agility and innovation. In reality, governance in the startup context is far more than a compliance checklist; it is a strategic framework that ensures accountability, transparency and sustainable growth. For startups, effective governance is not optional – it is a cornerstone of long-term success.

At its core, startup governance revolves around a critical principle, which is that the company is a distinct legal entity, separate from its founders. While founders are the visionaries and operational drivers, the startup does not belong to them alone. Rather, it has its own rights, obligations and stakeholders. Governance facilitates this separation, preventing founders from treating the company as a personal fiefdom and ensuring decisions align with the company’s best interests. In the fast-paced startup environment, where unilateral decision-making is tempting, checks and balances – often through an independent or finance committee – are essential.

This article examines the unique nature of startup governance and why founders often neglect it, as well as the resulting challenges and practical steps to implement it effectively, all with an eye toward fostering a culture of responsibility over rigid rule-following.

The unique nature of startup governance

Startup governance stands apart from the structured frameworks of mature corporations. In established companies, governance is typically formalised through boards with independent directors, detailed policies and regulatory oversight. Startups, by contrast, are often shaped by the founders’ vision and energy, with governance taking a more informal shape. Founders frequently assume multiple roles – director, shareholder, CEO and CFO – leading to a concentration of power that is both a strength and a vulnerability.

This informality stems from the startup’s early-stage reality, in which resources are scarce, decisions are urgent and survival trumps structure. However, it also underscores a fundamental governance tenet – the company is not the founders’ personal property. A company is a separate legal entity. Founders owe fiduciary duties to act in the company’s best interests, not their own. This requires segregation of personal and corporate objectives.

Effective governance introduces checks and balances to enforce this separation. For instance, a board that includes independent directors can provide objective oversight, countering the risk of founders prioritising personal gain – say, by approving self-serving expenses – over the company’s welfare. Investor directors, appointed by venture capitalists or angel investors, can also serve this role, bringing expertise and discipline. Yet, their dual allegiance to the appointing investor and the company can create conflicts, a point addressed later. The key is to establish mechanisms early that ensure the company’s autonomy, even amidst rapid growth.

Why governance is neglected and the challenges that follow

In the fast-paced world of startups, governance often takes a backseat as founders grapple with immediate demands. This neglect, driven by practical pressures, resource constraints, knowledge gaps and founder dominance, creates significant challenges that can threaten a startup’s future, especially in Hong Kong’s competitive and regulated landscape. Here’s why governance can slip and what risks can emerge as a result.

Survival pressures lead to weak or missing shareholder agreements

For founders, survival trumps all – securing customers, refining products and raising funds dominate their focus. Governance feels like a distant priority, a luxury for later stages rather than a pressing need. This mindset often results in weak or missing shareholder agreements, which define ownership, voting rights and dispute resolution. Without these, startups in Hong Kong’s litigious market face disputes – over equity or strategy – that can spiral into costly legal battles.

Resource constraints blur the lines between founder and company

With lean teams and tight budgets, startups rarely have the resources for governance specialists or formal boards. Founders frequently wear multiple hats – managing finances while steering strategy – leading to conflicts of interest. This lack of separation can blur the lines between personal and company interests. For example, a founder doubling as financial controller might justify personal expenses as business costs, eroding shareholder trust and risking legal breaches of fiduciary duty.

Knowledge gaps expose startups to legal and operational risks

Many first-time founders in Hong Kong lack familiarity with governance principles or their obligations under the Companies Ordinance. Without seasoned advisors, they may not see the risks of informal decision-making. This gap exposes startups to legal and operational pitfalls, such as missed filings, mismanaged funds, intellectual property disputes or employment violations, all of which can attract regulatory scrutiny and damage credibility in a tightly regulated environment.

Founder dominance stifles accountability and diverse input

Startups often embody their founders’ vision and many resist ceding control to boards or processes, fearing a loss of agility or identity. Yet, this dominance hampers accountability and diverse perspectives. A founder who dismisses investor input or who sidelines minority shareholders risks resentment and poor decisions. As the startup grows, this concentration of power can deter investors wary of governance gaps, limiting access to capital and talent.

By understanding these interconnected issues, founders can see how neglecting governance creates vulnerabilities. Early steps – like drafting clear agreements, delegating roles, seeking guidance and balancing control – can turn governance into a strength rather than a liability.

The case for early governance

Far from a burden, early governance lays a foundation for scalability and trust. Written records, such as shareholder agreements, board minutes and financial logs, provide clarity and accountability, which are invaluable as stakes rise. A startup with documented processes can resolve disputes efficiently and demonstrate professionalism to stakeholders.

Moreover, governance signals maturity. In Hong Kong, where investors scrutinise transparency, a governance-minded startup stands out, attracting capital and talent. Early adoption also mitigates risks, preempting conflicts or legal pitfalls that could derail growth.

Balancing oversight: the role of directors

Checks and balances are central to segregating founders from the company, often achieved through a board of directors. Independent directors, free from personal or investor ties, offer impartial scrutiny, ensuring decisions serve the company’s interests. Their industry expertise can also guide founders through complex choices.

Investor directors, common in venture-backed startups, bring resources and discipline but pose challenges. Their loyalty may lean toward the investor’s agenda, favouring short-term exits over long-term stability, for example. To align their role with the company’s good, startups must define their duties explicitly and mandate recusal from conflicted decisions. A balanced board, blending independent and investor voices, optimises oversight without compromising autonomy.

Practical steps for effective governance

Implementing governance need not overwhelm resource-strapped startups. Below are actionable steps tailored to Hong Kong’s context.

1. Affirm the company’s independence. Founders must treat the company as a distinct entity, delegating roles and documenting decisions to reflect its interests over personal gain.
2. Craft robust shareholder agreements. Define equity, voting rights and dispute mechanisms clearly, consulting legal experts to ensure enforceability under Hong Kong law.
3. Build a balanced board. Appoint independent directors for objectivity and investor directors for expertise, with protocols to manage conflicts, for example, recusal policies for investor appointees.
4. Engage professionals. Leverage corporate lawyers and accountants to ensure compliance and strategic alignment.
5. Adopt technology. Use digital tools to streamline recordkeeping and filings, reducing administrative strain.
6. Educate stakeholders. Train founders and teams on governance basics, fostering a culture of transparency.

Conclusion

Startup governance in Hong Kong is not a rigid set of rules to endure, but a mindset of responsibility to embrace. It hinges on segregating founders from the company, ensuring the latter’s interests prevail through checks and balances, whether via independent directors or carefully managed investor oversight. In a fast-paced environment, founders cannot dictate every decision; governance empowers the company to stand on its own.

By addressing governance early, startups mitigate risks, comply with Hong Kong’s regulatory framework and build trust with investors. Far from a distraction, it is a strategic imperative – a foundation for a business that thrives beyond its founders’ vision.

Cermain Cheung, Consultant

Oldham, Li & Nie