Move Fast, Try Not to Break Too Much
How Technology’s rapid expansion into previously under-serviced markets brings unexpected corporate governance challenges with it.
Technology was one of, if not the only beneficiary of 2020’s disruption. Individuals and firms seeking to maintain, or even exceed, previous levels of productivity while working from home have adapted their work models to include innovations from e-commerce and digital payments to video conferencing and collaboration tools. This has led to increasingly greater investment flows into these technology providers and others, feeding further expansion and innovation, as digitisation becomes a permanent global reality.
While this is undoubtedly an impressive success story, which many expect to continue for many years to come, rapid growth can often throw up unexpected challenges from a corporate governance and regulatory perspective. If mismanaged, they can be potentially damaging. To combat this, we have outlined the key areas that technology companies must focus on as they aim for rapid growth without the growing pains that can sometimes bedevil fast-growing companies.
The potential pitfalls in cross-border projects
Even more so than other sectors, there is a tendency for technology companies to move fast and everywhere at the same time. With the tech economy booming globally, companies are racing to expand into new markets, gaining first mover advantage for their innovative services and solutions.
Expanding into multiple regions at once requires thorough planning and the ability to evaluate not only the actions required for incorporation in a particular country, but also how that process fits into and impacts the processes in other countries from a global perspective.
When subsidiaries and holding companies are being established simultaneously, it is quite common that planning does not consider that some incorporations can only start after the holding company is established. Another common mistake is not considering that a newly established company might not be operational from day one. For example, the shareholder company might first have to deposit the capital for the subsidiary company which in some cases can take weeks after incorporation. It is therefore crucial that a global view with cross-border projects is taken.
Paying attention to corporate governance
Tech companies are very often managed by those who are building the company’s future growth – IT specialists, engineers, project managers and marketers who, during the expansion, become the directors of the new companies. While they are well set up to lead and drive the business forward strategically, it is not uncommon for the team’s corporate legal and governance experience to be somewhat lighter. Arranging for the accounts to be prepared and approved on time, board resolutions to be passed for certain decisions, and making sure that a company is up to date with its statutory filings is sometimes pushed to the back. This results in overdue filings, incomplete corporate records, or outdated/incorrect registrations with company registrars.
This therefore highlights the importance of educating business leaders about the duties, powers, responsibilities, and liabilities of company directors, and stressing the importance of these task to the health of the wider business. Ensuring the corporate annual obligations applicable to the newly established entities are met is another process which benefits from awareness, with a forward-thinking calendaring solution being best practice.
Associated decisions which need to be taken
Some companies, such as those involved in the digital payments sector, fall under regulated business activities scope, which means that they are required to obtain special licenses, banks, or local authorities’ approval to begin operating. Their business models and corporate governance needs are novel, and so authorities are likely to be more hesitant and demanding compared to “traditional” businesses. This means that extra clarifications might need to be provided or additional requirements applied due to the scope of activities. This can hamper some businesses attempting to rapidly transition from start-up to scale businesses.
Another tendency is for key managers to be board directors in many of the group’s entities. However, this raises the issue of director residency rules in entities such as Brazil or Canada which require directors to be residents.
The technology sector has experienced a period of extraordinary growth over the last decade, which, coupled with globalisation, is leading technology business leaders into uncharted territories. However, corporate governance cannot be ignored. Regulatory issues can hamper businesses looking to scale up at speed, at worst causing reputational damage.
Good business decisions can be made only when firms have the most information and understanding about the market and regulatory environment they are planning to operate in. It is therefore essential tech companies make sure they understand how to tackle the corporate governance challenges that come with expansion.
Director of Citco Mercator, UAB, Head of Client Services, Mercator by Citco