The Scarlet Letters “S” and “G”

The co-founder of Tin Men Capital on why “Social” and “Governance” are qualifiers of a company’s ethics and integrity

The phenomenon of ESG is not a new one. However, in recent years, “ESG” has practically become a synonym for “climate investing ”. While there is undoubtedly a need to consider climate factors when investing, the “S” (Social) and the “G” (Governance) are more relevant to the early-stage technology startups I invest in.

As one of the two managing partners at Tin Men Capital, I deeply value governance and social responsibility. Recently, attending a family wedding and visiting my 99-year-old grandfather reminded me how much trust and ethics matter in our work. I never worried that our entrepreneurs would act unethically in my absence, reflecting the vital principles of ethical governance that we uphold in our investments.

G IS FOR GOVERNANCE

I’ve previously forecasted that 2024 would be a year when the tech startup sector would have to confront its previous oversights. But the blame shouldn’t fall solely on the perpetrators — it also lies with those who failed to enforce proper controls or, worse, encouraged lax governance practices.

A simplistic approach to governance might suggest the following steps: First, appoint a governing body or authority. This authority then establishes a framework of rules for the ecosystem, and all involved parties comply with these rules. Optionally, one might consider punitive actions arising from noncompliance.

An even more radical perspective dispenses with the governing authority entirely, proposing that a self-sustaining set of rules exists and that participation in the ecosystem necessitates adherence to these rules. If that sounds familiar, it’s probably because it’s a model that has been experimented with, notably within the cryptocurrency sector’s Decentralised

Autonomous Organisations (DAOs). Yet, despite the logical structure of such systems, the cryptocurrency world has witnessed a disproportionate share of failures, thefts, and frauds.

The underlying issue? Human behaviour. Systems like this don’t exist as pure abstractions. They interact with other systems via the medium of people. And people are fallible — both in competence and in integrity. Things can and will go wrong when no one’s at the wheel.

S IS FOR SOCIAL

Previously, certain investors positioned themselves as “light-touch” to attract sought-after companies. High-profile founders often demanded carte blanche, favouring investors who refrained from probing too deeply. Meanwhile, less scrupulous investors avoided demanding oversight rights to maintain plausible deniability, seeking to profit quickly from their investments, leaving any ensuing chaos for others to resolve.

If founders and their investors genuinely care about building long-lasting businesses, they will care much more than just making a buck. Historical precedence proves this ethos. In 1981, the Business Roundtable stated: “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment, provides jobs, and builds the economy.”

Further back, Johnson & Johnson’s mission statement has remained unchanged since 1943: “We believe our first responsibility is to all who use our products… We are responsible to our employees… We are responsible to the communities in which we live and the world community as well… Our final responsibility is to our stockholders… When we operate according to these principles, the stockholders should realise a fair return.” Today, Johnson & Johnson has not just survived longer than most other companies; its shareholders have received more than fair returns.

Long-term profitability hinges on treating all stakeholders fairly — the “Social” in ESG — and robust “Governance” practices that, despite short-term challenges, ensure sustainability. Crucially, both practices are akin to sports training: consistent engagement makes these principles deeply embedded.

KEEPING IT UNDER CONTROL

To that end, investors should assess companies on these two fronts by engaging in ongoing dialogues with founders. These conversations should explore the founders’ motivations for starting the company, their goals beyond financial gain, and their moral obligation to stakeholders like family, initial investors, employees, early customers, or society. Understanding what founders genuinely care about and evaluating whether they can be trusted is essential to ensuring standards are maintained post-investment.

Merely believing founders are committed for the long term is not enough. People change, teams evolve, and goals can differ between line employees and senior management. A new shareholder may push for breakneck growth even if corners are cut. At the same time, early investors may prioritise long-term sustainability. This is where controls and incentives come in.

As substantial shareholders in our portfolio companies, at Tin Men Capital, we do not shy away from the significant responsibility of overseeing companies and requiring our explicit consent for certain crucial matters. Setting such expectations early in a company’s lifecycle creates its own momentum and turns it into a habit.

HOW WE DO IT

Still, while regulatory frameworks, verification processes, and penalties are vital for upholding standards, they must be balanced with positive incentives. In startups, motivation usually stems more from growth opportunities and positive reinforcement than from the fear of penalties. Additionally, it’s unrealistic to anticipate and govern every potential situation.

We advocate fostering a highstandard culture through leading by example, rewarding value alignment, and addressing deviations. Beyond financial incentives, peer recognition and respect are powerful motivators.

One also needs to verify that goals continue to be aligned repeatedly. This can be done throughout the organisation — from newly hired fresh graduates to the board and shareholders. Even if the day-to-day culture stays robust, it is possible for individual people’s goals to change over time. Periodic check-ins help alleviate this. Still, in the face of these efforts, can unexpected issues arise? Absolutely. But by embedding these principles deeply within our ventures, we minimise risks and pave the way for true, sustainable success.

“If founders and their investors genuinely care about building long-lasting businesses, they will care much more than just making a buck.”