ASIA FOCUS : INSEAD CASE SUMMARY

Sound corporate governance is key to success

A look at the reward system and norms put in place by MeritTrac Services

Set up in 2000 as an investment boom in Bangalore was drawing to a close, MeritTrac Services Pvt Ltd now leads its niche market for outsourced recruitment support in india.

A key factor that has led to MeritTrac's success is its exceptional management team. Though held back for a while by a flawed governance structure and reward system, the team has a good mix of skills and personalities, and has adopted sound norms to help it function smoothly.

MeritTrac survived a recession within a year of startup, thanks mainly to its founders' functional expertise and networks. The sales skills combined with technology and human resources expertise of MeritTrac's directors, Madan Padaki, S. Murlidhar and Mohan Kannegal, brought credibility and paying customers to the company within a few months of startup. This achievement also helped them raise early-stage funds.

Besides skill sets, the three core team members benefited from complementary personality traits, such as extroversion, cautiousness and attention to detail. The team's trust and co-ordination were further strengthened by the core norms that they adopted. For instance, MeritTrac's team members back one another on all tough decisions, giving each person the room and confidence to make close, risky calls.

The team shares a common office cubicle, and this co-location has helped the members learn from and cover for one another's work practices. This proved invaluable during the startup stage, when everyone does a little of everything.

Complementary skills and experience and a sound set of core norms helped MeritTrac's team overcome the flawed governance and reward system. At startup, the founders gave little thought to the distribution of equity and chose to split it equally among themselves.

They also did not enter into any legal agreement governing shareholder behaviour. This was the case partly because of unfamiliarity with the process, and partly for cultural reasons: As friends, they felt it would be impolite to discuss money and legal agreements.

As the company grew, it made different demands on its core team. Without a reward system that suited their company's growing success, the team members were faced with an increased mismatch between the risk taken, contributions offered and equity held by the various founders.

Four years after startup, as governance issues were draining management time and energy, the team finally entered into a shareholder agreement that outlines fundamental issues such as the entry and exit of founders and equity allocation and redistribution.

This process of laying down a sound governance system was costly, but the team's rapport and trust have ensured that MeritTrac continues to run smoothly. This illustrates that a careful choice of skills, personalities and norms, combined with sound governance structures at the outset, can help Asian companies build high-quality, cohesive teams.

Summarised from MeritTrac: (A) Case, 2006 INSEAD by Balagopal Vissa, Assistant Professor of Entrepreneurship at INSEAD

Bangkok Post
Sunday January 28, 2007