Balancing founders, boards and investors in SMEs
INTRODUCTION
Private capital has become an increasingly important source of growth financing in Uganda and across East Africa, with East Africa accounting for 29% of recorded African private capital transactions in 2025. For many founder-led and family-owned companies, private equity can provide expansion capital, strategic support and access to wider commercial networks. A private equity investment, however, brings more than funding. It often introduces new shareholders, board representation, enhanced reporting requirements and formal approval processes that may not previously have existed within the business. For businesses used to making decisions quickly and informally, that transition can be significant.
These changes are intended to protect the investment and support growth. In practice, they can also create tensions that founders DATE: June 2022 and investors do not always anticipate when the transaction is being negotiated.
This article examines some of the governance challenges that commonly arise after a private equity investment. It considers why they emerge and how they can be addressed in practice so that governance supports the growth of the business and the value the parties are working to build together.
I. When board approval is not the last word
A management team prepares a strong proposal, perhaps to raise debt for a new distribution network or acquire a smaller competitor. The board considers it, supports it and management leaves ready to proceed. Then the process stalls. The shareholders’ agreement requires separate investor consent that no one had fully prepared for. What seemed a straightforward decision becomes delayed, and the opportunity begins to narrow.
This tension is a common feature of private equity governance. Ordinarily, the board is responsible for managing the company’s affairs and directing its business. Private equity investors, however, particularly minority investors, cannot rely solely on board representation to protect their capital. They therefore negotiate consent rights in the investment agreement through a list of reserved matters requiring investor approval.
The result is a layered decision structure. The board considers what is in the interests of the company. The investor considers whether the proposal is acceptable from the fund’s perspective. Those are different questions, often answered by different people and on different timelines. The resulting delay is not accidental. It reflects a deliberate allocation of control over decisions that may materially affect the investor’s risk position.
Most problems can be reduced at the negotiation stage. Founders should resist treating the reserved matters schedule as standard boilerplate. It should be tested against how the business actually operates. If it captures decisions management routinely needs to take, such as arranging a working capital facility, restructuring a subsidiary or replacing a senior hire, that discussion should happen before closing, not months later when the issue becomes urgent.
Once the investment is made, significant decisions should be built into the planning cycle. Give the investor early notice, provide a concise information pack and include clear financial rationale where relevant. Investors who are well briefed tend to respond faster than investors who are surprised.
In practice: A simple investor briefing process outside formal board meetings can be highly effective. A short monthly update on decisions that may require consent in the coming weeks often reduces approval delays and builds the trust that allows investors to move quickly when timing matters. In competitive markets, decision speed can directly affect value.
II. When the founder’s instinct meets the investor’s process
For a founder who has spent years building a business through personal judgement, relationships and close knowledge of the market, the post-investment governance environment can feel unfamiliar. Decisions that once happened over a phone call or within a small trusted circle may now require a board paper, a formal resolution or additional consultation. New voices, including investor nominees and independent directors, are now involved in decisions about the company’s direction. For many founders, this can feel less like support and more like constraint.
What is often taking place is a collision between two legitimate operating cultures. Founder-led businesses in Uganda frequently grow through centralised and relationship-driven decision making. Speed, trust and direct control can be real advantages in markets where opportunities move quickly. Institutional investors operate differently. They are accountable to their own investors and fund mandates, and therefore rely on documented processes, structured oversight and clear approval pathways.
The tension is not usually personal. It is the result of two rational approaches to decision making, each developed for different stages of a company’s growth, being asked to operate within the same business.
When the founder’s instinct meets
the investor’s proce
The transition is smoother when it is planned early. Before the investment closes, founders should work through what the new governance environment will look like in practice: how often the board will meet, who will sit on it and which decisions will now require formal approval. Investors, for their part, should be cautious about imposing governance structures too heavily in the first weeks after closing. The early post-investment period is often a trust- building stage, and the way governance is introduced during that period can shape how management responds to it for the life of the investment.
Governance arrangements that founders understand and have helped shape are more likely to be respected and followed than arrangements perceived as externally imposed.
In practice: A well-drafted board charter is one of the most practical tools for managing this transition. This short, plain-language document sets out the board’s role, how decisions are made and how the board relates to management. Agreeing it within the first ninety days of the investment creates a shared reference point and helps prevent governance from becoming a recurring source of friction. Boards that operate with a clear charter also tend to function more efficiently, which can support exit readiness.
III. When the numbers are not ready
Three months after closing, the investor asks for the management accounts. What arrives is a spreadsheet last updated several weeks earlier, marked as preliminary, with figures that do not reconcile cleanly to the bank statements. The board meeting scheduled for the following week cannot proceed meaningfully. Trust begins to erode, not because the business is necessarily underperforming, but because no one has reliable information on which to judge its position.
Private equity investors rely heavily on financial and operational information to understand how a portfolio company is performing. Investment agreements commonly require regular management accounts, budgets, forecasts and board reporting. These obligations address a basic feature of any investment relationship: management runs the business day to day, while the investor must assess performance from the information it receives.
Many growing businesses in Uganda have not yet built the financial systems needed to meet institutional reporting standards. Finance teams may be lean, accounting systems may be basic and management attention is often focused on operations rather than board-ready reporting. This is common in founder-led businesses that have grown quickly. Problems arise when the gap is identified only after closing, when reporting obligations are already in force and expectations on both sides have been set.
The better approach is to address reporting readiness before the investment completes. Investors should assess the company’s finance function and reporting capability during due diligence and be realistic about what the business can currently produce. If reliable monthly management accounts are not yet possible, the investment documents can provide for a phased implementation plan, agreed milestones or a transition period during which reporting obligations increase progressively.
When the numbers are not ready
Founders should also use the pre-closing period to strengthen core financial processes. That does not necessarily require a large new team. It may mean improving existing systems, aligning the chart of accounts to how the business actually operates and ensuring the finance function understands what information investors and the board will require, and when.
In practice: The investment agreement can include a reporting readiness obligation requiring the company to bring its financial management systems to an agreed standard within the first six months after closing. Framed as an investment in infrastructure rather than a compliance burden, this protects both sides. Reliable and timely reporting also makes a business more attractive to lenders, future investors and potential acquirers.
IV. When the investor sits on your board
Private equity investors commonly appoint one or more representatives to the board of a portfolio company. These investor- appointed directors can add real value. They often bring financial discipline, transaction experience, sector insight and a broader strategic perspective that can strengthen board discussions. Their presence can also introduce tensions that, if not managed carefully, affect how the board functions.
Although nominated by the investor, these individuals serve as directors of the company once appointed and owe their duties to the company as a whole rather than to the shareholder who nominated them. In practice, however, they will naturally bring the investor’s perspective into board discussions. They were often selected because their judgement aligns with the fund’s investment approach and risk tolerance.
This can become sensitive where decisions involve significant capital expenditure, leverage, acquisitions or underperformance. Founders may feel that investor directors are prioritising capital protection over growth. Investor directors may feel they are exercising appropriate oversight. Neither position is unusual. The tension often arises from different risk priorities rather than bad faith.
Boards function best when this distinction is understood early. The aim is not to remove disagreement, but to ensure debate remains focused on what is in the company’s best interests. Before the investment closes, the parties should agree practical board processes: what information directors receive, when papers are circulated, how urgent matters are handled and how disagreements are escalated or resolved. Founders should also be deliberate about who they nominate as founder-directors. A board seat is not simply an extension of shareholder negotiations.
Founder-directors who approach board meetings as personal advocacy forums can weaken the board’s credibility and decision-making quality over time.
In practice: An independent chair can play a valuable role in a PE- backed company. Someone with no financial stake in either the founder’s position or the investor’s returns can provide the board with leadership that helps navigate difficult discussions without either side feeling that the process is working against them.
V. When performance falls and governance is tested
Revenue has missed target for two consecutive quarters. The investor, broadly supportive during the growth phase, now asks for more frequent financial updates and a strategic review at the next board meeting. Management, already under pressure to improve performance, experiences the increased oversight as a loss of confidence. The board, which should be the forum for resolving these issues collectively, risks becoming the place where the relationship begins to break down.
Underperformance tests every investment relationship. In private equity-backed companies the pressure is often sharper because the investor is managing a fund with defined timelines and obligations to its own limited partners. When a portfolio company’s performance deteriorates, the fund’s risk position changes and increased oversight often follows. From the investor’s perspective, this is a rational response to changing risk. Management teams may experience it differently. They are closest to the operational challenges and need space to implement solutions.
The gap between the investor’s need for information and management’s need to execute is one of the most common tensions in PE governance. It becomes harder to manage where the parties have not agreed in advance how governance should operate during a difficult trading period.
Many investments contain detailed rights for ordinary governance matters but say little about what happens when performance falls below expectations. As a result, the parties are left to improvise under pressure, often with incomplete information and reduced trust.
The better approach is to address this in the investment documentation before difficulties arise. The shareholders’ agreement can set out what happens if agreed performance thresholds are missed. What level of underperformance triggers increased reporting? What additional information will be required, and how quickly? Is there a process for a strategic review or an independent operational assessment if problems persist? These questions are easier to resolve during negotiations than during a downturn.
Management teams should also resist the instinct to limit the flow of bad news. Investors who are kept informed of developing problems usually respond more constructively than investors who discover those problems late.
In practice: Performance covenants can be structured so that information rights increase as performance deteriorates, while control rights remain with the board and management unless defined material thresholds are breached. This gives the investor visibility without creating the sense of management override that can fracture governance relationships under pressure.
When performance falls and
governance is tested
Conclusion
Companies that navigate these tensions well usually start with clear governance arrangements. This often includes a carefully negotiated shareholders’ agreement with an appropriately scoped list of reserved matters, board processes agreed early in the relationship, and leadership capable of guiding difficult discussions when interests diverge. Most of these issues are best addressed before the investment closes. The cost is usually limited to careful drafting, realistic negotiation and open discussion about expectations on both sides. When left unresolved, the consequences often emerge later through delayed decisions, strained relationships and avoidable loss of value. In a private equity-backed company, governance is not peripheral to value creation. It is one of the mechanisms through which founders and investors manage risk, make decisions and build a stronger business together.