Why Indian startups need corporate governance

A healthy balance between the interests of different stakeholders, including the promoters, shareholders, employees, and customers, is at the heart of corporate governance. Good governance is imperative, even for startups, and not a matter of choice

Piyush Sharma
Updated: Jul 8, 2022 10:50:56 AM UTC
Image: Shutterstock

India has overtaken the US and China as the third-largest environment in the world for startups, according to the Economic Survey 2021–22. In India, there are more than 70,000 startups, and more than a hundred of them have become unicorns. However, the recent controversy surrounding BharatPe, allegations of toxic work environment at others, has highlighted the demand for strong corporate governance in Indian startups.

The principle of a healthy balance between the interests of different stakeholders, including the promoters, shareholders, employees, and customers, is at the heart of corporate governance. Its four pillars are accountability, honesty, transparency, and responsibility. These principles served as the foundation for the 2013 enactment of India's new Companies Act, which replaced the outdated Companies Act.

1) Provisions were made to increase openness, including the definition of independent directors, clarification of promoter liability, and the creation of a system for reporting wrongdoing.

2) Accountability through further disclosure rules, such as the creation and implementation of risk management policies and corporate social responsibility, as well as strict guidelines for audit accountability, were also established.

3) Internal committees were established to speed up accountability in a company's decision-making processes, including the audit committee, nomination and remuneration committee, and stakeholders connection committee.

4) To instill honesty among those in control of and accountable for the operation of a company, restrictions on the compensation of key managerial staff, protection of minority owners, and investor protection were adopted.

The questions that go begging are: Do founders have a rudimentary understanding of corporate governance? Where is the line of responsibility drawn, and how can the board foster a corporate governance culture? What are the effects of poor governance? What steps may founders take to improve the governance system?

The big mistake of ignoring startup governance as a headline priority by entrepreneurs is the root cause of the ‘Zilingo-Ankiti Bose’ fiasco. Almost all startups have similar ambitions: Innovate on offerings, onboard and retain quality customers, achieve robust financials, and run the course from conception to implementation as regards the original idea.

Luc Sterckx is a member of numerous international boards and an INSEAD Certified International Director. He shares some insights into how corporate governance varies from business as usual in a book he wrote expressly about it for startups. He lists the following four necessary "balances" in this area:

1) Striking a balance between the short and long term- When developing their corporate governance game plan, startups frequently take a "short term/long term" strategy. But going in a more evolutionary direction would be more productive and efficient.

2) The balance between entrepreneurs, managers, and outside investors

3) Financial stability- Businesses should use loans and equity to pay for long-term capital needs.

4) Striking a balance between the finest of entrepreneurship and innovation

Also read: Corporate governance at India Inc: Understanding the decadal shift

How to strengthen governance?

The founders are responsible for creating the proper organisational culture. They need to follow the correct metrics. They should spend the time on defining revenues. Keep personal matters at a distance. And employ a reliable CFO.

Business governance concerns have the potential to be disastrous, as evidenced by the sudden collapse of huge companies like Arthur Andersen and Enron in the past. There are other glaring instances like Yes Bank, Satyam, or DHFL back home.

Founders can't delegate governance. It is a critical issue that requires as much attention as monitoring business growth, if not more.

Keep in mind that as your company grows, so does the scrutiny. Additionally, you will need to pass a considerably tougher test if you have any plans to conduct an IPO. Good governance is imperative, not a matter of choice.

The thoughts and opinions shared here are of the author.

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