Corporate Governance of the Startup World
Corporate governance is all-important, not a matter of choice. Although corporate governance is a hot topic in the startup ecosystem today, it is a relatively new field of study.
At the heart of corporate governance is the healthy balance between the interests of promoters, shareholders, employees, and customers. Its four pillars are accountability, honesty, transparency, and responsibility.
As the company grows, so does the scrutiny. Additionally, one needs to pass a considerably tougher test if one plans to conduct an IPO. Corporate governance is a hygiene for any organization. It pays off in the long term.
Why do few companies fail in Corporate governance?
The reason it breaks :
- Lack of an accepted metric for determining what constitutes successful corporate governance.
- Growth at all cost mindset
- Understanding of corporate governance for start-ups is limited.
- Line of responsibility is not defined.
- A non-reliable Finance team.
- The patchwork system of regulation is a mix of public and private policymakers.
Why Corporate governance should be one of the top priorities for Founders/Promoters?
Founders can’t delegate governance. It is a critical issue that requires as much attention as monitoring business growth, if not more.
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 in the USA. There are other glaring instances like Yes Bank, Satyam, and DHFL in India and now starts ups such as BYJU’s, BharatPay, Zillingo, Mojocare, GoMechanic etc.
Narayan Murthy, co-founder of Infosys, said that India lacks quality market research, leading to over-estimation of the opportunity by the unicorns and eventually reporting huge losses. As a result, it leads to larger TAM, which leads to more opportunities than reality and it ends up with Growth at all costs, leading to the wear and tear of the system/processes.
Nithin Kamath made a point on India’s opportunity getting oversold to Limited Partners (LPs) root of governance issues in startups.
“Corporate governance issues coming to light in Indian startups will only increase with time. It needs checkpoints just like any other task.
What can be done?
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.
- The balance between entrepreneurs, managers, and outside investors
- Financial stability- Businesses should use loans and equity to pay for long-term capital needs.
- Striking a balance between the finest of entrepreneurship and innovation. Reality check.
- Look for step change rather than incremental progress
- Building a Board for the Long Term
- Have a criteria for Board members and rotate if required.
