About the Author: Neeraj Singh Rathore is IICA-MCA Qualified Independent Director, ICF Certified Business Coach, Author, Speaker, PMP, NLP Master, Executive Coach & an Entrepreneur. With a 26+ years of Experience and a accomplished professional with a strong track record of driving organizational success. Strong leadership and decision-making abilities with a focus on ethical and responsible governance for SME.
Do you know what is common between Enron, Worldcomm, Satyam Computers, Kingfisher Airlines. Icici bank – Videocon, Bharat Pe, Yes Bank, Arthur Anderson and DHFL.
The common link is corrupt business practices which led to some of the biggest corporate governance failures/Scandals in India. This was due to lack of effective governance by the board of Directors.
The questions is : Do founders have a proper 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 above mentioned companies’ controversies have highlighted the importance of strong corporate governance for startups in India.
According to the Economic Survey 2021-22, India is now the third largest start-up ecosystem in the world, trailing only China and the US.
Entrepreneurs’ failure to prioritize startup governance has led to the ‘fiasco.’Almost all startups have comparable objectives: To innovate on offerings, attract and retain quality customers, establish strong financial statements for investors.
To have better governance and being in line with the Companies Act 2013, Indian companies must create a board of directors responsible for overseeing Corporate Governance and decision-making processes.
A minimum number of directors, including independent directors for certain types of companies, must be part of the board.
Independent directors are essential in providing unbiased guidance, serving as a check on management, and safeguarding minority shareholders.
Bad corporate governance starts with mismanagement of cash flows, To avoid negative consequences,
- Promoters may resort to manipulation tactics such as pledging
- shares or fudging accounts to raise funds (Kingfisher),
- Fudging the account to attract financial attention from bankers and big investors( Satyam and ILFS)
- Trying to divert in unrelated business( suzlon).
- Also join hands with market operators and manage their stocks.
Good corporate governance practices help to build trust and credibility with investors and customers
Investors are more likely to invest in a company that has strong corporate governance practices in place in case start up needs capital.
An adequate corporate governance, typically in the form of a well-structured advisory board, can have the beneficial effect of balancing the interests of the start up founders, team, investors and other stakeholders in achieving optimum results.
In recent times, the Companies Act and LODR( listing obligations and disclosure requirements regulations) regulations and MCA – Ministry of corporate affairs have played a crucial role in ensuring high-quality corporate governance across Indian companies.
Corporate governance thrives on the idea that every company has to ensure a healthy balance between the interests of various stakeholders such as the promoters, the shareholders, employees and customers. Accountability, integrity, transparency and responsibility are its four pillars.
Accountability through additional disclosure norms like development and implementation of risk management policy and corporate social responsibility as well as stringent measures for audit accountability were also laid down. Internal committees such as audit committee, nomination and remuneration committee and stakeholders relationship committee and many others were created to fasten responsibility in a company’s decision-making processes.
Causes of poor corporate governance.
• All start-up founders are frequently young men and women driven by the desire to prove their idea was correct and to grow their businesses to great heights. However, a lack of time, experience, and business knowledge frequently acts as a barrier to their passions and desires.
• This is compounded by the fact that during the early years, there are severe human resource and capital constraints, resulting in a lack of necessary advice and hand-holding by competent legal and accounting professionals.
• At times, the owner’s overemphasis on innovation, adding value to the product/service experience, and customer satisfaction can backfire. As a result, corporate governance frequently takes a back seat, and in some cases is completely ignored.
• It should be noted that start-ups, which are typically founder-driven, prefer the private limited company model as a secure entity. As a result, a private company’s compliance checklist is shorter than that of a public company’s.
• The ultimate goal of any start-up is to secure multiple series funding from investors and venture capitalists who are always looking for investment opportunities in lucrative start-ups rather than long-term good governance.
• The entry of investors into a start-up’s ecosystem signals the beginning of the end of the founders’ reign. This transformation also causes a significant shift in the structure of the board of directors, the decision-making body at the heart of every company, and the onset of bad governance.
Promoters/founders who run a tight ship from the start, with a strong compliance track record, clean financial records, and working through independent key management personnel, have an easier time weathering such storms and avoiding governance issues.
A startup’s failure to prioritise corporate governance during its formative years is detrimental to its long-term interests. Following sound corporate governance principles will always enable a start-up to make sound investment decisions, set out best practises in the form of rights and duties, obligations and liabilities, ensuring the company’s smooth operation and growth.