Startups & Satrups - The Governance Debate
In calendar year 2021 alone, the Indian startup IPOs raised over Rs 45,000 crores last year from the public market. Few of them are even in the top-25 valuable companies on the bourses - no mean task considering their peer-entities are as old as those new-age founders ! The unlisted private investment space saw 42 unicorns being minted.
It is also sign of current India : it is socially acceptable, and in smaller towns too, with a sense of pride to say that one or one’s child works in a (tech) startup. This is a marked difference culturally, where not so long ago, a so-called government job or job with known-brand was the only way to socio-economic acceptance. We now even have January 16 celebrated as the ‘National Startup Day’. Prime Minister Modi in a recent speech said, “ While in the pre-2014 era, only big businesses in the metros were prospering, today there is at least one start-up in 625 districts of the country”.
As much as we have to celebrate the success of our startup enterprises, and even celebrate the failures and learnings from every entrepreneurial attempt, we have to proactively worry about it’s missing or can-be-bettered governance aspects.
Are the Indian Corporate Boards, including that of the large startups, as meek and mere puppets, when it comes to dealing with anger issues or public-outbursts of CEOs or Founders of their organisations? Its amazing that many founders or CEOs get carried away with their swagger and throw away their hard earned goodwill over a temper tantrum and ego. When will the investor world get the comfort and the confidence that Corporate Indian Board members are not part of such puppetry in the board room ?
Doesn’t any negative public outburst of its leaders hurt the organisational brand ? Even if those comments were made in their private capacity ? What’s the role of the Boards in this aspect ? Especially in a private unlisted entity (including large-scale funded Startups), are the boards influenced by the nominee-directors of the large investors ? Considering that their role is to protect the interest of these (private) investors, and their investments !
Corporate Governance
Good governance is the soul of any sustainable successful corporate enterprise. Enterprises have to achieve their vision by sticking to legal, as well as ethical foundations. Hallmark of well-governed enterprise is that it would be inclusive in the way it deals with all its stakeholders, be accountable, transparent in its dealings, ethical in its dealings, responsive in its communication, and importantly equitable. It is also a system of developing a management team to be accountable for effective management of the business. In this journey, conduct and behaviour of leaders and directors in the organisation, more in a crisis or stressful times, will determine their governance intent.
Founder: The Key-(Wo)man Risk
The founder(s) are the ideator of the enterprise that has been funded. Founders or the CEO build their entity with deepest passion and absolute execution focus. They are concerned with outcomes of their plans; during this process, few of them forget their values and respect for people around. Because they think that “team is one large family” (haven’t you heard this a lot?), they think they can get away by any sort of behaviour within that family. There are many cases of such toxic-culture behaviour across Startup India or even large Indian corporates. Very few will ever be discussed in a MBA Case-study. Many do get discussed in the gyms, bars & business clubs.
Some of these founders or the CEOs take their ‘larger-than-life’ image-perception to the external ecosystem, with their “because I am saying so” attitude and expect subservient behaviour. This narcissistic control-obsession starts to hurt them, even if they don’t agree or acknowledge.
The founders’ behaviour, in many cases, is the ‘Key-(Wo)Man risk’ in itself ! That should be sufficient provocation for many of their investors to take note and to take action. But most investors cannot even dare to castigate the founders. For the entire team owes it’s allegiance to the founders / CEO and the ESOP structure put for them. And investors mostly are at the mercy of those founders or CEOs to shape the destiny of the company.
Fearing Exit Delays
Startup India, as well as Corporate India has many such instances of the founders destroying value, reputation, valuation by their tantrums or poor personal behaviour. In almost all of these instances (but for very rare bold & governance-driven individuals), no investor or independent director has stood up to the governance norms that they generally spell out from various public forums as their personal & professional value system ! Not surprising, as it has lot of money at stake. And the much-elusive word called ‘exit’ of their investment. Exit of a founder or a leader could delay that (financial) exit, and necessitate more hands-on attention and time of the investors & the board members in stabilising the organisation.
Independence Of Startup Directors
The fundamental objective of corporate governance is to enhance shareholders' value while protecting the interests of other stakeholders. A company's board of directors is the primary force influencing corporate governance. The board is expected to approve the strategies to develop long-term value and appoint an appropriate candidate as the CEO. It is also tasked with overseeing the performance of the CEO and the value system with which the CEO operates. In a private unlisted entity, how much of these are possible ? In most startups, governance is equated with ticking the compliance & regulatory factors, rather than the spirit of governance test !
What happens when some of these directors are compensated by the investors directly (apart of the usual sitting fees for the board role) and at times have side-contracts of commercial nature that would refer to the engagement as “advisory” ? Larger the investor, wider the set of ‘friendly external’ entities they might have access to; which can ‘house’ these side-contracts, so that it ticks all the compliance boxes for the so-called test of ‘independence’.
Also the truly independent directors, who are not nominee directors or those ‘head-hunted’ by the NRC (Nomination & Remuneration Committee of the Board), will be the actual minority on the board. In most cases, despite having independent directors, the nominee investor-directors are far clued-in as they might end up participating in the regular investor-update calls or are briefed by the investor who onboarded them in the first place.
To flip the argument, after many rounds of funding or larger funding rounds, in many cases, the founders become the minority shareholders. In such cases, do the independent directors, who are supposed to protect the interests of the minority shareholders, have a stronger voice on the board ? If there is a conflict between investor-shareholders and the founders (as minority shareholders), how conflicted are the independent directors ?
Does the influence or the public persona of some of these investors / directors overweigh the actual data of what’s in the governance journey ? Do some of them use their influence to be kosher in regulatory compliance, but poor in their behaviour by the spirit of the rules ?
Well, arguments of these nature are plenty. Rarely do they get discussed in the euphoria that we are creating unicorns, decacorns, etc.
This is where their boards, mentors and advisors to the founders and CEOs have to be firm when things are sour. Well, if their investors don’t act up now, let them hold their silence forever; for they cannot claim to be pundits of corporate governance ever. They are then around only for booking valuation-profits.
Governance will bring stability and long-term confidence in an organisation. Governance is a way of life and needs to be proactively built from day-1: day-o being the day when the founder thinks of her/his idea !
Else the governance risks, lapses and failures get passed with amplification to the public markets, when these firms get IPOd !
A wishlist and a hope :
