VCs To Tighten The Belt On Corporate Governance

Recently, there have been media reports of several well funded startups being raided by the IT department because of compliance and governance issues. Well known and well hyped social E -commerce platform, a fintech startup, and a B2B fashion E-commerce startup are amongst those charged with severe misappropriations, and for alleged financial frauds and breach of corporate governance rules. 

This compelled the venture capital (VC) firm who had invested in these startups to write a blog on corporate governance: “We want great companies to be built that are not just valuable but also enduring – and that can only happen if the values are right and the governance is strong. We think it’s time for us, as an ecosystem, to sign up for better governance. “What” has been achieved is now clear – we think it’s time to improve on the ‘how’.”

The ‘how’ can be improved by a well-structured, independent corporate governance that is critical to making sure an organisation stays ethical and follows all laws. Simply put, corporate governance provides the guardrails that drive accountability, transparency, fairness and responsibility. As the experience of an earlier generation of IT companies like Infosys, Wipro  and TCS shows, corporate governance allows a company to balance the differing interests of various stakeholders including shareholders, employees, and customers. It is what eventually reassures external stakeholders that the company has its housekeeping in order.

As the startup ecosystem in India continues to grow and evolve, with big IPOs and unicorns and decacorns, founders should focus on building a company that is not only valuable but also enduring, where corporate governance is the guiding principle. 

Well begun is half done. There is much talk about investors tightening their grip on ESG – environment, social responsibility and governance norms by ensuring that the startups focus on these imperatives right from the beginning making it a part of the culture of the company. Setting ESG as one of the key evaluation criteria for future rounds of funding, beyond acquiring seed capital, will help ingrain the seriousness among startups as they will go beyond just maximising profits. 

VCs must stand up and deliver tough messages to founders early on, not after things go haywire. Finally, it is the founders’ responsibility to have high standards of ethics and governance. They also need to learn to take criticism from their board members.

Echoing the same thought, last week, the Minister of Commerce and Industry Piyush Goyal told Indian startups to strengthen corporate governance standards. 

“We need to strengthen that (corporate governance) in our startup ecosystem. The kind of reports that we are reading of late about revenue and data fraud, tax evasion, these kinds of malpractices need to be clipped at an early stage. Otherwise, they will earn a bad name for our startup world,” Goyal said. 

Corporate governance is a shared responsibility between founders, management and the board and to get there the whole ecosystem needs to come together and commit to greater governance and continue to work towards making this a world class ecosystem.