Corporate Governance: New Age Startups

Mains Marks Booster     3rd August 2023        
Samadhaan

About:

  • Corporate Governance is the system by which companies are directed and controlled.
  • It represents the structure of rules, practices, and processes used to direct and manage a company for its efficient and effective functioning. 
  • If these rules, practices and processes are driven by moral principles or values to ensure efficiency, then it is called Ethical Corporate Governance. 
  • Principles of accountability, transparency, integrity, fairness, corporate social responsibility etc are core to this.

Need for Ethical Corporate Governance in Start-ups

  • Unconventional nature: Startups are the early-stage companies focusing beyond conventional strategies for smart solutions to problems in a cost-effective manner.
  • Ex Startups for Doors step delivery of Food 
  • High Valuations: Most of the Startups have high valuations. 
  • Ex. Paytm valuation dropped from $19 Billion (listing day) to $5 billion 
  • Accounting Issues: Presenting Gross revenue as net revenues. 
  • Ex. Rahul Yadav's 4B Networks, Zilingo
  • Tax Evasion: Using shell companies for Tax evasion. 
  • Ex. B2B unicorn infra.market
  • Misappropriation of Funds: Use of company’s expense account to fund own lavish style. 
  •  Ex. Bharatpe, BYJU
  • Large and growing numbers: India has the 3rd largest startup ecosystem in the world with 71,248 recognized startups, including 100 unicorns, with a total valuation of over ?25 lakh crore rupees.
  • Sectoral omnipresence: They are present in almost every conceivable space and function as the new engines of growth, job creation and socio-cultural transformation In India. 
  • Young age of founders: limited business exposure and short-term interests like funding rather than long-term sustainability leads to increased ethical lapses.
  • Ex. Zepto co-founder Kaivalya Vohra, who is just 19 years old 
  • Poor Self Compliances: Lack of due diligence and compliances by startups. 
  • Ex. BYJU’s financial issues

Challenges for Start-ups to adopt Ethical Corporate Governance

Unlike big corporate houses or listed companies with availability of guidelines, resources and experience, startups suffer from issues such as: 

  • Limited resources: In initial stages, most startups lack people or funds necessary for creating systems and processes for building an ethical workplace. 
  • Young-age of entrepreneurs: As number of startups are started by entrepreneurs with negligible or zero experience, they tend to have limited understanding of why ethical systems and corporate governance is essential for long-term growth. 
  • Workplace culture issues: The workplace culture prevalent in India is largely employer centric, creating issues like limited accountability, low emphasis on values such as fairness etc. This indirectly discourages start-ups to adopt an ethical culture organically. 
  • Short-term Focus: When started or in an early stage, the focus of most startups are attracting funding, which could lead to the neglect of ethical principles necessary in the long-term perspective.
  • Underdeveloped Ecosystem: Indian startup ecosystem has some missing links such as proper mentorship and support; public interest-oriented Venture Funds etc. 

Start-ups should adhere with the following ethical principles, to upheld corporate governance

  • Accountability: The Company Management should follow the obligation to explain and reason for the company’s actions and conduct. 
    • Ex. Streamlined methods can be adopted for this communication to avoid additional regulatory burden on Start-ups. 
  • Responsibility: On behalf of the company, the Board of Directors/investors should accept full responsibility for the powers they are given and exercise the authority. 
  • Transparency: Digital tools like weekly newsletters, updated website could be used to Inform stakeholders about the company’s activities as part of good governance.
  • Fairness: The corporate strategy, developed and implemented by management, should focus on long-term value creation through timely disclosures; helping investors to assess the financial and business soundness and risks of the company. 
  • Corporate Social Responsibility (CSR): In decision-making, management should consider the interests of all company’s constituencies, including: 
    • Stakeholders such as employees, customers, suppliers, and the community, and 
    • Regard for environmental, health, safety, and sustainability for long-term value creation.
  • Leadership: The top of startups should set the tone- demonstrating company’s commitment to integrity and legal compliance- to set the groundwork for an ethical work culture. 

Role of Other stakeholders – 

  • Government: Developing a Code of Best Practices on corporate governance standards and providing tailor-made versions ethical practices for different sectors (in order to encourage compliance).
  •  Citizens: In addition to being customers, they are co-producers and evaluators of services. The choices that they by and large dictate the processes and products of companies. They can help by making more ethically responsible choices. 

Conclusion 

  • Beginning a business is merely the first step on a lengthy journey. A startup can achieve this through establishing and maintaining a solid reputation, attracting and keeping competent personnel, and gaining confidence in its stated goals. 
  • An ethical startup ecosystem will create the groundwork for a moral society, a moral economy, and most crucially, a moral individual.
Samadhaan