Corporate Governance: New Age Startups

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.