Startups & Corporate Governance: The Responsibility Lies with Investors

By Dr. Srinath Sridharan, Policy Researcher & Corporate Advisor

The allegations of corporate misgovernance often eclipse the narrative of success. This places the spotlight on the pivotal role of investors in safeguarding the startup ecosystem’s integrity. As the guardians of financial prudence and ethical conduct, investors, particularly those with Board roles and access to regular MIS and management presentations, bear the onus of fostering robust corporate governance practices.

Over the past decade, India’s entrepreneurial landscape has undergone a remarkable metamorphosis, evolving into the third-largest ecosystem globally, boasting over 1,00,000 startups and 100+ unicorns (assumably this has not reduced with the fluctuating fortunes of some of them).

Recent incidents have underscored the urgency for robust corporate governance mechanisms within these burgeoning ventures. It is incumbent upon private investors to spearhead this transformation by assuming accountability and building on stringent governance frameworks.

Yet the harsh reality is that most will push such a role back to “Boards” or “founders.” As custodians of capital and stewards of responsible investment, investors wield considerable influence in shaping the trajectory of startups. Their need to show improved valuations must not blind stakeholders to the imperative of exercising discernment and foresight. Shortsighted pursuits of growth can sow the seeds of downfall, culminating in compromised financial integrity and tarnished reputations.

Engaging with investee companies, leveraging voting rights, and actively participating in shareholder deliberations are indispensable facets of investor stewardship. However, disconcerting dissonance often emerges when divergent timelines clash, pitting investors’ short-term objectives against the enduring principles of corporate governance.

Investors with Board seats or observer roles cannot abdicate responsibility by feigning ignorance of internal affairs. Mere lip service to corporate governance, underscored by token gestures or launching books or reports on the topic of governance, falls short of genuine accountability.

Investors must champion the cause of accountability, advocating for mechanisms that foster independent oversight and mitigate conflicts of interest.

Private investors, including private equity (PE) and venture capital (VC) firms, often find themselves shunning corporate governance accountability, opting instead to engage in a blame game with founders. In their pursuit of maximising profits, investors may prioritise financial metrics over ethical considerations and long-term sustainability. Additionally, the asymmetric power dynamics between investors and founders can lead to a lack of transparency and accountability, with investors wielding significant influence but often distancing themselves from direct involvement.

Investors must adopt an unwavering stance when it comes to demanding transparent financial reporting, emphasising the non-negotiable importance of ethics and compliance, and instilling rigorous financial discipline within the startups they support.

The Board has a pivotal role, even within the confines of a private company where every large shareholder holds a seat at the table. Charged with providing indispensable counsel and direction during periods of growth and flux, the Board serves as a critical arbiter for major company decisions, ensuring their alignment with the collective interests of all stakeholders. Merely occupying a Board seat does not absolve one of the responsibilities or the obligation to pose pertinent questions. Many corporate sagas stand as stark reminders of the repercussions of opaque decision-making processes. When the Board is excluded from crucial decisions and management disregards stakeholder interests, the outcome is reckless and self-destructive behaviour.

The conventional approach of appointing individuals to Boards based solely on personal rapport, professional affiliation, and compatibility must be abandoned. While a boardroom should not devolve into a battleground, it also should not serve as a haven for mere concordance with all yes-people. Boards thrive on robust discussions and the capacity to respectfully “agree to disagree” with genuine intent. Perhaps this crucial aspect is lacking in the curriculum of our B-schools, leaving investors ill-prepared for the complexities of board dynamics.