What went wrong with once marquee start-ups like Byju’s, Bharat Pe, Go Mechanics, Mojo Care and Zilingo, to name a few?
The financial results of Byju’s were not prepared on time. The board’s failure to perform their basic duty cannot but be deliberate. But how long can one run away from toxic debt and its corollary wasteful expenditure? Prosus NV, one of its investors, reportedly stated that its executive leadership had regularly disregarded advice and recommendations related to strategic, operational, legal and corporate governance matters.
Fake invoices and misappropriation of funds were reported in BharatPe.
Go Mechanics was booked for fraud, forging documents, cheating and falsification of records. Mojo Care went down under with an unsustainable business model, with charges of financial irregularities, inflated sales and overstated revenues thrown in. Zilingo also had a bad business model.
The above examples suggest a serious governance deficit. The boards, some of which had nominees of international investors as directors, failed in instituting systems and processes to prevent faulty reporting, siphoning of funds, toxic debt and getting carried away by the hype around valuation and transitory media adulation.
Corporate governance is often overlooked because there is no incentive for it and is hence accorded a low priority. Corporate governance is an enabler. It takes time to show results. There is no pain in the present. In all the examples cited above, considerable time had lapsed, before the consequences of malpractices emerged in the public domain.
What is the definition of corporate governance?
As per the Cadbury Report (1992), corporate governance is the ‘system by which companies are directed and controlled’. It includes the system, processes, structures and mechanisms that a company puts in place to achieve the desired objective.
Where does corporate governance start?
It starts with the founders. If they do not see merit in good corporate governance practices, it will not happen. Their commitment is a necessary condition. Founders need to have a clear understanding of the principles of good governance.
The intent of the founders is of paramount importance. They should not get into the growth valuation game. Growth at any cost, bolstered by greed, often leads to unethical practices. The importance of intent is best reflected in this quote from the Upanishads:
“You are what your deepest driving desire is. As is your desire, so is your intent. As is your intent, so is your will. As is your will, so is your deed, As is your deed, so is your destiny.”
At no cost should the founders yield to the pressure and greed of the investors to get into the growth valuation game, so that the investors can exit with massive profits. Valuation is transitory. Along with its handmaiden media hype, it does not take long to evaporate. A single-minded pursuit of growth to increase valuation, often leads to unethical practices.
Why good corporate governance?
Good corporate governance practices adhere to the old adage that prevention is better than cure, by mitigating risks, thereby saving resources and efforts which may be required in future, to fight regulatory battles. It boosts the reputation of the company, which helps in raising capital, attracting and retaining talent and in building moats to ward off competition.
What are the general principles of good corporate governance?
Good corporate governance is a recognition of the rights of shareholders and a commitment towards equitable treatment to them. It also requires recognition of its legal obligations towards non-shareholder stakeholders. Adherence to ethical behaviour, an obligation towards transparency in all operations with predictability and accountability in all decision-making, are some of the general principles of good governance.
What are the pillars of good corporate governance?
The foundation of good corporate governance rests on integrity (pecuniary, moral and intellectual), regulatory compliance, walking the talk by the top management, doing the right thing, displaying emotional intelligence and creating a climate of trust, in which different opinions are freely expressed and duly considered.
What is the obligation of the boards to promote corporate governance?
The core work of the board is to exercise oversight with the objective of ensuring accountability, reviewing strategy and performance, thinking collectively and taking the best decision, in good faith, in the interest of all stakeholders. They are required to use their insight to ensure that malpractices are prevented and/ or are swiftly detected, so that damage to the corporate is minimised.
Corporate government is best reflected in board functioning. The board sets the tone for organisational culture. David Bower had defined organisational culture as ‘the way things are done here’. Peter Drucker famously said that ‘Culture eats strategy for breakfast’. Organisations that create a culture based on fairness, transparency, honesty and respect reap the rewards. People are aligned to a culture not strategy. Strategy can be copied, culture cannot be. Contribution is recognised and rewarded. People care very dearly about fairness, a major determinant of how people behave and perform.
Jeffrey Sonnenfield in an article titled ‘What Makes Great Boards Great’ published in HBR, 2002 states that the exemplary boards are robust, effective social systems. They function on a virtuous cycle of respect, trust and candour. They encourage sharing difficult information and challenge one another’s assumptions and beliefs. No subject is beyond discussion. Groupthink is frowned upon.
What is the solution?
The solution lies primarily with the founders. From the very inception, they need to be aware of the necessity of instituting the best corporate governance practices in their companies. This is in their long-term interest. Often, they start their innings with an incubator. The organisation running the incubator has to educate them.
At an early stage of the start-up, preoccupation with getting the product right, finding the market and raising funds are often given as an explanation for neglect of corporate governance. That is where the role of the boards assumes importance. They have to ensure that the company adheres to the best practices from its inception. This will assume greater importance as the business grows with the concomitant evolution of corporate governance practices. Founders which constitute the board have to put in place a board whose directors have the expertise, knowledge and the moral courage to put in place course correction measures at the earliest sign of the management going astray.
(Saurabh Chandra is the former Secretary to the Union Ministry of Petroleum and Gas and the Department of Industrial Policy and Promotion (DIPP). During his 37 years career, he held several positions in the Indian Government, both at the state and central levels and in various public sector enterprises and government organisations. He is an IAS officer from the UP cadre and an alumnus of IIT Kanpur.)
