Corporate Governance in Startups

A much discussed topic in the startup space is corporate governance based on the basic principles of a) accountability b) transparency c) fairness and d) responsibility. A certain regulation, control is required to direct business in the right direction and in an ethical manner. Startups are our point of discussion, who are in need of supervision and guidance from some seasoned professionals in the field, to minimize their business miscalculations.

Simply understood, corporate governance is about compliance with legal provisions, having an experienced team of board of directors and a structure to guide the team. It is a system of rules, practices and processes to direct and control any company. A strong advisory board is necessary to be formalized to bring external expertise and guidance during a crisis period. It also entails the factor of security and trust; a high-profile advisory board provides a sense of security and trust to the stakeholders, whether it’s an investor planning to push funds or a potential employee seeking to join the team. A team of professionals, with preferably diverse backgrounds who are seasoned through times like the 2008 financial crisis, Dotcom bubble burst, would certainly be an asset for the company.

Greg Mitchell,a Latin American investor, believes that ‘corporate governance’ should be understood as “getting the best people together to support a startup” instead as some kind of governance; which is relevant in the context of startups.

Luc Sterckx, President and member of the boards of several international boards, who has written a book ‘Corporate Governance in Startups’ has an interesting opinion when asked – what are the best practices he recommends in governing startups? He says that the founders did not start the company to become champions in corporate governance; their key values and interests revolve around creativity, freedom, growth which should be taken into account and above all respected by the governance structures. 

While we understand founders are driven by their zeal and need expertise in the field to channelize their enthusiasm, it is also important that the governing board is able to grasp their innovation and play around the rules/practices to sort of provide them that leeway to create.

One important point of discussion in this area is whether to get the board of advisors early at the stage of a startup or later on while the company is in functional mode. It is preferred to have the advisory board at the growth stage, since at the early stage the founders would need the liberty of innovating and experimenting without any hindrance of traditional set of rules and this is what Luc Struckx as well, has tried to infer when he talks about striking a balance. Many experienced professionals in the business believe that the advisory board’s actual role begins when the startup is far ahead from the idea stage and has entered into the business.

At the SINE, one of the incubatee companies, Sustlabs, does believe in leading by governance from very early one. It has had an advisory board since they started and they’ve explained how beneficial it has been for them specially when the seasoned business people in their advisory board, guided them through the processes and also during the crisis COVID 19 pandemic brought.

The lack of an advisory board leads to massive mismanagement and increases the probability of errors. It can lead to services issues, misguided operations, unchecked fraudulent behavior, unethical practices and multiple unchecked operations. There are many such cases of startups which have failed and were compelled to stop operations after either fraudulent cases or unethical practices. At times, startups also take unwarranted shortcut routes or unadvisable business models to demonstrate exponential growth in short time, albeit it remains unsustainable in long term. Doodhwala, Local Banya are such examples who are not functional anymore.  Theranos, a healthcare startup founded way back in 2004 by a Stanford dropout named Elizabeth Holmes, had to shut eventually due to fraudulent practices as both corporate and personal ethics were absent at the revolutionary blood testing startup. Housing.com, a Mumbai-based startup is another example of failure due to lack of sound mentoring and direction for founders which made the company’s vision go haywire. Another classic and very recent case of how corporate governance plays out and how significant its role is in any business is BharatPe, a company also subject to regulatory governance. This case is also a study itself on how a co-founder and senior team member were made to leave the company by the governance structure due to ‘alleged’ fraudulent practices.

Corporate Governance sets the culture for any company or startup to have a governance structure in place already, to supervise you – is one reason, however, to protect you as well from many potential errors and to keep a double check on the operations of the company. It doesn’t have to be perceived as an obstacle during the decision-making process, but definitely sets a pattern and infrastructure for logical decision-making, for ethical practices and for legally compliant processes.