Yes, Governance Matters: Steering the Ship: How Good Governance Drives Performance

THE CRITICAL ROLE OF GOVERNANCE IN START-UP:

In today’s fast-paced business world, corporate governance plays a pivotal role in ensuring the long-term sustainability and success of any organization. It is crucial that start-ups prioritize corporate governance and financial management from the grassroots level and not treat it as an afterthought. Good governance is sacrosanct. It is no longer an option. Much like justice, not only must governance be done; it must be seen to be done.

Start-ups are pivotal in contributing to the emerging Indian economy and have the potential to create a significant impact on a global scale. As India aspires to become a global economic powerhouse, it is imperative that start-ups in India create new benchmarks in corporate governance, not only for India but also for other nations. By doing so, start-ups can set an example for the rest of the world and inspire other organizations to follow suit.

ESG AND ITS IMPLEMENTATION:

Countries are moving steadily towards inculcating “ESG” or “Environmental, Social, and Governance” norms into their regulatory framework by amending or enacting legislation to include ESG regulations, which require further compliance. Lately, there has been a growing interest in the intersection between start-ups and ESG. Start-ups, known for their agility and innovation, are increasingly being seen as a key driver of sustainable development, and ESG has emerged as a framework for measuring the impact of businesses beyond their financial performance. By integrating ESG considerations into their operations, start-ups can not only contribute to creating a more sustainable future but also attract investors and customers who prioritize socially responsible practices.

Governance should be woven into the fabric of a company, not just something that is stacked on at the end. This means that companies need to integrate it into its investment and governance documents from the start. Good governance can play a vital role in addressing oft-seen issues in start-ups in the Indian context. Start-ups in India have been facing challenges related to governance due to the lack of proper regulatory frameworks, weak institutional mechanisms, and inadequate disclosure norms. Good governance practices can help start-ups mitigate these challenges and build a culture of transparency, accountability, honesty and responsibility (The four pillars of corporate governance) for building a strong corporate culture and establishing trust with stakeholders.

WHY BUILD STRONG FOUNDATIONS?

Let’s delve into the critical need for governance in start-ups and explore how it contributes to their success.

1. Defining Governance in Start-ups: Governance in start-ups refers to the set of processes, policies, and structures that guide decision-making, ensure accountability, and establish a framework for responsible management. It encompasses various aspects, such as strategic planning, risk management, financial controls, ethical practices, and compliance. While start-ups are often characterized by a more flexible and agile culture, effective governance provides the necessary structure to navigate challenges and capitalize on opportunities.
2. Establishing Direction and Strategy: One of the primary reasons start-ups need governance is to set a clear direction and strategy. Without a well-defined vision and roadmap, start-ups can easily lose focus and deviate from their core objectives. Governance mechanisms, such as a board of directors or an advisory board, play a crucial role in providing strategic guidance, ensuring alignment between stakeholders, and fostering a culture of goal-oriented decision-making. A strong governance framework helps start-ups identify their target markets, define competitive advantages, and make informed choices to drive growth.
3. Ensuring Accountability and Transparency: Accountability and transparency are vital components of a well-governed start-up. Stakeholders, including investors, employees, customers, and partners, need assurance that the company is managed ethically and responsibly. Implementing governance mechanisms, such as regular financial reporting, internal controls, and compliance frameworks, enhances transparency and builds trust. By establishing accountability, start-ups can attract funding, retain talent, and forge long-lasting relationships with key stakeholders.
4. Mitigating Risks and Enhancing Resilience: Start-ups operate in a high-risk environment where uncertainty and volatility are constants. Effective governance helps identify and mitigate risks, protecting the company from potential pitfalls. By implementing risk management frameworks, start-ups can anticipate challenges, develop contingency plans, and respond swiftly to market disruptions. Robust governance structures enable start-ups to adapt to changing circumstances, enhancing their resilience and ensuring continuity during challenging times.
5. Attracting and Retaining Talent: Start-ups rely heavily on the skills and expertise of their teams to execute their vision. However, talented professionals seek organizations with strong governance practices. By establishing transparent and fair policies, start-ups can attract top-tier talent and foster a culture of accountability. Governance frameworks also provide a sense of stability and clear career progression, increasing employee satisfaction and retention rates. Effective governance demonstrates the start-up’s commitment to ethical practices, which is increasingly valued by potential employees.
6. Facilitating Funding and Investor Confidence: Start-ups often require external funding to fuel their growth. Investors, be it venture capitalists, angel investors, or institutional funds, evaluate start-ups based on their potential returns and the level of risk involved. A robust governance structure demonstrates to investors that the start-up is managed professionally, with clear decision-making processes and accountable leadership. Investors are more likely to trust start-ups with strong governance, leading to increased access to capital and improved investor confidence.

By embracing governance principles, start-ups can build strong foundations that set them up for long-term success, creating a sustainable and resilient path toward achieving their goals.

THE EXCLUSIVE THINK TANK CONFERENCE:

Globally, start-ups have evolved into the catalyst for economic recovery, reorientation, and growth driven by innovation. As India Inc. is pushing the needle towards achieving the trillion-dollar digital economy goal and has evolved as a hotspot for varied start-ups, it is imperative for companies to understand the importance of corporate governance.

To deep-dive into this, on April 29, 2023, Nishith Desai Associates and TiE Mumbai under the Indian presidency of the G-20 2023 organised an exclusive think tank conference at the research campus Imaginarium AliGunjan, Alibaug.

The exclusive think tank conference, supported by Startup20 Engagement Group led by Dr. Chintan Vaishnav was conducted under the guidance of Amitabh Kant, G-20 Sherpa, Government of India. Key representatives from 30+ unicorns and top venture capital funds along with officials from NITI Aayog and Atal Innovation Mission gathered for the conference. The exclusive think tank conference aimed at sensitising start-ups on corporate governance in a bid to create India’s image as a land of well-governed companies.

Amitabh Kant reiterated the importance of developing the corporate governance standards for India Inc. to go global and establish norms for other G-20 countries. To achieve this goal, an independent Start-up Corporate Governance Committee was formed comprising a team of 7 members (Ramanan Ramanathan, Harish Mehta, Apoorva Ranjan Sharma, Pratekk Agarwaal, Karthik Reddy, Kritika Murugesan, Manish Taneja and the Legal Advisory Team consisting of Nishith Desai, Sahil Kanuga and Maulin Salvi) to draft a recommended corporate governance framework for start-ups.

The team, in a series of meetings, put together the Recommended Governance Framework for Start-ups.

THE RECOMMENDED GOVERNANCE FRAMEWORK FOR START-UPS:

The said Governance Framework is designed to establish a culture of accountability, transparency, and ethical behaviour at all levels of start-ups, thus enabling a self-regulating world class start-up ecosystem.

The framework is a comprehensive guide that provides a clear and practical approach to establishing effective governance practices within a start-up for the benefit of the start-up and its founders. While frameworks are merely frameworks, the novel idea in this particular framework is the categorization of hundreds of start-up compliance requirements, based on the maturity level (Level 1, Level 2 and Level 3) of the start-up.

The framework will help start-up founders and entrepreneurs create a solid foundation for their businesses, by establishing structures and processes that will support their growth and success. The framework emphasizes the importance of transparency and accountability and provides guidance on how to establish effective communication channels between stakeholders, including board members, investors, and employees. It also highlights the need for start-ups to establish a culture of compliance, by identifying and managing risks and complying with regulatory requirements.

The framework is based on extensive research and consultation with experts in the field and is designed to be flexible and scalable to accommodate the unique needs of each start-up across various industries. It is intended to be a living document that can and will be updated and refined as business evolves.

The framework recognizes the need for start-ups at different level of maturity with appropriate levels of corporate governance which the start-up is recommended to comply with or explain its absence.

The Recommended Governance Framework for Start-ups is now live on the website of Startup20: https://www.startup20india2023.org/ for public feedback, review and comments. The same can be download from the below link

https://global-u ploads.webflo w.com/639ecc a066f41623b 6090b98/64 7b1d8d5d91 97f7132c6 e01_Rec ommende d-Gove rnance -Framewo rk-for-S tart-ups- A5-8.pdf.

INVITATION FOR FEEDBACK:

As with all such norms which impact the larger community, the Start-up Governance Framework is now open for feedback from the larger audience, so as to improve it further. We invite you to provide your feedback, which can be shared through the below google form link:

https://docs.goo gle.com/forms/d/e /1FAIpQL SfENWV9n U_vNd2AJL FaX0pQy6 hXc3MnXjiY PkYBeZy drAHPJQ/viewfor m?pli=1

The recommended framework is the starting point for its further evolution into creating a world class governance system. The success of the same is critically dependent not only in its implementation but also continuous insight into the improvement of the same through various stakeholders in the start-up ecosystem.

Corporate governance acts as a knight in shining armour, rescuing all stakeholder of a company at all stages, during and after fund-raising. As the saying goes, right begets right and wrong begets wrong. Following the sound principles of corporate governance could facilitate a start-up to (a) make sound investment decisions, (b) establish best practices in the form of rights, duties, obligations, and liabilities, and (c) move towards smooth functioning and growth. This framework is the first step of many in the right direction!