Investors, particularly at the institutional level, have a crucial role to play as active owners, engaging with invested companies, exercising voting rights, and participating in shareholder meetings. While the resilience of the Indian start-up economy in 2023 stood out, instances of corporate malfeasance cast a shadow over our achievements. Despite India’s elevated status in the global start-up ecosystem, the potential fragility of the domestic ecosystem poses a risk to its long-term resilience. This underscores the vital responsibility of investors in upholding sound corporate governance.
In 2023, several well-funded start-ups faced allegations of corporate misgovernance, sparking concerns. The root causes of these issues raise questions about the oversight by investors, auditors, and boards regarding financial and compliance discrepancies. The pursuit of high valuations may have overshadowed the importance of exercising prudence.
Governance challenges have led even prominent unicorns to downfall. Poorly planned growth, driven by ambitious yet shortsighted strategies, has resulted in the collapse of highly valued start-ups globally. The revelation of weak balance sheets, questionable accounting practices, or delays in financial reporting damages brand reputations, impacting both founders and investors.
To ensure good governance, institutional investors must fulfill their role as active owners, engaging with companies, utilizing voting rights, and actively participating in shareholder meetings. However, conflicts of interest, particularly regarding desired outcomes’ timeframes, may cloud decision-making, as investors may prioritize shorter-term objectives like exits. Corporate governance, focused on long-term sustainability, demands a separation of individual interests from objective decision-making.
A fragmented cap table, documenting ownership distribution, can further complicate matters, leading to conflicts among investors and with founders over company goals. Investors must guide companies by setting aside individual priorities, especially during challenging decision-making moments. Constant monitoring of regulatory compliance, external audits, and qualified accounting appointments ensure accurate reporting and prevent legal liabilities.
Transparent financial reporting, ethical practices, and financial discipline should be emphasized by investors. Prioritizing long-term value creation over short-term profit chasing is essential for sustained success. The board, even in private companies without minority shareholders, plays a crucial role in advising leadership, acting as a check and balance for major decisions, and ensuring alignment with stakeholder interests.
Regular and consistent board meetings are critical to avoid messy power struggles and lapses in communication. A case in point is the collapse of a major financial institution for start-ups, where inattention to portfolio nature and inefficient risk management contributed to its downfall.
In the Indian context, initiatives like Start-up India’s MAARG Portal and guidelines from the Securities and Exchange Board of India (SEBI) aim to enhance corporate governance practices. The Companies Act (2013) mandates the formation of a board of directors with a percentage of independent directors, reinforcing the importance of sound governance practices for sustainable economic growth. Corporate governance, encompassing communication, decision-making, and relationship-building, is the cornerstone of a resilient ecosystem.
