Why Should Founders Strive For Good Governance Practices?

As Indian startups continue to mature, they seem to be neck-deep into the troubles that continue to breed unabated due to ailing corporate governance practices in the world’s third-largest startup ecosystem.

The statement holds true especially when an increasing number of homegrown new-age ventures have faltered on numerous fronts in the absence of concrete corporate governance practices, and names like GoMechanic, BharatPe, Zillingo, DeHaat, Pristyn Care, and Mojocare are just a few of many examples to have staggered on this path.

Another key example is of India’s most-valued edtech startup, BYJU’S, which is facing a never-ending spate of misfortunes due to its corporate governance issues.

While the company has failed multiple times to file its financials in time repeatedly, it has also witnessed the resignation of three board members — GV Ravishankar of Sequoia Capital (now Peak XV Partners), Vivian Wu of the Chan Zuckerberg Initiative, and Russell Dreisenstock of Prosus.

At a time when the lines between corporate governance and compliance have thinned to the extent that it has sparked a debate across new-age sectors and industries, Bengaluru-based early-stage venture capital firm 3one4 Capital held a discourse on how boards can establish and safeguard sound governance practices before it is too late for startups to take the right turn.

The discussions which featured M Damodaran, former SEBI and UTI chief and currently the chairperson at Excellence Enablers Private Limited, and the chairman of Aarin Capital and Manipal Global Education, Mohandas Pai, moderated by Siddarth Pai, founding partner and CFO, 3one4 Capital, paved the way for some intriguing analogies when the trio unravelled the concept layer by layer and what it should mean for Indian founders.

Notably, while the former CFO and board member of Infosys, Mohandas Pai has donned many hats ever since his stint at Infosys, Damodaran has helmed nearly a dozen organisations and currently sits on the boards of companies such as Larsen & Toubro, Biocon, and InterGlobe Aviation. He has been on the boards of Hero MotoCorp, Tech Mahindra and CRISIL.

Moving on, the industry veterans started their discussion by highlighting the need to address the elephant in the room, which is understanding the role that corporate governance plays in ensuring the long-term success and sustainability of businesses.

Elaborating on this, Siddarth Pai underlined a critical distinction between governance and compliance, a point often blurred in discussions. According to him, governance transcends mere compliance with rules and regulations. While compliance adheres to external mandates, governance drives strategic decisions, rooted in the conviction of ethical values, long-term sustainability, and responsible decision-making.

Echoing the same sentiments, Damodaran drew an analogy with wearing a seatbelt while driving. There are hoardings alongside the road, in the US that say, “Buckle up. It is the law.” While the intent is correct, the message is wrong. He added that individuals should wear seatbelts because it is the right thing to do and not just because the law mandates it.

Simplifying the concept of corporate governance further, Damodaran said that it entails doing the right things at the right time, in the right manner, and for the right reasons. These four elements, he asserts, are the pillars on which strong corporate governance-driven ventures are built.

The duo, Mohandas Pai and Damodaran talked about how good corporate governance practices make the lives of founders easier in their quest to build sustainable ventures of tomorrow.

Addressing Conflicts At The Board Level

There are two fundamental issues with companies that have a weak corporate governance structure in place — conflict of interest and asymmetry of information.

Damodaran and Mohandas Pai emphasised that addressing conflict of interest is paramount. Board members are required to declare their interests and are expected to recuse themselves from discussions or decisions that pose a conflict. However, in practice, conflicts can sometimes be addressed due to leniency in recording minutes or a lack of self-awareness by board members.

Explaining the importance of addressing asymmetry of information, Damodaran provided an anecdote about a father who selectively shares important information with one of his children, creating an imbalance of power within the family.

“This disparity in access to information can have far-reaching implications for interpersonal relationships. While asymmetry of information is a contextual and situational challenge, efforts should be made to minimise it, although complete elimination is often impractical,” he said.

Damodaran recounted a case of a lawyer who served on the boards of multiple companies across diverse industries. Problems could arise if he brought knowledge from one board into another, inadvertently compromising confidentiality.

There are other challenges as well. While the total number of boards of listed companies, a person could sit has been curtailed to 7. Earlier, it used to be 20, and then 10. A board member usually sits on at least two committees. This requires a minimum of several days of engagement for a particular company.

Is it even physically and mentally possible to be on so many boards? Can such a board member raise valid questions on behalf on behalf of stakeholders for each company on whose board he is an independent director?

These are the questions that must be looked into while appointing a board member. Another pertinent issue is whether these independent board members should be friendly to the extent that impacts on objectivity.

Why Independent Directors Do Not Need To Be Friends With Founders

Challenging the conventional practice of appointing individuals to boards because of personal comfort and compatibility, Damodaran said that while a boardroom should not be a battleground, it should also not be a place of mere peaceful coexistence.

Damodaran contended that independence should not be defined solely based on personal or commercial relationships but on the capacity of a director to challenge assumptions, probe projections, and scrutinise thought processes. He advocated for constructive tension in the boardroom, with independent directors actively asking tough questions. Their role, he emphasised, is to represent the interests of all stakeholders, not just management or shareholders.

“The role of the board is to serve as the guardian of the interests of all stakeholders, moving beyond the outdated notion of prioritising shareholders above everyone else,” said Damodaran.

“In the boardroom, it’s crucial to have friends of the company, but not necessarily friends of the promoter. While I’m not suggesting that you bring in adversaries, it’s essential to draw a clear line. Your friendship with the promoter, no matter how close, should be left outside the boardroom. Bringing friends into the boardroom, especially close friends of the promoter is a practice I don’t subscribe to,” Damodaran said.

He added that directors should be the ones who challenge, question, contradict, and present alternative viewpoints, keeping the greater good of the business in mind.

Dealing With Disclosures At Board Level

While all the details pertaining to business practices must be disclosed at the board level, business secrets should not be.

“This is because there are certain proprietary processes or information that must remain confidential. These cases require clear definitions and discussions with the board and the chairman. An example of this is the Coca-Cola formula, which is closely guarded and not disclosed to the board,” Mohandas Pai said.

While transparency is crucial in many aspects, there are business secrets that have no bearing on compliance or legal requirements but significantly contribute to a company’s competitive advantage. In such instances, maintaining confidentiality is paramount to preserve the company’s competitive edge, Mohandas Pai added.

What’s The Way Forward?

According to Damodaran and Mohandas Pai, the way forward is transparency and accountability. The duo pointed out that transparency extends beyond financial reporting to encompassing all aspects of a company’s operations. They said transparency should be proactive, with companies willingly sharing information rather than waiting for regulatory mandates.

“Accountability is closely linked to transparency, and board members must be held accountable for their actions and decisions. This accountability should be to all stakeholders, not just shareholders. Accountability should be integral to a company’s culture and governance framework,” Damodaran said.

So, how can the key stakeholders of an organisation make sure that both accountability and transparency seamlessly flow into their governance practices?

“By building a value system,” Damodaran explained.

Elaborating on the question, both Mohandas Pai and Damodaran said that the key custodian of governance in any organisation is the board of directors, as they play a pivotal role in shaping the culture not only within the boardroom but also across the organisation.

“This influence starts with the chairman of the board, who must set an example by addressing issues in a manner that prioritises the public interest over personal gain. Cultivating the right culture takes time… it is akin to an organisation’s DNA, which is shaped by the values instilled by those who have led it,” Mohandas Pai added.

Mohandas Pai also noted that an organisation’s culture is not something that can be changed overnight, and it relies heavily on the values and behaviour of its leaders. People observe and learn from their leaders’ actions and these actions become ingrained in the organisation’s DNA.

“Although despite best efforts, someone with conflicting values may enter an organisation. In such cases, it’s crucial to address the issue early and consider whether they truly align with the organisation’s culture. In startups, especially, where teams are small, a single individual with misaligned values can have a significant impact. So, it’s vital to evaluate not only the skills and experience someone brings but also their compatibility with the organisation’s culture and values. Failure to do so can lead to disastrous consequences,” Damodaran said.

Followed by the keynote address by Damodaran, as the discussions between the two reached its conclusion, both reiterated the importance of creative tension between founders and the board. The best way to nurture this, they said, is to realise the importance of constructive criticism and alternate perspectives while forging ahead.

While it may take time to learn this critical lesson, it will slowly but surely go a long way in helping Indian founders build some of the most sustainable ventures in the not-so-distant future.