About the Author: Neeraj Singh Rathore is IICA-MCA Qualified Independent Director, ICF Certified Business Coach, Author, Speaker, PMP, NLP Master, Executive Coach & an Entrepreneur. With a 26+ years of Experience and a accomplished professional with a strong track record of driving organizational success. Strong leadership and decision-making abilities with a focus on ethical and responsible governance for SME.
Establishing effective Corporate Governance practices is crucial for startups to thrive in a business ecosystem. As of 2022- 23 there are now 82,000 recognized startups according to Department of Industry and Internal trade. Hence corporate Governance needs to be taken up seriously. By implementing good governance practices, startups can enhance communication, streamline decision-making, and maintain strong relationships with investors, ultimately fostering a sustainable ecosystem.
In adherence to the Companies Act 2013, businesses in India are obligated to establish a board of directors entrusted with the responsibility of overseeing Corporate Governance and decision-making processes. This board must comprise a specified minimum number of directors, including independent directors for specific types of companies. Independent directors play a crucial role by providing impartial judgment, acting as a check on management, and safeguarding the interests of minority shareholders.
Furthermore, listed companies and certain entities are mandated to constitute an audit committee consisting primarily of independent directors. The primary focus and action of this committee is to ensure the integrity of financial reporting, internal controls, and effective collaboration with auditors.
Independent directors play a crucial role by providing impartial judgment, acting as a check on management, and safeguarding the interests of minority shareholders.
Adhering to effective Corporate Governance practices is challenging for startups due to limited resources, lack of experience, and the need to balance stakeholder interests. As startups grow, their governance requirements evolve, necessitating a proactive approach to establish a culture of responsible governance from the beginning.
The principle of a healthy balance between the interests of different stakeholders, including the promoters, shareholders, employees, and customers, is at the heart of corporate governance. Its four pillars are accountability, honesty, transparency, and responsibility. These principles served as the foundation for the 2013 enactment of India’s new Companies Act.
Good corporate governance can help startups to:
- Prevent fraud and corruption: A robust system of checks and balances can assist corporate governance reduce risks by preventing fraud and corruption.
- Make better decisions: Startups can make better decisions and offer better counsel if their board of directors is composed of seasoned and competent individuals.
- Attract investors: Investors are more inclined to fund businesses with sound corporate governance procedures since this ensures that their money will be prudently managed.
- Establish a solid reputation: For any startup, a positive reputation is crucial. By proving that they are a responsible and ethical business, corporate governance can aid startups in developing a solid reputation.
Here are key Action step for good corporate governance for startups:
- Internal committees, such as the audit committee, nomination and remuneration committee, and stakeholders connection committee, will be established to speed up accountability in a company’s decision-making processes.
- Accountability through further disclosure rules, such as the creation and implementation of risk management policies and corporate social responsibility, as well as strict guidelines for audit accountability.
- Provisions to be made to increase openness, including the definition of independent directors, clarification of promoter liability, and the creation of a system for reporting wrongdoing.
- Restrictions on key managerial staff compensation, minority owner protection, and investor protection were implemented in order to foster honesty among people in charge of and responsible for the running of a corporation.
- The creation of a simple and unambiguous company charter: The corporate charter is the document that outlines the goal, organisation, and governance procedures of the organisation. In order for everyone associated with the company to understand their duties and responsibilities, it is crucial for start-ups to have a clear and comprehensive corporate charter.
- Startups should have clear and transparent financial reporting so that investors and other stakeholders can understand the financial success of the business.
- An ethics code: An ethics code outlines the values and principles of the organisation. It’s critical for start-ups to establish an ethical code so that everyone in the organisation is aware of what is expected of them.
- A whistleblowing policy: This rule enables staff members to voice concerns about illegal or unethical actions without worrying about repercussions. It’s critical for startups to have a whistleblowing policy so that staff members are at ease voicing any potential concerns.
Start-ups can establish successful corporate governance practises by adhering to the above fundamental principles. The right corporate culture must be developed by the founders. And if you can, get a trustworthy CFO.
By complying with various regulations, adhering to international standards, and adopting best practices start-ups can build investor confidence, foster harmonious relationships, and maintain fair market practices. They should also recognize the importance of shareholder rights, implement whistle-blower mechanisms, and promote CSR activities.
To create a strong and sustainable business environment, it is essential for start-ups in India to promote good governance practises. Start-ups can foster long-term growth by putting an emphasis on ethical behaviour, openness, and accountability. Start-ups must diligently adapt to changing requirements and acknowledge the significance of corporate governance despite ongoing problems.
Keep in mind that scrutiny increases as your business expands. Additionally, if you intend to launch an IPO, you will need to pass a much harsher test. For Start-up and Growth Industries today, good governance is not a question of choice but rather the need of the hour.