How corporate governance in Indian start-ups help secure investor trust

Start-ups would benefit from aligning themselves with the investor vision for long-term growth opportunities.

In brief

• Striking a balance between financial progress and sustainable growth can help uphold investor confidence and secure consistent funding.
• Building a foundation of accountability reassures investors and helps them get the right measure of the risks involved.
• Compliance with regulations can serve as the cornerstone of long-term success.

Indian start-ups exemplary growth trajectory inspires confidence in the country’s ability to realize its ambitious vision of soon becoming a $5 trillion economy. While Indian start-ups have managed to secure funding with ground-breaking innovation, the current geopolitical landscape is spurring venture capitalists to exercise caution.  This has ignited crucial inquiries, such as how start-ups can achieve a harmonious equilibrium between maintaining financial progress and nurturing sustainable expansion in order to uphold investor confidence and secure stable funding. Understanding investor perspectives on corporate governance and prioritizing the need for transparency and accountability will be a pivotal differentiator. By demonstrating a laser-like focus on investor expectations through a robust governance framework and integrity agenda, homegrown ventures can pave the way for long-term success.

Here are some ways in which start-ups can start right on their journey to becoming aligned with the investor vision: 

A foundation of accountability and transparency on internal financial controls

Trust cannot be built in a day; it must be achieved cumulatively over the years. However, companies that inculcate financial discipline early in their journeys are better poised for success down the road. Building a foundation of accountability conveys responsibility not just within the organization but also to investors who get the right measure of the risks involved in investing in the start-up through gauging its fiscal health, progress potential, and areas of improvement. Having the right internal financial controls in place mitigates concerns and demonstrates the company’s commitment towards responsible risk management.

A sound internal audit program can also act as an enabler for implementing and adhering to internal financial controls and can also highlight value adds to bring in efficiencies, automation, and other improvement opportunities. A business focussed approach apart from the financial controls can drive value addition agenda of internal audit functions at these start-ups.

On board with changes 

The board of directors play a crucial role in shaping a start-up’s strategic direction, implementing mechanisms to ensure sound governance, and safeguarding the interests of the stakeholders. Strong board dynamics foster effective decision-making and a sense of accountability within the organization and set the tone right for start-ups. The board’s ability to deal with complex challenges and crises is directly proportional to the diversity of its members and their unique perspectives, which is why a balanced ratio of founders, Independent Directors, and investors is ideal. Recently, the importance of maintaining a sound gender ratio is also being recognized and adhered to. The board’s oversight in identifying and mitigating risks can have a profound impact on their investment. 

Prioritizing regulatory demands

While focus on innovation and growth can help start-ups attract funding, compliance with regulatory norms can serve as the cornerstone of long-term success and attract even the discerning ones. It reassures them that their funds are being wisely directed in ways that are legally appropriate. Regulatory compliance also helps reduce legal and financial risks, ensuring that the company’s reputation and value remain intact, providing it with a competitive advantage in the market, and presenting further growth opportunities.  

Controlling related-party transactions

The Companies Act 2013, Section 188 (1) and SEBI’s revised Clause 49 of the Listing Agreement reinforce the need for increased oversight on related party transactions from the board and auditors. While these regulations are focussed towards mature and listed companies, referring some of these guidelines and bring in improvement in governance at start-ups as well.

With non-compliance resulting in dire penal consequences, start-ups will have to keep a close watch on their transactions with related parties, such as founders, employees, friends, and relatives as well. There should also be an arm’s length arrangement with other business interests of the founders and key managerial personnel. By ensuring compliance, companies can display their pro-activeness in compliance with regulatory demands and, at the same time, communicate their resilience and adaptability.

Detailing risk and crisis management strategies

In the volatile landscape of early-stage businesses, building robust risk and crises management strategies is key to continued progress. Demonstrating a vigilant approach towards risks and taking proactive steps to anticipate risks and mitigate potential crises can play a crucial role in building resilience. By becoming cognizant of the risks, both companies and investors are better poised to make informed decisions that will have long-term consequences. 

Aligned ethics and values

There is no measure of gauging ethics and values, but it reflects in the overall performance of the company. Introducing feedback, whistleblowing mechanisms, implementing good governance practices, maintaining transparency—can have a cumulative effect on building a culture of integrity from the ground up. Investors are drawn to organizations that foster a culture of well-being and co-operation.  

This article first appeared in The Hindu Businessline on 21 November 2023