Business Standard

Startup & family business governance

- R GOPALAKRIS­HNAN The writer is an author. His new book, Embrace the Future: the soft science of business transforma­tion, is due in February. rgopal@themindwor­

Some people hold a view that ideas on neeyat and governance are relevant only for well-establishe­d and listed companies. While the subject is relevant for them, governance is relevant also in startups and family-managed businesses. A metaphor might help to make the point succinctly — just as values and ethics must be addressed early on within families and schools, governance and business neeyat must be addressed early in startups and family businesses.

Enterprise is essential for national growth. Family businesses and small companies are the backbone of enterprise; sometimes I wonder whether they themselves realise how important they are. There are about 63 million enterprise­s registered with the government. Of these, a minuscule 20,000 have capital of more than ~10 crore. The media focuses on listed companies and startups. In terms of employment, income generation, and exports, the small and medium sectors are crucial. Several companies in India and overseas have been in the news for governance reasons in recent times: Unlisted startups (Byju’s and Paytm), listed companies (Zee and Religare), and foreign entities Tesla and Toyota Motors. Stuart Kirk wrote a piece in the Financial Times on January 27, 2024, wondering whether there was any correlatio­n between better governance and company results. I responded by emphasisin­g the obvious about the distinct and separate roles of the management and boards.

The kinetic energy of a company rests with the management, led by the chief executive officer (CEO). The management’s role is akin to the raw energy generated by the firing of fuel in the engine compartmen­t of an automobile — innovative ideas pulsating with calorieloa­ds of human energy. To be effective, this energy needs channelisi­ng to the wheels of the automobile through the transmissi­on: This is the role of the board. Boards and leadership groups are essential in channelisi­ng management ideas and energy for effective delivery to customer and community. A pleasurabl­e car must have both a great engine and a matching transmissi­on system. So too, an enterprise must have fine management with a great board. The board collaborat­es, yet provides a challenge to the management. It is not the board’s role to design or execute strategies and innovation, though individual directors may contribute through experience and debate.

Private-equity (PE) companies try to achieve the same effect. Since several PE executives have no hands-on business experience, the firms rely on experience­d leaders as advisors. Why do some startup founders behave as though the PE providers should provide them money and let the founder do whatever he or she wants — Bharatpe, Zilingo, Equally, the greed of some Peexecutiv­es may pressure founders to grow exponentia­lly. Sequoia is a respected and valuebased PE firm, yet it considered ousting its former CEO Michael Moritz from the board chairmansh­ip of a troubled fintech startup, Klarna, which it itself financed. Enterprise sans governance is prone to crashing.

Public markets provide a test of governance. Though imperfect, they are better than no test. India is proud that it has produced about 110 startup unicorns. Bravo. However, only 13 have faced the test of the public markets, accounting for just $1.5 billion out of a total of $4,200 billion; of the 13, only six are reported to generate positive operating cash flows, which is the most basic test of business acumen and success. All of these six positive-cash flow unicorns were founded around 2005, and have built an enterprise track record of almost two decades, and the average age of these six founders was 57 when they began. Startups often manage business for valuation. Familymana­ged businesses and startups have been combined in this piece about governance, though there are difference­s. For example, families manage businesses for legacy, with valuation as an outcome. An example of this, Beit Binzagr in Saudi Arabia, in a future column.

The innovative ideas in startups and family businesses would benefit by challenge and debate. Such action does not mean that the board is adversaria­l to management. As stated in my recent book (Inside the Boardroom ), behavioura­l aberration­s beyond the boundaries of business sanity and neeyat must engage the attention of boards. If not, the question will continue to remain, what was the board doing?

In closing, a potentiall­y controvers­ial view. Courts rely on near-perfect proof and regulators rely on substantiv­e evidence, but boards must rely on and act upon early warning signals. It is common that directors can hear the canary in the coalmine first.

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