Fire in the dream factory

Boards at startups need to be made more accountable

The ongoing crises at Paytm and Byju’s — the country’s two leading startups — point to serious governance lapses. In Paytm Payments Bank’s (PPB’s) case, the banking regulator, the Reserve Bank of India (RBI), has been citing violations of know-your-customer (KYC) norms while imposing short-term restrictions in recent years. After PPB apparently failed to put the house in order despite repeated warnings, the central bank issued an ultimatum, prohibiting any deposits, topups, and transactions linked to the company from March 15, extending the earlier deadline by a fortnight. In all this, the role of the board of directors of the beleaguered firm comes under the spotlight. The board, populated with former bankers and bureaucrats, is seen as ineffectual while a serious breach of processes has continued. Some of the board members have resigned since the crisis surfaced, but that’s an easy exit route after a company has come under the regulatory scanner. Some PPB board members have reportedly indicated that the red flag was raised during meetings but the chairman (founder Vijay Shekhar Sharma) had the final say.

At Byju’s, several board members resigned last year with only the founder, Byju Raveendran, and his family remaining. The exit of the independent board members followed the resignation of the statutory auditor, Deloitte. Subsequently, tech investor Prosus, which was part of the Byju’s board, made a public statement that the decision to exit was taken after the leadership at the edtech firm disregarded advice and recommendations relating to strategic, operational, legal, and corporate governance.

There have been plenty of examples in the startup world earlier too of display of a cavalier approach to corporate governance. Over the years, many startups cutting across sectors — real estate to food delivery — have seen rapid business expansion, breathless fund-raising, and sky-high valuations with little attention to profitability, resulting in many firms going belly up.

Some of it may have to do with the very nature of a startup, whether in India or overseas. Entrepreneurs setting up a venture are driven by their passion and, till the funding winter arrived a year or two ago, were handsomely bankrolled by foreign investors. In the race to gain quick traction with customers and investors, the governance rulebook often gets short shrift in a startup’s formative years. However, with scale and size and unicorn and decacorn tags comes regulatory glare too, and, concomitantly, the “animal spirits” of entrepreneurship need to be tempered to bring the business on a sound footing.

But for all this to be possible, tightening the oversight mechanism in corporate governance has to be a priority area for policymakers. That is true both for traditional businesses as well as startups. The involvement of family members and the power wielded by executive management in corporate boards should be reviewed. And independent board members must be given the wherewithal so that their red flag is not dismissed by companies’ executive members and founders, and their families. Ultimately, boards must be accountable for any lapses and wrongdoing in companies that they are supposed to oversee.