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Expert Speak: Governance Framework for Startups

September 16, 2017

Journey of an entrepreneur is both challenging and exciting. Each day brings new set of problems and opportunities. Everyone in the firm is stretched and hours are long. 

 

Even though immediate issues have to be resolved, it is also important to keep the big picture in mind. While you are starting by building a small one room house, it is going to be part of your ultimate large dream palace. It is in the preparation of big success, an IPO or strategic sale, in the long term, that some elements of governance have to be baked into the foundation of the enterprise. 

 

  1. Compliance: From the very beginning of the venture, the intention should be to comply with applicable laws and regulations. It is a fact that in India, we have multiplicity of laws and regulations, many of them irrational and conflicting. So, the entrepreneur has to identify   the key laws and regulations where noncompliance would put the enterprises at major risk.  If you are in a regulated business compliance with regulations and good relations with the regulator are extremely important. 

     

  2. Financial Integrity: From the very beginning, the founder has to separate personal assets and expenses from those of the business. It is quite tempting to charge some personal expenses to business, and many people do. However, this practice becomes a major issue when you get external investors.  Tax saving is another reason given for fudging the books, but it is a very slippery slope. Some people take liberty with revenue recognition and other accounting issues, but it is a very foolish approach and in long term very damaging.

  3. Service Providers: In early days, you will not be able to afford an expensive accounting firm. Therefore, select a small accounting firm but it should such that it would be able to help you as the business grows in size. They will also be critical in accounting due diligence by new investors in the coming years. Similarly select a law firm reasonably priced but which can meet your needs now and as you grow. Of course, later on as the enterprise becomes large, for complex and bigger transactions, you can engage other larger (and probably more expensive) professional firms.

  4. Corporate Culture: It reflects the founders' values and priorities and is a key determinant of long term success of the enterprise. I suggest that focus on customer Centricity, cash generation, frugality, simplicity, innovation, flexibility, swift responsiveness to external developments, and widespread determination to succeed big time should be important elements of corporate culture.

  5. Board and Board Meeting: Having a small Board with at least one outside director (with domain knowledge and who has been part of a growth enterprise) is highly recommended.   Also, there should a quarterly formal Board Meeting for an hour or two, to review progress and discuss way Forward. This process should not only be helpful in early years of the enterprise but will become the basic governance framework later when the company becomes large and has multiple shareholders.

  6. MIS: You should put in place a simple MIS system or a Dashboard, which shows the key information about the business. It could include, sales, collections, cash generation, cash in the bank, number of employees, or other measures reflecting the progress and health of business for the management to act promptly. 

  7. Investor Communications: You should send to investors a short one-page Progress Report preferably every month but at least every quarter. Such communication is vital for building long term trusted investor relationships. 

 

Mr. Arun Duggal is Chairman of ICRA (A Subsidiary of Moody’s USA). He is also Chairman of Mangalore Chemicals & Fertilizers Limited and International Asset Reconstruction Company. He is on the Boards of Directors of ITC Limited, Info Edge (Chairman Audit Committee), Dish TV, Dr. Lal PathLabs Ltd (Chair N&R Committee).   Mr. Duggal is a Visiting Professor at the Indian Institute of Management, Ahmedabad. He is an experienced international Banker and has advised companies and Private Equity firms and financial institutions on Financial Strategy, M&A and Capital Raising. He, as an Angel Investor has supported several Entrepreneurs. 

 

Mr. Duggal had a 26 years’ career with Bank of America, mostly in the U.S., Hong Kong and Japan. His last assignment was as Chief Executive of Bank of America in India from 1998 to 2001.  He is an expert in international finance and from 1981-1990 he was head of Bank of America’s (oil & gas) practice handling relationships with companies like Exxon, Mobil, etc. From 1991-94 as Chief Executive of BA Asia Limited, Hong Kong he looked after Investment Banking activities for the Bank in Asia. In 1995, he moved to Tokyo as the Regional Executive, managing Bank of America’s business in Japan, Australia and Korea. 

 

He is founder of Women on Corporate Boards program in India under which high potential women are mentored individually by Corporate Leaders to prepare them for Board careers. Women from this program are serving on over 125 corporate Boards.

 

A Mechanical Engineer from the prestigious Indian Institute of Technology, Delhi, Mr. Duggal holds an MBA from the Indian Institute of Management, Ahmedabad (recipient of Distinguished Alumnus Award).

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