The year 2023 witnessed several instances where founders clashed with the Board of Directors, spotlighting issues related to corporate governance. Prominent figures like Byju Raveendran of Byju’s, Ashneer Grover of Bharatpe, and Housing.com founder Rahul Yadav faced scrutiny over their leadership styles. TV Mohandas Pai, former Infosys Board member and co-founder of Aarin Capital Partners, emphasizes the critical role of a high-quality Board with competent independent directors, especially in guiding and propelling startups. While Pai, part of Byju’s advisory council, refrains from discussing the edtech company specifically, he provides insights in an interview.
In the realm of startups, the delicate balance between 'superstar' founders and the Board of Directors is crucial. This balance becomes even more challenging when founders are highly opinionated, and Boards face the task of maintaining equilibrium. The effectiveness of a Board is significantly reliant on having a capable chairman who can navigate the dynamics between the Board and management. The chairman's role is multifaceted, requiring the ability to balance investor interests, mentor the management, and command respect from all stakeholders, particularly in high-profile companies.
Established Indian IT services giants like Infosys and Wipro have long been exemplars of high corporate governance standards in the country. However, in the startup landscape, corporate governance standards seem to have a considerable distance to cover. The focus on transparency is more pronounced for listed companies where third-party money is involved. Compliance with norms is often observed more in form than in substance. While private companies deal with governance matters between investors and management, there is a shift towards greater transparency when planning to go public and involving public money.
Mohandas Pai suggests a proactive approach to governance for startups planning to go public. At least two years before an IPO, companies should ensure the presence of independent directors and a capable chairman on the Board. This move is crucial for aligning with the expected transparency and responsibility that comes with public funding. Pai emphasizes the need for independent directors who are not solely investor nominees, as they bring unbiased perspectives. He suggests changes in SEBI norms, proposing that companies aiming for an IPO should have a Board of independent directors for at least a year before filing the prospectus, making them more accountable.
In addressing the timing of stock option grants, Pai stresses the importance of prior discussions and disclosures. Grants made shortly after listing, especially for founders, should have been a part of discussions well before the IPO. Sudden revelations pose a risk and indicate a lack of oversight by the Board. Pai suggests a reform in SEBI norms to mandate the presence of independent directors on the Board at least a year before filing the prospectus. He acknowledges that this is a work in progress and emphasizes that independent directors need time to familiarize themselves with a company's workings, making them more accountable.
In the quest for effective governance, Pai warns against a Board solely comprised of investors, highlighting the need for independent directors. While investors often pursue the best IPO price, it may not align with the best interests of shareholders. The call for a balanced Board composition that includes independent directors remains a crucial aspect of fostering transparency and accountability in startups, especially as they navigate the path to public offerings
