Mature start-ups need fully functional boards: Auditing major Deloitte

Amid growing questions about corporate governance practices at Indian start-ups, auditing major Deloitte has said mature start-ups, with a valuation of over Rs 650 crore, should have a fully functional board with a full-time chief financial officer (CFO) and develop an anti-fraud programme covering key areas of finance. The recommendations are part of Deloitte’s Start-up Governance Playbook. 

The report came against the backdrop of alleged financial irregularities in various start-ups, and a day after edtech firm Byju’s saw the resignation of Deloitte Haskins & Sells as its auditor for delay in filing its financial statements. 

The Deloitte study said the internal audit of a start-up should be tasked with providing assurance of its process, with a statutory auditor carrying out critical evaluation of fraud controls and raising red flags to the board. 

The study divides start-ups into four categories -- early stage (founder-driven; fundraising under Rs 50 crore), evolving, growth, and mature.

While at an early-stage start-up, Deloitte recommends having a board as applicable by law and being aware of compliances, it said governance requirements should get more stringent as the start-up grows. 

For instance, the report suggests, start-ups from the evolving stage (with valuations between Rs 250 crore and Rs 650 crore, and capital raised Rs 50- 200 crore) should put in place a whistleblower programme, and as the company grows, a finance sub-group should provide an oversight over the programme. 

“In start-ups, there are two peculiarities: One, governance, generally, is understood to be something for large companies. Second, from a scale perspective, start-ups grow very rapidly. That’s why we broke it down into four stages, and across the four stages, we would think that any start-up would take at least a decade from an early stage to a mature stage,” said Sachin Paranjape, partner, risk advisory, Deloitte India.

By the time a company becomes a mature start-up, Deloitte recommends having professional independent directors on board, an in-house team to support the company secretary, and mandatory committees. At this stage, the CFO should provide certification to the board on effectiveness of the control, and any material exceptions should be remediated in a time-bound manner, it said. 

While all start-ups should make disclosures about related-party transactions, a mature start-up must have this information available on its website. Audit committees should approve these transactions, and disclosures should be made in accordance with the statutory requirements, it said. 

It is at this stage that a start-up must also have succession planning and remuneration-related steps in place. “CEO and special leadership team performance should be reviewed periodically and compensation plans should be aligned to attract talent. The nomination and remuneration committees should also develop a succession plan for the chair and the board members as well,” the report said. 

Corporate social responsibility also comes into play at this stage. Deloitte has recommended that a mature start-up should forecast CSR spends depending on profitability, and a CSR policy should be made available on the company website. 

“Strong corporate governance promotes transparency, reduces conflicts of interest, and improves the quality of decision making. To ensure long-term success and stability of start-up businesses, it is essential for start-up founders, VCs and the management to create, implement and monitor clear governance practices at every stage of the start-up journey,” said Nikhil Bedi, partner and forensic leader, Deloitte India.

“Good governance is not just a matter of compliance, but also an integral aspect of building a long term sustainable business. By following the best practices outlined in this Playbook, entrepreneurs and investors can foster a culture of trust, transparency, and accountability that will accelerate India's journey towards becoming a global leader in innovation and investment," Rahul Khanna, Co-Chair, VC Council, Indian Venture and alternate Capital Association (IVCA). IVCA collaborated with Deloitte in the study.