• Monday, March 04, 2024
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Maintaining investor confidence: The corporate governance imperative for Nigerian startups

Maintaining investor confidence: The corporate governance imperative for Nigerian startups

Nigeria stands as a frontrunner in Africa’s startup ecosystem, attracting the highest number of funded startups in 2021-2022, thanks to its dynamic pool of talented, innovative youth. However, 2023 witnessed a worrying trend, with a record number of Nigerian startups failing, casting a shadow over the previously thriving ecosystem. There are many reasons why a startup may fail. This may include a range of issues such as insufficient funds/ inability to raise capital, unfavourable government policies, and ease of doing business, amongst many other factors. Beyond economic woes, startup failures in Nigeria can be attributed to a key issue, poor corporate governance.

It has been observed that many Nigerian startups don’t have an effective corporate governance system as it often takes a backseat in the early stages of a startup. This is so because founders are focused on gaining market traction, and meeting their targets amid limited funding or an unfavourable economy. Also, the line between ownership and management is not well established.

Interactions with founders reveal that many of them are wary of losing their managerial autonomy with the appointment of new board members. They are concerned that adding another layer of decision-making could slow down the process and they fear that board involvement could lead to decisions not aligned with their vision for the company.

Poor corporate governance has led to mismanagement and closures in some startups. Payday’s CEO, Favour Oni, faces allegations of self-payment amidst reducing staff salaries after a $3 million raise. The company is also scrutinised for customer fraud claims. 54gene, a genomics startup, witnessed turmoil with three CEOs departing in 2023, leading to lawsuits and internal friction. Pivo’s downfall resulted from CEO-COO conflicts, eroding trust and hindering growth. Payday’s internal governance practices raise concerns over financial decisions and transparency.

‘Out of control founders’ are a chilling reality for many VC firms who have shared their experience with founders who went rogue and engaged in legally shady and ethically dubious activities. The problem has been pinpointed to be that many founders lack basic financial training, projection skills and even burnout management strategies.

Weak governance in startups, marked by undefined processes, invites financial mismanagement, fraud, and internal conflicts. This lack of transparency raises concerns for investors, hindering funding and damaging the company’s public image. Unprofessionalism and unethical conduct fueled by weak governance erode public trust. Without diverse board perspectives, decision-making becomes impulsive, risking inefficiency and harm to the company’s success.

Given the prevalence of corporate governance challenges in Nigerian startups, it’s worth revisiting the effectiveness of the legal and regulatory framework in mandating and enforcing good governance practices.

Legal Framework for Corporate Governance for Startups in Nigeria.

There are two main Acts that govern the administration of Startups are the Nigeria Startup Act, 2022 (the “Startup Act” or “NSA 2022”) and the Companies and Allied Matters Act, 2020 (“CAMA 2020”).

1. THE NIGERIA STARTUP ACT, 2022

The Startup Act does not directly make specific provisions for corporate governance. However, it contains several elements that indirectly encourage and support good governance practices in startups:

The Startup Act fills a crucial gap by indirectly promoting good governance. It establishes a dedicated body to champion ethical practices and provides a safe space for startups to experiment with governance structures through the Regulatory Sandbox. Transparency and accountability are emphasised, encouraging startups to embrace good governance through highlighted benefits like increased investment and trust. While the full impact of the Nigeria Startup Act is still to come as its implementation unfolds in phases, early signs suggest that more attention should be drawn to Nigerian startups taking these recommendations very seriously.

2. THE COMPANIES AND ALLIED MATTERS ACT, 2020

While not designed solely for startups, the CAMA 2020 promotes good governance with provisions like transparent financial reporting (annual audits and accounting records) and responsible directors’ duties. Section 374 also provides that every company shall keep accounting records. Section 402 provides that all companies in Nigeria are to file audits of their accounts with the CAC for the relevant financial year and within the time frame prescribed by law except for small companies and companies yet to commence business since incorporation. While the Act exempts startups qualifying as small companies under the Act, from this specific requirement, it subtly nudges them towards embracing this practice anyway. These practices build trust with investors and lay a solid foundation for future success. Notably, CAMA also encourages internal controls and risk management systems which are crucial for startups navigating growth and navigating potential challenges.

THE WAY FORWARD

Strong corporate governance isn’t just for established companies; it’s the lifeblood of successful startups at every stage, from the initial spark of an idea to the exhilarating journey of scaling up.

Founders must align visions, finances, and contributions, fostering trust. Transparent equity structures and performance tracking ensure fair recognition. Defined roles in founder agreements prevent misunderstandings. A seasoned board aids in navigating growth challenges. Clear ethical guidelines cultivate a culture of integrity and trust as the company expands.

Transparency and accountability form the bedrock of good governance. Timely financial reporting under board oversight instils confidence in investors. Establishing robust communication channels with shareholders keeps everyone engaged. Adherence to legal and regulatory requirements, including taxes and data protection, is pivotal. Embracing good corporate governance at every stage ensures long-term success, attracting investors and retaining talent for sustained growth.

While investor focus on financial performance and rapid growth is understandable, neglecting good corporate governance can undermine a startup’s success. Investors are not just passive recipients of returns; they are active partners in nurturing responsible practices.

They shouldn’t just tick governance boxes and leave it to founders. It should be more of a collaboration. They should educate founders about its importance, work together to establish strong systems, and actively monitor their effectiveness. They should facilitate regular board meetings with diverse perspectives but resist micromanagement. That is, founders should be trusted while encouraging informed decision-making.

They should establish clear budgeting, reporting, and internal evaluation mechanisms. Conduct regular audits and maintain open financial records to build trust and ensure accountability. It is also important to create safe channels for employees to report unethical activities internally, preventing escalation and fostering a culture of accountability.

Investors are essentially watchdogs who will ensure that ethical lines are not crossed. Recognising the need for stricter guidance, some VC firms in Nigeria now implement robust financial oversight and mentorship during the crucial first 100 days. This hands-on approach is reshaping their entire investment strategy. During this intensive period, the VC firm actively guides and monitors company building, ensuring founders stay on track, both financially and ethically. It’s a proactive investment in preventing future flameouts.

Just as a sturdy foundation sustains a towering skyscraper, robust corporate governance acts as the bedrock for a startup’s long-term success. It’s not just about ticking boxes and navigating legalities; it’s about building trust, fostering accountability, and setting a clear roadmap for growth. It’s about ensuring that decisions are made with transparency and prudence, that resources are managed efficiently, and that the interests of all stakeholders, from investors to employees, are protected and aligned.

This should be a wake-up cry for founders to prioritise good governance as they chase their dreams. Let’s build a future where Nigerian startups flourish, not from luck or happenstance, but from the solid foundation of ethical practices, informed decisions, and shared responsibility. Ultimately, this is the path to creating successful companies and a resilient and vibrant entrepreneurial ecosystem that will drive Nigeria’s future prosperity.