Is startup governance still flying under the radar in Indonesia?
Published on February 6, 2023
In markets like Indonesia, best governance practices are quite evident for corporates and institutions, but not so much for early and growth-stage startups. For example, the Indonesian Corporate Governance Roadmap, launched in 2014 by the OJK with support from the International Financial Corporation, seeks to achieve greater protection for shareholders and stakeholders alike.
Each year, the Indonesian Institute for Corporate Governance and other organizations hand out awards to the top 20 best-governed companies in the country, but the winners are invariably state-owned enterprises, highly regulated banks, and other large entities.
In contrast, startup management tends to fly under the radar, for the most part. “It’s no secret that corporate governance in early-stage ventures has never been particularly stringent, especially in more nascent tech markets like Indonesia,” said Leighton Cosseboom, Head of PR and Communications at AC Ventures (ACV).
While moderating a MindShare episode of ACV’s signature podcast Indonesia Digital Deconstructed, he asked guests Pandu Sjahrir and Joel Shen, “When should startups give particularly serious attention to governance, and what most basic early steps should be taken to move forward?”
Governance is good for early-stage ventures
Pandu, Founding Partner at ACV, drew an analogy between the resistance of some startups to governance and a child’s pushback against eating vegetables. “They might dislike the taste, but it’s good for them. If it’s my daughter, it’s broccoli,” he quipped.
But adherence to good governance can help founders to establish solid reputations, which they can then leverage when raising capital for future ventures, he observed.
Best practices for governance depend on a startup’s stage of growth. Pandu added, “For example, when startups receive funding of between US$10 and US$15 million, someone on the financial side should begin reporting to board members every quarter.”
“Until Series B, it’s just the founders, but after series B, you are transitioning from the founders into becoming an institution. Also at series B and above, you need to start thinking about having an independent board member who is not part of your investment cap table and who can give guidance to your business. Then, although there’s no hard and fast rule on this, once your finance team is ten to 15 people or more, you probably need an internal audit team.”
Meanwhile, Joel, a venture lawyer operating in Indonesia and Singapore who heads the Withersworldwide technology practice in Asia, emphasized the importance of having a simple governance plan in place right from the beginning.
Dispelling three myths
Joel described what he sees as the “myths” that often come up about startups’ adoption of governance strategies.
“The first myth is that startups are simple, so they don’t need a governance plan. To this point, I would say that startups are not simple. As Pandu has alluded to, there is a whole range of different interests represented in a startup at various stages, from investors to founders to employees. So it’s therefore essential to put in place even a simple governance plan that facilitates the decision-making process and takes all of these interests into account,” he explained.
Joel added that a governance plan can be as basic as a document stipulating which functions within the company need to be consulted when making certain decisions
“The second myth that often comes up is that startups are not subject to scrutiny in the same way that public companies are because they’ve got a whole bunch of needs competing for their attention and their resources. So governance is something that can be left to later stage companies.”
He added, “But I say that startups today are subject to higher levels of scrutiny than ever before. They’re subject to due diligence at every round of fundraising they do, and eventually, someone’s going to look at the startup in the context of an IPO. So it’s always a good idea to get these processes in place sooner rather than later.”
What’s the third myth? It’s that governance plans are costly to put in place and slow down the decision-making process, he said.
“In my contrarian view, a governance plan does not impede or stretch out decision-making. The last thing you want to hear from a board member or an investor is ‘Why was I not consulted about this?’ Then you’ve got to restart the consultation process with the board and the various interested stakeholders. So having a governance plan already in place really helps you preempt all of these questions.”