High growth and entrepreneurial companies have emerged as the backbone of India’s economic success story and a key factor in the country’s development and progress. They have contributed significantly to the GDP, offered numerous opportunities by creating jobs, increased exports and delivered high value to the stakeholders involved. With changing times, building high growth companies has gone beyond just generating exponential revenues and profits. The secret for success lies in other factors, such as managing consumer expectations, accelerating market share, focusing on digital disruption and being agile. Many high growth companies can also be characterized having an entrepreneurial bent, which further helps in fostering an environment of innovation and creating unique products and services for discerning customers. But in this rapidly evolving global business landscape, it is imperative that companies focus beyond just being cash rich and delivering high ROI, and proactively deal with emerging risks that may have an adverse impact on their business.
Understanding the business landscape
Most companies falling into the high growth and entrepreneurial category show immense potential. To maintain a secure future, their focus on compliance, sound governance practices and creating an ethical working ecosystem has increased. Today, high growth companies are investing in the areas of compliance and governance, and adopting global leading practices more than ever before. However, it is possible to get almost ‘carried away’ by the high growth wave experienced, which may lower focus on the impending threats. The path taken for development and profit maximization could have barriers, with exposure to fraud, bribery, corruption, money laundering, cybercrime or other risks. The inclination to foresee risks and take adequate steps to protect the company may inadvertently take a backseat.
Let’s take an example of XYZ & Co., a new-age technology enterprise with a niche yet distinctive product base. The company grew by leaps and bounds within a span of three years, grabbing a major chunk of the market share in its category. Not long after, it caught the eye of some private equity firms that were looking to enter this space. During the course of due diligence conducted prior to investment, the private equity firms noted certain discrepancies. This included some employees giving business contracts to their relatives, leading to a situation of conflict of interest as well as cases of non-compliance such as non-filing of tax returns.
In this case, while the company was driving on the path of high growth and entrepreneurship, a number of such loopholes were exploited by individuals with mala fide intent. Further instances of delayed filing of returns saw penalties being imposed by the authorities. The result – the private equity deal fell through. In hindsight, XYZ & Co. could have taken a number of steps to mitigate the insider threats, be compliant with relevant laws and minimize the financial and reputational damage.
Underlying risk factors
High growth and entrepreneurial companies in rapidly growing markets could face a host of risks. Therefore, they need to prepare for the unexpected by keeping checks and balances in place. Some key features of such companies and the associated risks are highlighted further.
- The foundation of high growth businesses is accelerated growth. However, this increased focus could potentially lead to compliance oversight – for example, not documenting transactions in the book of accounts, non-adherence with regulations (such as Companies Act 2013), non-filing of returns or auditing financial statements, using unauthorized or illegal software and not obtaining adequate work permits or visas.
- High growth companies can also have less segregation of duties among some employees, and see them multi-tasking between different roles and responsibilities. This could lead to oversight with respect to corporate governance, concerns around transparency of operations and even unethical conduct.
- Inking third-party business relationships to bring synergy and efficiency is another key area. Collaborating with complementary business partners can optimize high growth businesses by turning challenges to opportunities, increase competitiveness and boost stakeholder confidence. However, it is crucial to mitigate any third party risks such as bribery, corruption and kickbacks which may arise during the course of operations.
- The quantum of digital disruption has magnified in recent times, and businesses across diverse sectors are leveraging technology to create a matchless differentiator. Correspondingly, the new age workforce is also digitally savvy with presence on the internet and social platforms. This scenario can also lead to various risks in the form social engineering fraud to access sensitive information. Technology adoption has also resulted in greater prevalence of cybercrime incidents such as phishing, vishing, ransomware and spoofing. The use of detection, deterrence and response measures can help high growth companies protect data and secure systems.
- Cash rich high growth companies can also see cases of embezzlement, financial misstatement, and other kinds of employee fraud for financial gain. Instituting adequate policies (code of ethics and code of conduct), conducting trainings, building internal controls and fostering an ethical environment are some ways to dissuade employees from taking the wrong route.
The road ahead
High growth and entrepreneurial companies will continue to be engines of growth for the Indian economy. It is imperative that they adopt the right strategy and continue investing in compliance to stay successful in the long run, and not just the short term. There is no short cut to success, and high growth and entrepreneurial companies will need to walk the tightrope to balance between profitability and governance. Maintaining the right tone at the top, investment in people, technology and processes, compliance with requisite regulations, governance mechanisms and due diligence of third parties remain essential areas. Companies can also undertake periodic fraud risk assessments, formulate a fraud response plan and continuously monitor operations to proactively manage fraud and corruption risks, heighten business performance and augment investor value.