When a large company’s board is left with only three members, consisting of the promoter-couple and another close family member, it is a sign of deep distress. The beginning of a possible end for Byju’s was marked last week when three investor-directors resigned from the board, sending shockwaves through the world’s most valuable edtech company and India’s most highly valued startup.
The departing members of the board, however, should not be missed much. They likely found it wise to abandon the sinking ship to safeguard themselves from future liabilities and damage to their reputation. The question arises as to why they did not take this action sooner. Byju’s has delayed announcing its results for 18 months, which is an outrageous act for a company of its size. Corporate governance experts suggest that the directors should have resigned within three months of the results delay to send a strong message to the founder family, who they now accuse of being in total control.
Moreover, the credibility of the entire board suffered a severe blow when Byju’s auditor, Deloitte, disclosed that it did not receive the necessary documents to finalise the financial statements for the year ending March 2022, despite sending multiple letters to the board. Deloitte also noted that it had not received any communication regarding the resolution of audit report modifications, the status of audit readiness for the financial statements, or the underlying books and records for the year ending March 31, 2022. It is also quite perplexing that a company of this magnitude did not have a system for concurrent audit.
What can explain this apathy from the board? One reason could be the typical Indian culture of company boards aligning with management when times are good. No questions were asked as the majority of Byju’s investors enjoyed substantial returns on their investments. The company’s valuation skyrocketed 22 times from January 2018, when it became a unicorn valued at $1 billion, to March 2022, when it raised funds at $22 billion. However, those days now seem like a distant memory.
It is inconceivable that a company of this size was allowed to operate without any independent directors—individuals who can act in the interest of the company, unlike promoter-directors or investor-directors. In fact, it should be mandatory for all companies above a certain business threshold to have independent directors on their boards. If Byju’s were a listed company, it would have been taken to the cleaners by the market regulator. With a large number of stakeholders, including employees, students, and vendors, transparency demands that the founder-directors step aside temporarily until a thorough investigation into the company’s affairs is conducted.
There is no doubt about chief executive officer Byju Raveendran’s contribution in scaling up the company to its current size. However, in his pursuit of transforming Byju’s into an edtech giant, he overlooked the establishment of basic governance systems. Despite being an exceptional teacher in his early days, Raveendran seems to have forgotten a fundamental lesson: no institution can sustain itself when its credibility suffers repeated blows.
Since last year, serious allegations have been leveled against the company, including non-payment of vendor dues and other statutory payments, as well as potential foreign exchange violations. Byju’s has also faced an investigation by the Enforcement Directorate regarding alleged foreign exchange violations.
What likely pushed things over the edge was Byju’s decision to sue its term B lenders, accusing them of engaging in predatory practices and halting further payments. In response, these lenders made severe allegations against the company, claiming that Byju’s concealed a significant sum of $500 million by transferring it out of the business account. This marked the beginning of the company’s problems. Lenders abruptly withdrew from the loan restructuring process, amounting to a substantial $1.2 billion.
Raveendran’s conduct in dealing with the resigning board members was equally problematic. Initially, he denied their resignations, then attempted to persuade them to stay, but those efforts failed. He later attributed their departures to the respective investors’ shareholding falling below a specific threshold. Such behaviour is unbecoming of a CEO leading a large company.
Byju’s formal reassurance to all stakeholders that they are actively working towards constituting a “diverse and world-class board commensurate with the company’s size and scale” sounds insincere. The question remains: What was the company waiting for all this time?
Another glaring failure of Byju’s was its lack of a Plan B for a post-pandemic world. The management behaved as if the pandemic would persist indefinitely, forcing students to rely solely on digital learning. It is evident that Byju’s did not pivot quickly enough from an online platform to hybrid and offline offerings. During the Covid-19 pandemic, nearly 100 million students enrolled in the company’s app. However, with the reopening of schools, the appeal of the online model waned.
Even after all the setbacks, Raveendran remains confident that the company’s valuation stands at $22 billion. However, this is nothing but false bravado, considering that minority investor BlackRock had already devalued it twice—to $11.5 billion in October and further down to $8.4 billion in May. On Tuesday, another investor, Prosus NV, holding a 9.6% stake in the company, slashed the valuation further to $5.1 billion. This is far from the $48 billion figure that Byju’s was considering for its debut in New York through a merger with a special-purpose acquisition company.
Last week, Raveendran emphasised his unwavering dedication to the edtech firm, stating, “Byju’s is not my work; it is my life.” However, the problem lies in his failure to exercise discipline in his own life. Governance failure appears to be a consequence of companies receiving free money. Unfortunately, free money does not last forever.