Andrew Douglas explains why good governance can be a treasure trove of opportunity for SMEs wanting to get serious about their business.
Improved productivity, responsiveness and resilience driving greater and more sustainable profits with less risk is what good governance should deliver – compliance is a nice, but secondary benefit.
Much has been made of the importance of corporate governance and rightly so.
All businesses do, and should, have an obligation to comply with relevant legislation and standards and to be transparent and accountable to their stakeholders. A focus on the compliance aspects of governance and the responsibilities of directors has, however, overshadowed the more positive and arguably, more productive pursuit of contemporary governance practices. Good governance is not just a "keep out of jail card" for directors and managers, but a way to drive improvement across the business.
What is governance really?
There are varying definitions of corporate governance, many of which touch on aspects of the concept but fall short of the mark. With that said, to define corporate governance in a nutshell is not easy but, put very simply, "good governance is good business".
More specifically, corporate governance is the framework that allows for a company to be directed and controlled, and ensures that those who direct and control the company do so accountably. This framework of policies, procedures and practices (and related systems) allows a business to operate effectively, responsively, ethically and compliantly, while controlling risk. In many respects, it is about positioning the business to be sustainable.
This framework is "shaped" by informed, objective and aware people (typically directors and officers) who are in a position to develop effective strategies and to have real influence over the business, and who act with care and diligence.
To whom does governance apply?
Governance is not just for public companies, large companies or for the Government. It is not bureaucracy and "red tape" and it is not just for "boards of directors". It is for all businesses of all shapes and sizes, be they large, small (even the "one-man band"), public, private, for-profit or not-for-profit and is of primary concern to those who direct and manage such entities.
While good governance "looks different" for different-sized companies, the role it plays, not only in compliance but in risk management, business performance and sustainable growth, is critical for all.
How does governance add value?
To have policies and procedures in place to ensure accuracy, consistency and responsiveness to key stakeholders (for example, customers, shareholders, regulators), to facilitate productive and efficient work practices, to guide, develop and monitor people's performance, to capture, interpret and report accurate and relevant data, and to manage the risks inherent to the company's operations, and for these to be aligned with the strategic direction set for the business, are all aspects of "good governance".
In essence, it is through good governance that sustained returns and ultimately, increased value can be delivered to the shareholders or owners of a business and which can help to attract investment if required.
Moreover, financiers are becoming increasingly focused on governance as part of their risk-analysis process.
This means a business' ability to secure funds may be substantially limited if it is not considered to have appropriate governance in place.
The principles of good governance touch all areas of a business and to be truly effective, become an integral part of the way the company "does business". Oh, and by the way, it should also keep the directors and managers out of jail (which also adds value)!
Why the bad press?
The typical preoccupation with compliance, the "fear factor" writers use to lure directors and officers to the subject and perhaps most of all, a lack of recognition that the vast majority of Australian businesses are small to medium-sized enterprises (SMEs) has led to the term "corporate governance" being negatively received in many ranks.
The "one size fits all" approach asserted by many "governance experts" fails to acknowledge, let alone address, the fact that the governance requirements of, and mechanisms by which to apply "good governance" to SMEs, can be substantially different from that of larger organisations. Similarly, the way in which the leaders of these businesses interpret and filter information is often markedly different from those in the corporate boardroom, thus further confusing the issue.
When seen for what it can and should be, and applied within the context of the individual business, governance can be a very positive influence that can help to harness the potential of any business.
The development of good governance is an evolutionary process and changes as a company grows – "one size does not fit all".
For a small, one-owner or director business starting out, corporate governance may take the form of a well-considered business plan; a well-drafted company constitution; sound advice from external advisers (for example, an accountant or lawyer); maintaining the licences, registrations and qualifications necessary to stay in business; some considered risk management (including insurance); the directors understanding their legal responsibilities; some basic operating policies and procedures; position descriptions and performance reviews for staff; effective financial controls; accurate and timely accounting and forecasting; adhering to formal reporting requirements; and possibly a few other considerations to ensure the sustainability and reputation of the business.
As the business grows, it may need to focus more on strategy (for example, business development, industry and product innovation, mergers and acquisitions and so on); a more detailed business or development plan; more or different policies and controls to ensure staff "take as much care" as the owner would; incorporating more sophisticated data capture and reporting systems; implementing more extensive human resources systems, practices and coordination; introducing a more defined management structure; appointing professional managers and implementing related performance management systems; conducting financial and quality audits; ensuring effective financing structures (debt, equity, venture capital and so on) and cash-flow forecasting; adhering to additional reporting requirements; and developing a forum for independent, objective and informed input (for example, an advisory board, either formalised or virtual), as well as other governance mechanisms.
If the business continues to develop, it will most likely require a formalised board structure with an independent chairman and non-executive directors and a related charter; formal and regular reviews of the board and executive; a focus on a concerted growth/diversification/acquisition/divestiture plan; structuring the business and related entities to facilitate this plan (for example, ready for equity or merger partners or public offer); a comprehensive, formalised risk-management plan; related disclosure or reporting; and more.
It's good business
Governance is a tool not an obstacle; a positive not a negative. It is a way of doing good business and, therefore, is a good way to do business.
Too much has been made for too long of compliance and not enough of the performance benefits of governance. Not enough focus has been given to governance in the context of developing companies, despite them making up most of the business landscape.
By necessity, it has been the focus of large companies, but the world of "good governance" remains largely undiscovered by Australian SMEs and therefore is a treasure trove of opportunity waiting for those who want to get serious about their business.
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