We hear a lot about corporate governance, particularly in the press when things go wrong at some of the country’s biggest companies. But what does corporate governance for SMEs mean in reality and how is it relevant to the vast majority of companies that class themselves as small or medium sized businesses?
When I talk to many people through my role as Audit Director at MGI, I often hear that “corporate governance is only for larger companies and besides, I’m too busy running the business.” There appears to be a high level of scepticism towards corporate governance as the view is that is another level of unnecessary compliance for no benefit.
However, corporate governance is not about compliance and hindering a business, it is about establishing a framework of processes and attitudes with a view to adding value to the business, helping build its reputation and ensuring its long term continuity and success. Good corporate governance generally delivers major advantages in circumstances such as when a business is looking to sell, raise funds or just improve its overall financial performance.
Unfortunately the vast majority of information available on corporate governance tends to be only relevant to large listed entities, which makes it very difficult for SME’s to understand what it all means and what the benefits are. However, I have assisted many clients to establish practical ways to adopt certain aspects of corporate governance for the overall improvement of their businesses. Some of these include:
- Family owned businesses should establish and document a clear definition of the role that each family member plays. If non-family members are part of management it becomes even more critical that the staff member is fully able to undertake the role without have conflicting views from a range of different family members.
- It is important to establish an effective board which meets regularly to discuss the operations and future strategic direction of the company.
- There should be a clear division of responsibilities at the head of the company between the running of the board and running of the company’s business. This allows accountability for the operations of the company which the board can critically review.
- The board should have mix of skills and experience which allows for more robust debate about the issues facing the business. Obviously the size of the board will be dependent upon the complexity and size of the company and may need to change over time as the business grows and expands.
- The board is responsible for managing risk and should maintain a sound system of internal control to ensure safeguarding of the company’s assets and the shareholders’ investment.
- The board should be supplied with appropriate information within a timely manner. The more timely the information, the higher chance the board can discuss and if need be, change the direction of the business to address the conditions that the business is facing.
- All directors should receive adequate and ongoing training to allow them to keep abreast of key issues of the day.
- The board should review its strategic direction on a regular basis.
- The board should undertake a regular appraisal of its own performance and that of each individual director.
- Levels of remuneration should be appropriate to attract, retain and motivate executives and non-executives of the quality required to run the company successfully.
- Establishing guidelines to ensure that private and non-business activities are not pushed through the business.
Many of the above points relate to the operation, size and structure of the board. This is relevant to almost every company in the country regardless of its size or complexity. However, once the company grows, particularly if it grows quickly or expands into different areas, there are additional considerations that directors should give consideration to, including:
- Appointing an independent chair or director to the Board – this provides the board with an outsiders view of its operations and direction, allowing them to objectively analyse the business without being involved in its day-to-day running.
- Establish sub-committees including an audit committee and a remuneration committee.
- Consideration of remuneration should include key people within the business and cover incentive schemes and appropriate remuneration for board members.
- Consider appointing an external auditor to obtain comfort around the financial results of the company, the effectiveness of the internal control environment and whether the company has established appropriate policies and procedures.
- Be in regular communication with non-active shareholders of the business, by way of timely and regular updates on business operations.
Good corporate governance really is for everyone and not just for large listed companies. All businesses, regardless of their size or complexity, can benefit from improved corporate governance arrangements. The benefits can include increased accountability of performance, improving both the quality and timeliness of the company’s financial reporting and enabling a board to be united in focusing on the company’s overall strategic direction. The tone of good corporate governance is set from the top and should be filtered all the way down to the bottom ensuring that all staff members live and breathe the corporate culture.
If you feel like your small business would benefit from improved corporate governance processes, feel free to reach out to the Audit and Assurance team at MGI for an informal chat.