Boards, shareholders, compliance – probably not the things that made you start your business, get you out of bed in the morning, or give you a kick when you talk about them over dinner. But while corporate governance might not be the most glamorous side of your business, it has the potential to make or break it.
What is corporate governance?
It sounds complex, but corporate governance is essentially a system of rules and procedures that ensure a company is run effectively, legally and with integrity. It’s a framework that identifies who has power and accountability and promotes good relationships between stakeholders –shareholders, employees, customers and the community.
Do SME’s really need to bother with it?
Legally no. Beyond the requirements of the Companies Act 2006, SME’s don’t need to put in place any formal corporate governance arrangements. But good governance provides a framework and a toolkit for management and growth, it helps companies make the right choices that build sustainable businesses.
It helps with the tough decisions
Just because a company is smaller doesn't mean it's less complex. SME's are likely to have founders as CEO's and board members. Often family members are involved in the business at a senior or board level. And, if angel investors are involved their interests need to be managed. A comprehensive governance framework will help navigate responsibilities, authority and timings.
It will make you more efficient
We're operating in unpredictable times where often decisions need to be made fast. If there are set processes, authority levels and accountability in place the right people will be empowered to make the right decisions, at the right time.
It promotes confidence
If you're looking for investment, having a corporate government framework in place is key. The clarity and consistency of decision-making and a clear understanding of roles and responsibilities will give any future investors confidence in your business.
So, if you’re going to get your house in order, where should you start?
Every company has different priorities and unique challenges that will feed into their governance framework but there are some features that will be universal, like putting in place clear decision-making responsibilities, reporting lines and checks on power.
The UK Corporate Governance Code is the go-to resource for listed companies, and while it's complex there are principles that are useful for SME's.
The code is based around: Leadership, Effectiveness, Accountability, Remuneration and Relations with shareholders.
If you're looking to improve your corporate governance, it's worth considering the following principles:
Everything should flow from your company's articles of association – essentially ground rules for the business that are usually established by shareholders.
Put in place an effective and independent board – responsible for the long-term strategy and success of the business. It doesn't have to be overly formal and if your business is at an early stage and you're not ready to share sensitive information externally it could take the form of an advisory board.
Think about diversity – when you have a diverse board you have diversity of thought and that leads to better decision making and better outcomes.
Keep your board efficient – your board is there to oversee, not work on an operational level. Too many meetings and they'll inevitably get drawn into the day to day. If you're a small company, you may only need a meeting every quarter.
Become risk responsible – a board can help you have the right plans in place to deal with risks to the business. Consider developing a basic risk register that they can review regularly that details possible risks, impacts, planned responses and risk mitigation.
Governance doesn’t stop with the board – your senior leaders are just as important in fulfilling good governance on a daily basis as the oversight that happens at board level. There needs to be good lines of communication between senior leaders and the board, and a mutual understanding of your objectives.
Helping your business reach its potential
Good corporate governance is about more than just box-ticking compliance. When you have the right team of advisors around a table, they can provide the independent perspective that can help your business reach its full potential. The importance of good governance inevitably increases with the size of your business but if you have the right foundations in place, you'll be in the best position to grow in a sustainable way.