Corporate Governance Who needs it and why do it? www.baybridge.com.au “I only have a small business. Surely corporate governance doesn’t apply to me!” What is one fundamental way to significantly improve your profitability and stay on track towards your business objectives? Corporate governance. Even smaller businesses benefit from good corporate governance. Corporate governance is a crucial part of managing a growing and successful business. Nevertheless, many small business owners/directors/managers overlook the need for and benefits from corporate governance. Good governance can present major advantages for your business, for example; in times of success and expansion, when trying to fund further growth through various capital raising strategies and importantly when preparing to sell your business. So what is corporate governance? It is the system by which you manage and direct your business. It refers to the decision making and control exercised by you the owner, the director, the partner or senior manager in your business. When implemented correctly, it influences greatly how your business objectives are set and achieved, how you intend to monitor and manage risk and how to sustain the satisfactory performance of your business. Good governance in the context of your smaller company is not so much concerned with compliance to formal rules and regulations. Rather the ‘corporate governance framework’ of your business is the set of policies, rules and procedures that should be in place to promote pro-activity (not re-activity), monitoring & transparency, accountability and the ongoing measurement of progress towards your key objectives – revenue or otherwise. Logic has it that this ultimately contributes to the profitability and sustainability of the business, benefiting you and your major stakeholders. Why corporate governance? Let’s just call it ‘governance’. Corporate governance is simply governance of an incorporated entity i.e. your business. Small businesses sometimes feel that the notion of a business’s survival, rather than good management practices (governance), is the critical priority to running their business, but in reality they are intrinsically complementary to one another. Business Growth (& Survival) + Governance = Long Term Prosperity! Goodwill, risk management and harmonious relations internally and externally are all part of good governance – and all a part of good business practice. As such they are critical to building a successful trading entity. Just to be clear – corporate governance is not so much about operations and the everyday activities of your business, but about decision-making by those in charge, where critical questions of your business’s direction and success must be addressed; • • • • • • • • • • • • • Who exactly are our customers and how can we best compete? What capital is needed to fund the business? What is the best marketing strategy for our product and our brand? How do we manage a downturn in revenue? What are the explicit management processes used to control the company? What is the business’s approach to risk management? How big do we want to be? How big can we actually be in our current set-up? Should we take over other businesses and what should be the processes to manage a possible acquisition or investment? Should there be a separate company or an overarching corporate structure implemented? Are we ready to expand and take advantage of growth? What growth model are we investing in? Is franchising going to work? If so, how? Does the business need additional capital? Does that mean relinquishing equity? What’s our succession policy or are we intending to sell? If so, how should this be achieved? There is no reason why smaller businesses should not benefit from complying with good governance principles. Having well-considered formal policies in place can help small business owners to run their businesses more efficiently and consistently in their actions. This is particularly important as the business grows in scale and clear rules are required to maintain order and ensure alignment with stated objectives. However, because small businesses operate in a different context to larger publicly traded companies, some adjustments and compromises have to be made. For instance, in larger companies the company secretary is responsible for adherence to corporate governance principles. In a small business, this is likely to be the responsibility of the small business owner or general manager. Unlike big companies which produce audited financial statements every financial year, small businesses can develop their own system of regular financial reporting e.g. compiling and assessing (un-audited) financial statements every month showing basic income, expenditure and the overall financial position of the company. Corporate Governance & Your Business - Where Do You Start? Good governance is based on the relationship between managing/lessening risk and the objectives and success of your organisation. Effective corporate governance policies will ensure your business is utilising the best market practices and ensure your business is adhering to applicable laws, rules and regulations. So how can your small business avoid the pitfalls of insufficient governance? • • • • • • • Set clear objectives and plan them out with milestones across each calendar year Put in place effective planning for the short and long term to achieve those aims Institute controls i.e. policies and procedures, to ensure satisfactory progress Establish a corporate structure that outlines the roles and responsibilities of staff Standardise ways in which to monitor and measure company performance Assess the level of risk across all aspects of business and establish mitigating plans Create a reporting function to provide transparency and accountability across the entire management team (and Board if appropriate) Right across the Australian small business landscape there are numerous examples of inadequate corporate governance resulting in catastrophic implications for an organisation. Poor decision-making processes and a lack of accountability have eventually led to many failures in many businesses. Many of them would have been avoided had better adherence to basic governance principles been exercised. Any company can develop good governance practices. The key is to understand the foundations of good governance and how these apply to your company. These include:Delegation of authority The origin of authority is ownership. However, your business will soon reach a point in its development where you the main shareholder are no longer able to fulfil the roles of shareholder, executive director and manager simultaneously. To whom is authority in certain situations delegated and what are the processes and boundaries? Guide your employees to recognise the decisions that they can and cannot make on their own. Checks and balances A basic principle of good governance is that no one individual should have unfettered power over decision-making. A lack of appropriate oversight exposes the enterprise to human weakness. Even the most capable of individuals can sometimes make mistakes or lose their ability to analyse issues in an objective manner. To minimise these risks, it is crucial to establish procedures that subject all decision-making to some level of scrutiny. Professional decision-making An atmosphere of open discussion should be encouraged. Perspectives and viewpoints should be heard and assessed. There should also be a clear formulation of options and consequent decisions, with appropriate documentary evidence, so that the decision-making process is followed by decisive action. Risk management Often overlooked in business management is risk. Almost all operational and management decisions involve some level of risk i.e. a degree of uncertainty that what has been planned will actually eventuate. Risk assessment covers both probability that an event will occur plus the level of consequent impact. For all significant areas of risk in your business, a risk management plan, with mitigating actions, should be established. Conflicts of interest It is important to recognise that the company is not an extension of the personal property of the majority owner. The owner may view the company's interests as synonymous with their own. This can lead to a self-interested bias in decision-making. At worst, it could lead to the expropriating of the assets of the company (deliberate or otherwise) at the expense of minority shareholders or stakeholders. Have all potential conflicts of interest been highlighted and addressed? Accountability It is important that each employee, manager and board member understands expectations about the nature and scope of his/her responsibilities and commitments. As your small business expands in size and complexity, explicit business conduct rules will need to be formalised. Once accountability in practice has been defined, communicated and established, you have the foundation for good governance practice. Transparency Directors, managers and employees are likely to give greater thought to their conduct if they are aware that they are being observed. A key stage in opening up your business to external scrutiny is taken by the appointment of independent non-executive directors. This signals a company's willingness to become more open and transparent with respect to its decision-making and performance management. Employee welfare Define roles and responsibilities for all staff. This is your contract with them as to how they must do their work. Monitor job performance, but also encourage employees to undergo continuing education. This will make sure that all staff stay up-to-date with relevant regulations and business developments plus stay motivated to improve their skills and career prospects. Establish a formal recruitment and pay criteria as well. Good governance is for everyone It’s hard – you’re probably fully occupied right now just managing your business operations and associated finances. But good governance – corporate governance – is an insurance to prevent and help recover from unforeseen adverse events. It is also an obligation as a conscientious business owner or manager. In a large organisation, corporate governance is clearly more complex and difficult to manage when compared to a smaller business. However, many of the basic principles and reasons behind it can be applied to the way that you make decisions and control your small business. Small business owners can put in place an advisory group to help oversee the business (the equivalent of a large organisation’s board of directors). The board can be made up of individuals with no legal rights to the business but who can draw on their business or industry specific experience to advise and even mentor the small business owner and his/her management team. Remember, good corporate governance is not just for large publicly listed entities. All companies, regardless of their size or extent of their operations can achieve tangible benefits from implementing strong governance systems. “Small businesses implementing good corporate governance procedures will be primed culturally and legally to make the successful jump from the small to medium and maybe even public.” Baybridge Group provides interconnected legal, strategic and advisory services, and is a leading authority on all franchise matters. It supports its clients to transform them into some of the fastest growing franchise networks both nationally and internationally. Phone: (02) 9232 3511 Email: info@baybridge.com.au Web: www.baybridge.com.au