Corporate governance is key for smaller businesses

Can governance give private companies an edge?

Corporate governance

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Small and Mid-sized Businesses (SMBs) can benefit from better corporate governance. Benefits include: better business development, cost control, and talent attraction and retention. Furthermore, SMBs interested in attracting investors can use better governance as a core value proposition. This applies to both established markets and emerging ones. For emerging markets SMBs, it is a must if they are looking to raise finance in international markets.

Venture Capital and Private Equity firms consider corporate governance a core component of SMB value creation. Some think that up to 30% of that value creation may come from better governance!

What do we mean by corporate governance?!

There are several definitions of corporate governance. Here is the one from The Organisation for Economic Co-operation and Development is an intergovernmental economic organisation (OECD):

“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

There are different models of corporate governance. In this article we look at the UK one.

The UK model

According to the Institute of Directors (IOD), a UK professional body, the vast majority of UK businesses are private, i.e. not listed on exchanges. These are mostly SMBs or start-ups, making a huge contribution to the economy. Who are not obliged to have any formal corporate governance, beyond the regulatory requirements of the Companies Act 2006. However, the IOD suggest that all private businesses can ensure sustainability in the long run, by applying some corporate governance principles.

The UK model of corporate governance is world-renowned and also replicated. In large part, due to its flexibility and recognition that no two businesses or boards are the same.

The IOD guidance

The IOD published its own governance guidance for private businesses (based on a pan-European guidance by The European Confederation of Directors Associations). Here are the principles applicable to all private businesses:

  1. Shareholders should establish an appropriate constitutional and governance framework for the company
  2. Every company should strive to establish an effective board, which is collectively responsible for the long-term success of the company, including the definition of the corporate strategy. However, an interim step on the road to an effective (and independent) board may be the creation of an advisory board
  3. The size and composition of the board should reflect the scale and complexity of the company’s activities
  4. The board should meet sufficiently regularly to discharge its duties, and be supplied in a timely manner with appropriate information
  5. Levels of remuneration should be sufficient to attract, retain, and motivate executives and non-executives of the quality required to run the company successfully
  6. The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets
  7. There should be a dialogue between the board and the shareholders based on a mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should not forget that all shareholders have to be treated equally
  8. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge
  9. Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance

Final thoughts

There is extensive research showing that businesses with better corporate governance outperform in the long run. Research is also showing that poor governance can lead to failure. But SMBs should make no mistake: there will be challenges in finding the right governance formula for their business.

The IOD guidance may or may not work for a business. The key for any business is to recognise the importance of governance and find, possibly with the help of people who have been there before, what works for them.

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