The value of good governance - what SMEs can learn from corporates

New Zealand SMEs have often discounted corporate governance as expensive or complex without fully understanding the benefits this leadership discipline brings.
times for SMEs to grow up

New Zealand SMEs have often discounted corporate governance as expensive or complex without fully understanding the benefits this leadership discipline brings. But, as Aaron Wallace reports, governance is now becoming a pillar of market-leading organisations.

Aaron Wallace of Hayes Knight

In this competitive climate, businesses must find ground-breaking ways to reach new markets. It’s vital to consistently manage, monitor and improve your business, and that’s where corporate governance can play a crucial role. Governance is about structuring, operating and controlling a company with a view to achieving long-term strategic goals for shareholders, creditors, employees, customers and suppliers. It is, and will continue to be, the cornerstone to success and business longevity.

Fortunately, many business owners now see the benefits of incorporating this executive discipline into their business. However, who should be on that governing board, how it could be run and what resources or issues it should consider, are common stumbling blocks. Opportunities are being lost by those unsure of how to answer these questions. Every business is unique, so it’s difficult to put together golden rules for running a corporate governance board, but here are some points to help get you started:

What’s the ideal mix?

Boards are often looking for members to fulfil certain skill sets or roles missing from the business, such as financial, legal, marketing or operational. A diverse mix of people who can challenge each other is a powerful combination. Successful boards often employ an independent adviser who can bring discipline, experience and objectivity. They regularly get asked to chair the governance board, as having a dominant shareholder or CEO in this position can lead to issues being sidetracked. The key is to get the right independent person.

Having the external accountant or company lawyer on the governance board is common; but these professionals should act in an advisory role with a ‘big picture’ or business focus. A pure technician may not be the best choice. Likewise, an experienced member of a large corporate or NZX-listed company may not be the best fit as the mechanics of a SME are significantly different.

It’s important that the governance board creates a sense of trust and respect, among its members and with external parties. It must be shown as a winning team and not a pack of interested individuals feeding their own agenda.

What are the rules?

There should be a governance or competency framework. This will often be linked to a Constitution or Shareholders Agreement that outlines the decision lines and powers of each management level in the organisation, including the board. There should be a drive to search for better ways to operate the business and meetings should be challenging, but not destructively confrontational. Operate by the rule: ‘say what you mean, mean what you say, but don’t be mean in how you say it’. While healthy debate is good, the board should feel as if they can have a beer together at the end of a meeting.

All board members must buy into the strategic direction of the business and champion this theme at every opportunity. Leading by example will help get the troops to buy in to the direction and future sustainability of the organisation.

Content and issues to discuss

Meetings should be governance by nature, not operational. While reviewing compliance matters should be considered the gatekeeper to business risk, performance orientation should be a recurring agenda item. Any proposals around strategic opportunities or a reorganisation of current operational matters should be sent to all board members in advance along with a detailed paper to support these proposals and provide a healthy and informative discussion.

An agenda should be weighted to monitor and manage the business but also to look forward to building a stronger model. It should be about growth as much as it is about survival. Discussion around progress towards the rolling five-year plan must always be on the agenda, as should the review of standard reports such accounting matters, monitoring of marketing activities and non-financial performance indicators.

Running the initial meetings

Those first meetings will be untidy and slightly unstructured as the governance board finds its feet and builds a structure that’s meaningful to your organisation. At different times, the focus will be on current ‘hot issues’ such as marketing, liquidity, R&D, personnel matters, strategic growth etc. At initial meetings energy must be put into developing and agreeing on the company vision, creating a ‘brand map’ and building a five-year plan everyone will buy in to. Where there are several owners in a business, identifying shareholder/director values, reviewing a commercial remuneration model and setting a valuation methodology for an eventual exit may also be involved.

A common hurdle owners must get over when establishing a corporate governance board is the recruitment of the optimal team. Reluctance to remunerate for board positions can prevent owners from attracting the best members.

Not all positions will be remunerated, so ‘paid for’ positions could be limited and cost effective. Given the purpose and role they perform, a director’s fee should be considered an investment, not a cost. The proviso is that any external party joining the board must be passionate about building a better business and making it stronger. Members must appreciate that their role extends beyond turning up for a monthly meeting. The position requires varying time input and topical issues will determine which board members need to offer more of their skills between board meetings.

Most businesses never reach their potential due to a lack of skill, capital and resources. A tailored, low-cost governance programme may not solve the world’s problems, but it’s certainly a step in the right direction.

This story originally appeared in Beyond the Numbers, issue five.

Idealog has been covering the most interesting people, businesses and issues from the fields of innovation, design, technology and urban development for over 12 years. And we're asking for your support so we can keep telling those stories, inspire more entrepreneurs to start their own businesses and keep pushing New Zealand forward. Give over $5 a month and you will not only be supporting New Zealand innovation, but you’ll also receive a print subscription and a copy of the new book by David Downs and Dr. Michelle Dickinson, No. 8 Recharged (while stocks last).