Effective Governance in small business
Too often, business owners are caught up “in” the operating of the business, with no time left to work “on” the business. Consequently, the business evolves without any clear strategy for growth and in a cycle of reactivity rather than by design through proactive planning.
With over two thirds of the Australian economy made up of family businesses, there is the added complexity of ownership, management and family issues often overlapping and impacting the business. Separating these issues through appropriate governance forums is considered best practice.
Governance is no different to any other business decision. It is important to do the research and evaluate the expenses verses the outputs as part of the decision making process.
Cost: There are two sides of the equation to be considered when assessing the cost to the business:
1. What is the cost of time and money in establishing a Board and holding meetings?
2. What is the cost of not establishing effective governance practices?
It’s quite simple to measure the financial costs for Director’s fees, expert advisers and the time value of key executives attending Board meetings.
However measuring the intangible costs to the business is more difficult.
A lack of direction and focus, jumping from one challenge to the next, working in the business and managing, rather than directing, all impact on the ability to lead, stay ahead of the competition, and drive
growth. When this happens, succession and risk issues tend to be put on the back burner and remain unplanned. In the event of a crisis or critical event, the business may suffer a significant loss of future income, opportunity and potentially not recover.
Benefit: Efficient and effective governance systems add value through the following forums:
• Board of Directors for the business
• Family Council for the family
• Shareholders committee for the owners of the business.
Using the appropriate forums to communicate and discuss issues creates an alignment of shared goals with the vision of the business. Therefore, separating the family and the business at board level can minimise conflict and allows directors to direct.
The focus of the Board and its broader role is to:
• Govern the organisation and set the strategic direction
• Ensure planning is soundly based and implemented
• Initiate and maintain high calibre CEO and executive selection, appointment, monitoring and evaluation, with a robust plan for succession
• Ensure the company has adequate defined and effective controls, audit and compliance systems in place, with accurate and timely internal reports, policy frameworks, with plans to prevent and manage risk, and protect shareholders interests
• Continually assess and monitor the organisations public image and reputation for performance and good governance.
An effective board of directors will bring a strategic perspective providing clarity, direction, transparency and accountability. A non-executive director will add expertise, skills, experience, knowledge, and independence to provide a balanced composition to the function of the board. The benefits are a clearly articulated business and strategic plan, risk minimisation, a more professional business, and enhanced relationships with key stakeholders. This allows management to manage and focus on the operational side of the business by implementing the strategy.
Analysis: The advantages of good governance need to outweigh the commitment of time and money. Conducting due diligence into the right size and style of board, with a balanced composition of directors comprising a mix and range of skills and experience that fit your organisation, will guide this decision.
Successful, long-term private and family businesses tend to have the following key success traits in common:
• Execute and enable strategy
• Build structures and processes to sustain long-term performance
• Achieve success through people
• Place a high value on leadership and talent.4
All of these keys to success are created through effective and efficient governance best practice. In doing so, implementing good governance practices is really about planning to take the business to the next level; with the key word being planning. Three simple questions are very effective in guiding that plan:
1. Where are you now?
2. Where do you want to be in one, five, ten and 25 years from now?
3. What do you need to do to get there?
Effective governance is, perhaps, the single most sustainable way to achieve competitive advantage, long term growth, and achieving the goals of both business and family.