Corporate Governance and the Small Business
The Department for Business Energy and Business Strategy estimates there are 5.9 million businesses in the UK. More than 99% are straightforward privately owned and not listed on any exchange.
These companies are mostly SMEs or start-ups and contribute hugely to the UK economy and are vital to our future.
Unlike the well-known names of the FTSE100, the huge majority of companies do not have to employ any formal corporate governance arrangements (apart from complying with the law and the Companies Act 2006).
However – good corporate governance is good for businesses.
What is good governance?
Even small businesses need some existence of governance to trade smoothly. Everyone within a business should understand their responsibilities regardless whether you are the owner or the cleaner. Good governance sets out responsibilities and makes clear and implements certain legal rules and regulations which need to be adhered to.
Good governance is when a business ensures that there is a good decision making process in place. Without good governance, an organisation lacks policies and procedures to ensure accuracy, consistency and responsiveness to the market and to its stakeholders including customers, shareholders, and regulators.
Large businesses are more likely to have a management team in place, ensuring the firm adheres to the principles of good corporate governance as is expected of a large organisation. Whilst a small business may have a simple governance structure, small businesses must also ensure they have good governance in place. This can be achieved by having a trusted advisor on hand and/or having some form of administrative support.
Regardless of the size of your organisation, good corporate governance is good for your business.
Here are some reasons why;
It encourages good decision making
If a market changes shape or a new opportunity suddenly arises in your commercial area, or even if you need to quickly adapt, having a swift but robust decision making process in your business can help you to change direction efficiently in order to drive the business forward. Good decision-making also has a great impact on the morale of your employees as they are more likely to feel part of a ‘switched on’ flexible organisation.
It helps manage risk
Risk is often overlooked but it is so important. If you are too focused on business as usual, you could easily become entrenched and miss opportunities or fail to recognise impending risk factors. Often it is an outsider who can maybe come in once a month and spot these vulnerable areas which can be obvious to fresh eyes.
Good corporate governance practices ensure the business stays on top of statutory reporting, annual returns, renewing insurances and permits/licences.
It encourages management to seek advice
Adhering to good corporate governance practices encourages businesses to regularly review the firm’s strategy and performance and seek external opinions where necessary. Bringing in external expertise to assist strategic decision-making can add significant benefits to the firm.
A good corporate governance framework takes into account the kind of business it is and whether there are stakeholders or other shareholders who must be considered. It clarifies duties and responsibilities appropriately and where delegation of duties is carried out ensures there is clear and proper understanding of what is to be done and by whom. Effective governance will ensure that the business runs smoothly and safely right from the start, as each person’s skill set will be used to carry out the work they are best suited for.
Some elements of governance include:-
• Risk management
It is by governance that those in positions of authority and those who work in a company are held to account for their actions and decisions. This brings transparency, trust, accountability, and integrity.
A starting position checklist
- Is the ownership structure reflected in a shareholders or partnership agreement?
- Does the business have adequate policies and procedures setting out process for HR/purchasing/sales/operations/regulatory?
- Are the advisors of the business all properly instructed and reviewed appropriately?
- Does the business have proper contracts and agreements in place – ranging from employees to suppliers?
- Has anyone recently checked any activities of the business which fall under a regulator’s jurisdiction e.g. data protection – are we compliant?
The list goes on and on but for the small businesses out there, it really is worthwhile to sit back and take stock of what you and what you should be in terms of governance housekeeping.
1st June 2020
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