CORPORATE GOVERNANCE FOR SMALLER COMPANIES

Consultancy

Relevance of Corporate Governance to Smaller Private Companies

Corporate Governance tends to be higher on the agenda of companies or other organisations that are in receipt of public money – listed companies, public sector agencies, and charities – with the emphasis being on stewardship, control and compliance. While smaller private companies may emphasise the need to focus on the bottom line, this betrays a lack of understanding that good governance will in fact strengthen the bottom line. Some examples of how the good governance practice can achieve this are outlined below.

Ensuring No One Individual has Unfettered Powers

Some of the worst examples of corporate incompetence and failure arise where one individual has had unfettered powers to make decisions on behalf of the company. The Robert Maxwell use of the Mirror pension fund which led to the Cadbury Report of 1992 is a prime example. Good decisions are made when there is challenge and informed debate.

An effective governance framework defines roles, responsibilities and an agreed distribution of power amongst shareholders, the board, management and other stakeholders. Especially in smaller companies, it is important to recognise that the company is not an extension of the personal property of the owner.

Recognising the Added Value Role of the Non-Executive Director

An executive director is a director who is also an employee of the company. Their contract of employment will impose specific duties: e.g. Finance Director. A non-executive Director is not an employee. They are usually part time, not involved in the day to day running of the company and are paid fees. There is no legal distinction between an executive and non-executive director – they are equally responsible for the governance of the company.

A key step in the development of unlisted company governance is the decision to invite external directors onto the board. Its effect on boardroom behaviour and culture should not be underestimated.

Non-Executive Directors can:

  • Provide an independent view to protect the interests of the company when potential conflict of interests arise with executive directors.
  • Bring wider experience, an external view or perhaps specialist skills or contacts.

Even quite small companies should consider the appointment of a non-executive director in terms of the value for money offered. Someone who has been there and got the T shirt and has a list of valuable contacts – the cost could be quite minimal.

Stakeholder Engagement

The Companies Act 2006 places a duty on directors to consider the impact on employees, suppliers, customers, the community and the environment as part of their decision making process. Effectively, the Companies Act introduces on to the statute book for the first time the concept of the “stakeholder” – that is someone other than a shareholder who has an indirect interest in what a company may be doing. But are their direct benefits to be gained from stakeholder relationship management?

The answer must be yes, whether it is in terms of supply chain management, good employee relations or building customer loyalty. But how many smaller companies take time to manage and develop these relationships:

  • Communicating the company’s vision, mission and values.
  • Seeking feedback on employment, service or business experience.
  • Identifying opportunities of mutual benefit.

Board Evaluation

A key principle of good governance is that every company should be headed by an effective board which is collectively responsible for the long term success of the company.

The Board should undertake a formal evaluation of its own performance and that of individual directors. Often one of the most difficult, and yet essential aspects of good corporate governance. How effective has the Board been in carrying out its responsibilities to:

  • Set the strategy for the business.
  • Monitor financial and non-financial KPIs which flow directly from the strategy.
  • Engage with shareholders and stakeholders.
  • Manage risk.
  • Provide challenge and independent thought, not just nodding through proposals.

Discussion of areas where there is clear agreement on under performance and areas where there is a divergence of views will lead to greater board effectiveness and enhanced company performance.

Brendan Mullan

Email: enquiries@virtusconsultancy.com

 

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