Dr. Craig West is the founder of Capitaliz and has been working with business owners on succession and exit strategies for over 20 years.
Corporate governance is a critical aspect of managing any business, but I find its importance is often underestimated in privately owned businesses. Many owners (and some advisers) think it is only for larger businesses; this is simply not true.
According to one definition, corporate governance “involves the system of rules, practices, and processes by which a company is directed and controlled.” This includes “shareholders, management, customers, financiers, government, and the community.”
In an earlier article, I wrote about key value drivers. In my experience working with mid-market businesses over the last 15 years, the very best-performing businesses also have strong corporate governance in place; this brings the structure, discipline and accountability that many SME businesses lack.
The Value Of Corporate Governance For Privately Owned Businesses
I believe corporate governance is essential because it enhances accountability and transparency by providing a clear framework for decision making within a business. This transparency builds trust with stakeholders, leading to better decision making and more efficient management. Additionally, corporate governance plays a crucial role in risk management by identifying, assessing and managing risks, thereby mitigating potential financial losses or reputational damage.
Moreover, good corporate governance practices can improve business valuation by enhancing a company’s reputation and credibility, making it more attractive to investors and potential buyers. This is particularly important when planning for succession or exit. Strong governance practices also facilitate access to capital, and in my experience, investors and lenders are more likely to provide funding to businesses that demonstrate robust governance. Lastly, corporate governance ensures compliance with relevant laws and regulations, preventing costly legal issues and fines.
Effective corporate governance plays a crucial role in decreasing risk by establishing clear policies and procedures, which ensure that all employees understand their roles and responsibilities. By implementing internal controls, businesses can safeguard assets, ensure the accuracy of financial reporting and promote operational efficiency. This is why it’s important to conduct regular audits, both internal and external, to help identify potential issues before they become significant problems.
Lastly, a strong corporate governance framework promotes a culture of integrity and ethical behavior, which is essential for maintaining trust and accountability within the organization. By proactively identifying and managing various types of risks, including financial, operational and strategic risks, corporate governance enhances overall risk management and helps businesses navigate potential challenges more effectively.
Corporate Governance For Business Succession And Exit Planning
Within the 21-step process for Business Succession and Exit planning I introduced in a previous article, corporate governance plays a crucial role in this process, particularly in the following steps:
Step 8: Strategic Planning: Corporate governance ensures that strategic planning is conducted systematically and effectively. This includes setting long-term goals, developing strategies to achieve them and monitoring progress.
Step 9: Strategic Financials: Good governance practices ensure that financial information is accurate and reliable. This is essential for making informed decisions and maximizing business value.
Step 10: Systems And Procedures: Having well-defined systems and procedures in place is a key aspect of corporate governance. This ensures that the business operates efficiently and effectively, which is crucial for succession and exit planning.
Perhaps, most importantly, corporate governance itself is also one of the 21 steps as we look at key factors to maximize value.
A Guide To Implementing Corporate Governance In An SME
Implementing corporate governance in privately owned businesses can seem daunting, but I have found it to be a crucial step toward ensuring long-term success and sustainability. Here are some practical steps to get started:
1. Establish a board of directors. Forming a board of directors (internal and external) is a fundamental step in implementing corporate governance. This board is often made up of key advisers, but there are essentially three key offerings external directors might bring to the table:
• Skills and expertise the owners don’t have. This might be financial or marketing, for example.
• Network, relationships and introductions to potential clients, staff, etc.
• Reputational, presence, gravitas or however you’d like to describe it.
In forming the board, owners need to think about what gaps they have and what they need (skills or networking, etc.) and create a board that fills these gaps and provides a range of skills and experience that will help the business meet its goals.
2. Define roles and responsibilities. Clearly outline the roles and responsibilities of the board members, management and other key stakeholders.
3. Develop policies and procedures. Create comprehensive policies and procedures that govern the business’s operations, including financial management, risk management, compliance and ethical conduct.
4. Implement internal controls. Establish internal controls to safeguard assets, ensure accurate financial reporting and promote operational efficiency.
5. Conduct regular audits. Schedule regular internal and external audits to assess the effectiveness of the governance framework.
6. Promote a culture of integrity. Foster a culture of integrity and ethical behavior within the organization. This involves setting a strong tone at the top and ensuring that all employees understand the importance of ethical conduct.
7. Engage stakeholders. Involve key stakeholders, such as employees, customers, suppliers and investors, in the governance process.
8. Provide training and education. Offer training and education programs to board members, management and employees on corporate governance principles and best practices.
10. Monitor and review. Continuously monitor and review the governance framework to ensure its effectiveness.
Designing the right board structure, inviting the right team of advisers, matching them to business goals and constantly reviewing and monitoring should add the structure, discipline and accountability most businesses lack but sorely need.
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