21 Feb 2018
There is a general perception that Governance is for large businesses, in fact more often than not the term used is “Corporate” Governance, and thus SME’s (Small and medium size businesses) in general believe that this practice can be delayed to a later stage of their growth cycle. Whilst there is a growing interest and awareness towards the best practices of corporate governance, especially amongst large family businesses in the region that are transitioning to second or even third generation owners, it’s never too early for even a young aspiring entrepreneur to elevate their knowledge about governance and how they can apply it to their business at infancy stage.
One thing to note is that Governance is a journey and never a one size fits all solution. There are common goals such as achieving sustainability, adding better controls, driving better transparency, ensuring accountability across all levels of an organization, and mitigating against risk, but how to do that may vary from a company that is in its first 3 years of operation vs an established forty year old global conglomerate.
For an SME or a young entrepreneur, governance practices need to be demystified and not seen as a burden and a cost but rather as a driver towards sustainable growth. For example risk mitigation may be seen as a practice that we do when we have more revenues, expenses, assets, liabilities and profits at stake, whereas in reality if you do not manage risk at an early stage you are more likely to be amongst the majority that do not see it past the first three years of operations, known to many as the valley of death. Tackling risk during the first three years, is very different than another high risk stage of operation which is transitioning to a second or third generation of ownership, but equally as important. In a large corporation, managing risk may involve hiring an in-house risk team, or seeking the advice of an external consultant, whereas in an SME you may seek a mentor or advisor that can help in guiding the leader to the various potential risks and what are the ways to mitigate against them.
Another way to view the journey of a small business is through the various stages they may obtain and seek funding, which impacts the ownership structure, and thus the governance required. Family, friends and partners that have partnered with an SME may not be as structured towards their approach to seeking a return on their investments but do need to have transparency and a proper mechanism to either hold accountable members that are not performing or exit their investment. Forming an advisory board of mentors, partners, and family will differ at this stage and may address how to hold the entrepreneur or leader of the SME accountable, and smooth out any conflicts that may occur between the investor and entrepreneur. This stage differs from when the SME attracts venture capitalists or private equity firms, or at a more advanced stage when the firm may have multiple owners and may need further independent non-executive board members with a diverse set of backgrounds. Conflicts of interest may arise even more at early stages, such as use of start up capital for personal use or outside of the original scope of the business, and hence it is just as important to have the right level of controls on the business. Whilst at a larger business you may have, internal audit practices, or a sub committee from the board that oversees audit and risk, at an SME addressing proper policies and procedures, having an authority matrix across various levels of the organization including the early stage shareholders and the appointed CEO or managing partner may suffice.
If you are an entrepreneur or running an SME, governance is not an added burden or cost to your business, but rather an evolving practice that can help fuel your businesses towards more sustainable growth.