Governance in small businesses

corporate governance

The word governance refers to the processes of ruling or controlling resources in particular. The pillars of corporate governance are ethics and risk and main elements of governance are fairness, accountability, responsibility and transparency.

The increased importance of governance in business today is from the collapse corporations such as Lehman Brothers, Enron and WorldCom as a result of breaks downs in one or in the case of Enron, all of the elements of corporate governance.

Corporate governance as a practice has grown immensely subsequent to the economic impacts of the collapse of these global giants and has been strictly required of large corporations. Organisations of this size are powerful and they tend be most at risk of such power being abused by individuals on the other hand this places investors and other stakeholder with legitimate claims to the corporation at the mercy of management and this relationship is a risk of being abused.

The question now however is whether small businesses should be expected to instil good governance procedures in their companies. It is said that compliance with the codes of good corporate governance such as Sarbanes Oxley in the US in particular costs companies millions per annum and yet they don’t necessarily prevent impropriety from occurring where good corporate governance is concerned. So what then is the point for small businesses many of whom barely make enough to get by?

The opposing view particularly among advocates of codes such as the King 3 report (SA) and the Combined Code (UK) will tell you that investors are more likely to pay a premium for equity in a well governed company than pay a discount for one that has no proof of adequate controls or governance measures in place.

What then of small businesses?

Well according to research by 4imprint, a research company which provides “how-to” articles based on this research, small businesses should start integrating corporate governance practices in order to support its investors.

Corporate Secretary, an online publication on governance, says reasons for corporate governance in a small business are;

Small companies are always growing so they need to implement policies and procedures ahead of time. This will eliminate future risk of growing bigger in the future such as insidious growth of the wrong culture of distrust or abuse of power.

Regulations, unfortunately part of being in business is to comply with regulation and a big part of this regulation is to ensure that the business has transparent procedures and policies that provide its employees with a framework on how to conduct business while still being compliant with the law.

So how can this be done exactly?

An advisory board is probably the simplest way in which this can be done as it would be composed of independent members who are able to help the organisation identify risks, address conflict of interest and identify how the business can operate optimally. This advisory board can be a type of business “mentor” to the small business and by extension would fulfil a function similar to a board of directors in a large corporation.

Further to this the small business should consider consistent financial reporting which will equip it with the resources it needs to closely monitor its revenues and expenses. These records will also serve to hold staff accountable and promote transparency.

Lastly, addressing compensation and benefits by means of a kind of policy or protocol for how staff (owners included) is remunerated. Once again this promotes transparency and fairness and goes a long way to ensuring that in the future the company has entrenched in its culture the moral code of doing the right thing.

 

 

 

Sources:

Corporate secretary.com

SA Business Index

4Imprint

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