Aaron Wallace looks at governance challenges facing SMEs and offers some pointers on how to get a board up and running.
In today’s competitive
market, we’ve managed to wave goodbye to the good old days of running our businesses by the seat of our pants. The low hanging fruit have been picked and we’re being challenged to find ground-breaking ways to climb the ladder to reach our new markets. With slogans such as ‘innovation is today’s business oxygen’ being bandied around by columnists, consultants and fresh thinking entrepreneurs, we’ve created a need to consistently manage, monitor and improve our business.
We’re being asked to act like a ‘grown up’ business in order to ‘grow up’ our business.
Entrepreneurial resource is being questioned and a stronger leadership model is becoming a central theme in successful organisations. The growing noise around governance is securing a lot of air time and rightly so. It’s becoming a pillar in market leading organisations. Traditionally, New Zealand SMEs have often discounted corporate governance as expensive or complex without fully understanding or appreciating the benefits that this leadership discipline brings. Governance is about structuring, operating and controlling a company with a view to achieving long-term strategic goals for shareholders, creditors, employees, customers and suppliers.
It is, and will continue to be, the cornerstone to success and business longevity.
Fortunately, many business owners are now grasping the need and benefits to incorporate this executive discipline into their business. However, there seems to be a hurdle in establishing who might be on that governing board, identifying how it could be run and determining what resources or issues it ought to consider, which is stopping a board from being set up. Business opportunities are being lost because of inexperience and shyness towards how to search for these answers.
What’s the starting point? And is there an ‘everything you need to know about corporate governance’ guide?
Every business is unique, which makes it difficult to put together a golden checklist of how to run a board. That said, below are a few points to help get you started and fill that information gap at the outset.
Who should I have?
What’s the ideal mix?
Quite often boards are looking for members to fulfil certain skill sets or roles that are missing from the business such as a financial, legal, marketing or operational discipline. There is no hard or fast rule on what skills or how many members there should be, however a diverse mix who can challenge each other is a powerful combination.
Successful boards often employ an independent adviser who can bring discipline, experience and objectivity. They regularly get asked to chair the board, simply because having a dominant shareholder or CEO in this position can often lead to issues being sidetracked. The key is to get the right independent.
Having the external accountant or company lawyer on the board is a common situation; however, these professionals should have an ability to act in an advisory role with a ‘big picture’ or business focus. A pure technician may not be the best choice.
Likewise an experienced member of a large corporate or NZX-listed company may not be the best fit as the mechanics of an SME are significantly different. Whilst SMEs may be more agile to change, what makes them tick and their ability to shoulder a poor decision is quite unique and critical to how an approach or alteration to the business may be adopted.
It’s important that the board creates a sense of trust and respect both amongst its members and to external parties. The board must be shown as a winning team and not a pack of interested individuals feeding their own agenda.
What are the rules?
There should be a governance or competency framework, which will often be linked to a Constitution or Shareholders Agreement which outlines decision lines and powers of each management level in the organisation, including the board.
There should be an uneasy sense of ‘restlessness’ to improve and search for better ways to operate the business. In saying this, the meeting should be challenging, but not confrontational to the point of being destructive.
The principle of ‘say what you mean, mean what you say, but don’t be mean how you say it’ should prevail as a rule. Although healthy debate is encouraged, the board should feel as if they can have a beer together at the end of a meeting.
All board members must have bought into the strategic direction of the business and always champion this theme at every opportunity. The ‘fish rots from the head down’ is a good analogy to demonstrate the power of a cohesive board. Leading by example will help get the troops to buy-in to the direction and future sustainability of the organisation.
What content and issues should be discussed?
It’s important that the meetings are governance by nature and not operational.
Whilst reviewing compliance matters should be considered the gatekeeper to business risk, performance orientation should be in the DNA of this team and a recurring agenda item.
Any proposals around strategic opportunities or a reorganisation of current operational matters should be received by all board members in advance along with a detailed paper to support these proposals and provide a healthy and informative discussion.
An agenda should be weighted to monitor and manage the business but also to look forward to building a stronger model. It should be about growth as much as it is about survival. Discussion around progress towards the rolling five year plan must always be on the agenda, as should the review of standard reports such as accounting matters, monitoring of marketing activities and non financial performance indicators.
How do we run the initial meetings?
Make no qualms about it, those first meetings will be untidy and slightly unstructured as the board find their feet and build a structure which is unique and meaningful to that organisation. At different times there will be a need to focus and spend more energy on ‘hot issues’. Marketing, liquidity, R&D, personnel matters, strategic growth, etc will all have their time in the sun. Initial meetings will require energy into developing and agreeing company vision, creating a ‘brand map’, and building a five year plan that everyone will buy in to. Where there are several owners in a business, identifying shareholder/director values, reviewing a commercial remuneration model, and setting a valuation methodology for an eventual exit may also be involved.
Commonly the initial hurdle that owners need to get over when establishing a board is the recruitment of the optimal team. A reluctance to remunerate for board positions has in the past inhibited the opportunity to attract the best board members, whilst owners haven’t respected the value that these ‘paid for’ roles can bring in those early stages. Naturally, people don’t value what they get for free and owners must accept this. Do they offer their goods and services at a 100 percent discount?
Not all positions (e.g. senior management attending as part of their role) will be remunerated so ‘paid for’ positions could be limited and cost effective. Given the purpose and role they perform, a director’s fee should be considered an investment, not a cost. The proviso is that any external party joining the board must be passionate about building a better business and making it stronger. They must not be there simply to go through the ‘operational tick the boxes’ cycle and clip the ticket. Members must appreciate that their role extends past turning up for a monthly meeting. The position requires varying time input and what issues are hot at the time will drive which board members are required to offer more of their skill sets between board meetings.
Most businesses never reach their potential due to a lack of skill, capital and resources.
A tailored, low-cost governance programme may not solve the world’s problems, but it’s certainly a step in the right direction.