Thinking, look at the big picture and take a long-term view, writes Sophi Rose.
Many SMEs will benefit greatly from the governance of a board, if it is scaled to match the needs and budget of the particular business.
Itโs a short sentence but there is lot to unpick in that statement.
So let me back up a little and share a few ideas about what governance is, what is a boardโs role and what โscaledโ means in the SME context.
Governance
You can find many definitions of governance and few good discussions on what should, or should not, be included in the concept. There are also a lot of misconceptions that boards are just for the โbig operatorsโ, risk averse, compliance heavy and stifling entrepreneurial thinking.
At the Institute of Directors, we believe that governance can actually help a business to thrive, grow and be sustainable. It is as much about challenging your thinking, sticking to your purpose, driving your strategy โ and seeing what might be coming at you in the future.
Governance is underpinned by responsibility, accountability, fairness and transparency. It is the piece of the puzzle that is not day-to-day management. Itโs time out of the day-to-day space to work โonโ not โinโ your business.
In the SME sector, directors are usually also shareholders and owners. Sometimes the owner is the sole director. Working โonโ the business can be inextricably interwoven with working โinโ the business. Sometimes itโs a time thing โ but also the beauty of a board is that it brings together a range of skills and perspectives to help guide a business forward, act as a sounding board and a place to test your thinking. It makes you make time to think.
Thatโs where an external board, not bogged down in day-to-day management, can improve governance.
Good governance, delivered by an external board, is known to deliver benefits in areas such as:
โขย ย ย Anticipating and managing cashflow challenges.
โขย ย ย Deciding whether to expand, or downsize.
โขย ย ย Managing difficult employees.
โขย ย ย Attracting senior staff.
Good governance can help your business thrive by:
โขย ย ย Creating a clear vision for the future, and a strategy to get there.
โขย ย ย Improving performance and financial results.
โขย ย ย Recognising and pushing for action on new opportunities.
โขย ย ย Helping to attract investment.
The board
Governance is often the role of a dedicated board of directors โ that is the framework anticipated in the Companies Act. But governance might also be convening an advisory board, or simply bringing in expert advice.
For SME owner/directors or shareholders, it is easy to view a board as a cost. Where is the value for me in a formal, regulated structure of operational oversight?
A board of directors could, to those in the SME sector, seem more like an impediment than a benefit. A handbrake rather than a supercharger when things need to move quickly.
At the IoD, we would re-frame that slightly. If I offered you access to a diverse panel of experts for business mentoring, advice, input and feedback on your strategy for a day every month, I suspect a lot of you would ask: โHow much? And where do I sign up?โ
Yet, if I call this panel of experts a board, the dynamic shifts: it no longer seems like an opportunity, rather a form of compliance and control.
In reality, a board is an opportunity to ensure good governance; and good governance can help you:
โขย ย ย Understand current risks and anticipate future risks.
โขย ย ย Identify new opportunities and explore whether they are โon purposeโ.
โขย ย ย Reduce opportunities for fraud or mismanagement.
โขย ย ย Bring the experience of others into your decision-making.
โขย ย ย Understand, and manage legal responsibilities.
โขย ย ย Reassure potential investors that you have checks and balances in place.
Scaling your governance
To get best value governance advice you need to know what you want, why you want it and how a board, advisory board or governance advisor can deliver it. Youโll also need to consider what you are prepared to pay for it. That will depend on your business, the challenges you are trying to overcome and the opportunities you want to seize. It will all be about the context.
There will be many things to consider, but rule of thumb is that you should have a formal board โ if you can see how it will add value.
As a first step, an advisory board can help bring external expertise into the governance of your business while allowing you to retain ultimate decision-making control. This may be an attractive option for family businesses that already have directors.
Often SMEs look to create a full board of directors when growth is not only a possibility, but a priority. Sometimes the strategic needs of the business simply progress beyond the capability and potential of the owner, particularly if they are working โinโ the business, and a board can help deliver more capability.
Directors have responsibilities
Whatever type of governance arrangement is right for your business, bear in mind that if you are legally a director, you are just as responsible under legislation such as the Companies Act or the Health and Safety at Work Act as any other director on any corporate board.
If you are also a manager, that doesnโt reduce your personal responsibilities. The fact it is a family business doesnโt reduce your personal responsibilities. Even if you hardly ever exercise your power as a director, your personal responsibilities remain under the law.
Our Four Pillars of Governance Best Practice offers an interesting case study of a business in which three directors โ a husband and wife, and the wife of the business manager โ became out of their depth and ended up personally liable for reckless trading.
The Court noted the directors had little appreciation of the duties of directors, recorded very little about the decisions taken on behalf of the company, allowed the affairs of the company to sit in the hands of the manager, and paid little attention to the financial affairs of the company.
When the company went into liquidation, the directors were found to be personally liable.
This case highlights the need for directors to actively understand and be involved in the governance of an organisation.
Of course, itโs also important to have the โrightโ board or a board with the right skills and experience to navigate your course. ย
Hindsight is a wonderful thing. But it would be nice not to look back and say, โI wish we had brought in a better governance structureโ.ย ย
ย
Sophi Rose is General Managerof the Institute of Directors.
