Corporate governance for small businesses

Good corporate governance is often viewed as important for large companies with an established board of directors. However, the principles that underpin good corporate governance can benefit any organisation, irrespective of size.

Why is it then that the term governance often raises alarm bells with small business owners? Perhaps it’s the fear of losing control over their business, or the assumption that they must report to someone else. When in fact, good corporate governance should lead to business owners feeling more empowered, more supported and more equipped to make good quality decisions.

In a nutshell, governance is all about thinking strategically and taking a ‘big picture view’ as opposed to focusing on day-to-day operations. In the context of small businesses, owner-operators are often bogged down with the day-to-day running requirements of the business, leaving little time to devote to long-term strategy and sustainability. One of the key benefits of governance structures is the ability for small business owners to take time to work “on” the business as opposed to work “in” it. This subtle switching of ‘hats’ is one of the first steps toward building a governance structure.

However, there is no ‘one-size-fits-all’ approach to governance; it will look different for each and every business. The approach will depend on the size and stage of the business, the operating environment, the risk profile and the key stakeholders. It is therefore crucial that all businesses take time to think about their governance practises. Broadly, governance structures typically fall into one of three categories: no formalised governance structure; an advisory board; or a full board. The idea of a full board may be overwhelming for SMEs or not appropriate given the size and scale of the business, but they may still benefit hugely from establishing an advisory board.

At one point or another, SME owners will inevitably need expert advice, that’s where an advisory board comes in. An advisory board is an informal group of business professionals who help advise owners on a number of business issues. Generally, an advisory board should have a legal advisor, an accountant, a marketing expert, a human resources expert, and a financial advisor.

The ability to draw on these different areas of expertise offers SMEs the benefit of a variety of different perspectives, knowledge, experience and most importantly support. Opting for an advisory board also ensures overall decision making authority remains with the owner, removing any apprehension owners may have about loss of control.

As entities progress through the business life-cycle, they may eventually find that their advisory board grows into a full board. There is an abundance of resources available that outline the composition and responsibilities of boards, including guidance issued by the Financial Markets Authority (FMA) which includes eight key principles that underpin best practice. The topics include areas such as ethical standards, board composition and performance, risk management, and reporting and disclosure. Whilst it is unlikely that all of the principles will be relevant for small businesses, they provide sound guidance on the fundamental areas and help simplify the underlying objectives of governance.