5 Best Corporate Governance Practices for Small Businesses
What would a country be like if it had no laws? I’m sure you can immediately imagine the uncontrolled havoc that people would be constantly wreaking. Having strong corporate governance principles in a company is much the same as having laws in a country. An established governance framework minimises the possibility of unethical or unlawful acts being committed, motivates each individual to do their best at all times, and maximises performance of the business as a whole.
Corporate governance is not just something practiced by large corporations. These governance principles are incredibly helpful to small businesses, because it maximises the work contributions of each employee – particularly helpful for SMEs that rely on small numbers of people. If you’re a small business owner, there’s no doubt that solid corporate governance practices will bring long-term benefits to your bottom-line.
What are the benefits of corporate governance for small businesses?
- Minimises wasteful expenses, corruption, and unethical/unlawful behaviour
- Maximises staff performance by holding everyone accountable for their actions and job results
- Builds a strong, highly motivated workforce by ensuring fair treatment and compensation
- Creates strong shareholder and investor confidence in the business
- Ensures effective management of business risks
5 Best corporate governance practices for small businesses:
1. Adopt strong internal controls for accountability
Having proper accountability structures means that all members of the company, from the most junior to the most senior, are held responsible for their actions. Employees are less likely to commit unethical/illegal acts like forging expenses, having personal interests in transactions, etc.
- Conduct regular accounting audits to prevent fraudulent transactions.
- Require approvals for high-value transactions.
- Separate approval powers. Require at least two directors to approve the disbursement of company funds.
- Standardise financial documents to make audits easier.
2. Assign clear roles and responsibilities to directors and officers
A distinct understanding of roles allows senior management to focus on maximising the performance of their business functions, and avoids unproductive job overlaps between different business managers.
- Create job mandates in writing for the board chairman, each board director, the CEO, and all company officers. Each person’s role and responsibilities should be clearly understood.
- Create separate board-level committees to perform key oversight functions. Committees are commonly grouped as such:
- Corporate governance
- Special committees, for high-value or complex transactions
- Always remember “noses in, fingers out”: the board of directors should maintain oversight of the company, ensuring that senior executives are serving the best interest of shareholders. However, the board should respect that day-to-day management is best left to company officers, who are ultimately answerable to the board.
3. Set measurable performance targets, and make transparent compensation decisions
You don’t know what you don’t measure, and you can’t improve what you don’t know. Work teams – both big and small – benefit greatly from quantitative and qualitative measures to drive consistent performance improvement. Constant measurements also make it easier for business owners to allocate financial rewards where they’re most deserved.
- Identify measurable KPIs for management. Ensure that KPIs are aligned to the results you seek, and will drive performance. Provide regular and honest feedback on performance to ensure best results.
- Make fair and justifiable compensation decisions based on these measured performance targets. This allows executives to clearly understand what drives their incentives, and avoids contentious debates over the fairness of individual remuneration.
- Establish a board-level Compensation Committee to engage in annual reviews of compensation.
4. Establish a thorough compliance process to mitigate unlawful or unethical behaviour
No, this isn’t about setting up thick layers of red-tape that kills new ideas. Having established compliance processes helps small business owners ensure their employees are conducting themselves in an upright fashion, minimising the liability of the company and of the directors.
- Establish an official code of conduct that lays out specific actions to prevent conflicts of interests.
- Establish a conflict of interest policy: company members must know when, and to whom, to declare personal interests in transactions, hiring, or any other company activity.
- Implement a non-compliance process: compliance reports should be regularly generated, and the types of responses against non-compliance should be agreed upon.
- If the non-compliance is serious enough, authorities and shareholders need to be informed.
- Appoint a board-level compliance committee to oversee compliance with this code of conduct.
5. Regularly identify business risks and address them
Small companies, with their limited resources, are especially vulnerable to business risks. Technological disruption could make your goods or services obsolete. A big lawsuit could wipe out your finances. A cyber attack could destroy years’ worth of laboriously-accumulated customer data. Risk management is essential here to ensure your business continues to prosper for decades.
- Directors and officers should assess the multi-varied risks the company faces: financial, technological, strategic, reputational, and compliance risks.
- Develop a fundamental understanding of short-term and long-term risks the business faces. These assessments should be sufficiently deep to push management to question the sufficiency of current risk management systems, and to make regular improvements to them.
- Ensure sure your business is protected by insurance policies that will cover you from a wide variety of risks. You should have coverage against property damage, employee injuries, and various legal liabilities, at the minimum. Engage an experienced insurance broker to provide advice and handle claims.
Engage an experienced risk management team to protect your business
Small companies, with their limited resources, are especially vulnerable to business risks. Technological disruption could make your goods or services obsolete; a big lawsuit could wipe out your finances; a cyber attack could destroy years’ worth of laboriously-accumulated customer data. Risk management is essential here to ensure your business continues to prosper for decades.
A central part of any business’ risk management strategy should be to have a comprehensive suite of insurance coverage to guard the business against common risks.
- Property damage
- Inventory/equipment damage
- Business lawsuits
- Personal liability as a director/officer
- Customers defaulting on payments owed to you
- Hackers attacking your website and database
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