Corporate Governance is a term that is normally ascribed to large corporate bodies and listed companies. However, every business, regardless of its size ought to consider using corporate governance mechanisms for it to have longevity, attract financiers and key partners.
Research has shown that companies that are properly governed have better financial results, grow faster and are more sustainable, while companies that have poor governance practices tend to have poor performance, more fraud and are more likely to experience failure.
Corporate governance is primarily about accountability, ensuring that all decisions that are made in the organization are for the benefit of the company, its members and stakeholders. This means a Director of a company is expected to act within the company’s constitution, exercise independent judgement, manage the company with skill, declare all conflicts of interest and act in the best interest of the company among others.
These standards have been enshrined in the Companies Act, 2015 and failure to meet them may lead to civil liability and fines.
In the context of small businesses, good governance may not be a question of protecting the interests of absentee shareholders but it’s the process of coming up with policies and processes that increase accountability and add value to the business.
The Principles of Good Corporate Governance.
1 Transparency.
2 Integrity.
3 Accountability.
4 Compliance.
Practical Steps for Corporate Governance for all types of businesses
- Have a Board of Advisors and Board of Directors
A Board of Advisors is a group of professionals with specific skills that advise a business owner on how to run their business. The skills may vary from marketing, finance, management, and are usually skills that the business owner may not possess but are critical in the running of the business. This type of Board is largely informal and can therefore be structured in many ways.
A board of directors on the other hand is a panel of people who are elected by the shareholders to represent them. They are responsible for overseeing the management and direction of a company or organization and have a fiduciary duty to the shareholders, this means that they can be held liable for the decisions they make or fail to make if they acted inappropriately.
Key differences between Board of Advisors and Board of Directors
- Advisors do not have any voting rights, the business owner has the discretion to decide which advise they shall implement, while Directors have voting rights in the business and are involved in its decision making and strategic management of the business.
- Advisors are normally chosen due to the specific field in which they are experts of, while Directors may not be. Considering the Kenyan context, in most small businesses, Directors and Shareholders are usually the same people and therefore may still need advisors to help them understand their options better.
- The Board of Advisors is informal while Board of Directors are appointed by Shareholders and therefore are liable to the organization, stakeholders, and its shareholders. Their duties are prescribed by law and carry penalties and civil liability.
1.Create policies and procedures
Policies and Processes are a key step in corporate governance as they ensure that the management and employees of an organization can be held accountable. They provide a road map to the day to day operation of a business and ensure that the business is compliant with laws and regulation, and guide in decision making. Some key policies are a Human Resource Policy, Financial Policies, Operations Manuals etc.
2. Transparency and Conflict of Interest
Lack of transparency and conflict of interest policies can easily lead to a situation where your employees and managers are making decisions that benefit them in other ways, but may not necessarily be good for the business. Having a mechanism that deals with transparency and conflict of interest helps business owners to ensure that all decisions made in the business are for its benefit. Transparency will also lead to higher levels of integrity in your business.
3. Compliance as a habit
Though it is last on the list, compliance is a major component of corporate governance. Lack of compliance can pose a huge risk to your business that may even threaten its existence. Massive fines, threats of closure and loss of credibility are some of the few risks that a business may face where they are not compliant. Every business ought to know which laws apply to it, ensure that it is properly licensed, pay all taxes dues and make all declarations as required under law.
Good corporate governance can also help a business move from one generation to another, and allows for better succession planning. Every business owner wants their business to outlive them, and corporate governance is a key aspect in succession planning.
Corporate governance is very relevant to even the smallest business and is one of the key measures of success for a business. Financiers, partners, employees and clients are all interested in knowing that the business you are running is financially stable, is compliant, and is well managed. All this happens through the proper corporate governance measures instituted in your business.
For more information on corporate governance and how to go about it for your business please reach out to us.
