Where there are no established structures and systems guiding any business operation, it is only a matter of time before that business crumbles. Corporate governance may already be in the everyday vocabulary of directors in established companies and government institutions, but small and medium-scale enterprises also stand to benefit immensely from its tenets.
If you own a startup or growing company, you probably want to know what corporate governance practices are and how they can help ensure the smooth running of your business. Therefore, before we touch on the five must-haves, it will be necessary to explain what the concept entails.
What Is Corporate Governance?
After you incorporate a business, it’s important to have set processes in place to ensure your business is successful. Corporate governance embodies the standard framework of operation of a corporation or business. It consists of the principles that the employees and directors of a company must follow to achieve its aims and objectives. As it goes, these principles and practices bind those who make them, and only through an established due process can they be amended.
With these structures in place, employees will be more motivated, and the company can curb wastefulness and unproductivity. Besides, prospective investors and shareholders will have more confidence in the business because it has a structure that spells out the direction the company plans to follow.
While a small business may not be legally mandated to have corporate governance principles in place, they will benefit immensely from doing so, especially from these five:
Solid Board of Directors
Corporate governance demands that established businesses have competent, qualified, and diverse professionals as board members. These individuals will, of course, share in the company’s vision, but they are often independent with no personal interests that can jeopardise their official roles. In addition, the selection of these board members is usually gender and culturally sensitive. This practice helps to harvest ideas from the different groups of people represented within the company’s location.
While small businesses can have as many directors or workers as big ones, they can adapt this practice by drafting employees with the right skill sets and exposure to handle their affairs. The management team should also not be an inaccurate representation of the society within which the business exists. A good system must encourage them to ask questions and air their views without fear of victimisation.
This practice ensures that the business implements only policies and programs that will move it forward in accordance with its interests. With experts and people of diverse backgrounds reviewing decisions, the risk of pursuing an unprofitable course by the management is greatly reduced. Also, the ideas emanating from the directors will most likely help to capture the pulse of the company’s customers.
Structures For Accountability
If something is not happening right within a business setup, a system should be able to identify who is the one responsible. Accountability means that every employee or official shows themselves as being prudent with the company’s financial and non-financial resources. Big corporations achieve this by performing periodic auditing of all transactions and setting procedures for spending approvals.
Appointing an Auditor to regularly audit all financial transactions is critical for small businesses to nip malpractices in the bud. The company can develop standard documents for recording daily transaction details to make auditing more straightforward. Another accountability structure small businesses can adopt from corporate governance practices is the separation of approval powers. At least two officers should be signatories to the company’s bank account, and both must approve any project before funds can be released for it.
A Clear Job Description
Job overlaps are one way to create confusion at workplaces and slow down productivity. It also makes accountability difficult because auditors will have difficulty identifying who is at fault when things don’t go well. A clear job description is one corporate governance practice that small businesses cannot afford to abandon. Everyone, from the cleaner in the office to the most senior employee, must know where their duty starts and stops and the limits of their powers.
Beyond stating these roles in black and white, business owners must also create a structure to educate newly-employed staff members on these things. This orientation takes care of any ambiguity in the drafted document and allows new recruits to ask whatever questions they may have. For each job category, the company’s CEO can also assign different supervisors to monitor the progress of that unit.
Standardised Performance Evaluation & Reward Mechanism
Directors of big companies usually have a performance target to measure the progress of their business. This practice mandates that directors and board members must achieve certain goals for some companies. Then, after a set time, an approved body evaluates to see who is performing and who is not. Usually, reward or compensation goes with the performance and has nothing to do with sentiment.
Small businesses that want to expand must adopt this corporate governance practice to make their workers result-oriented. Those in charge of rewarding or compensating must be impartial, and the reward also has to be commensurate with the achievement.
A Working Compliance Process
One of the biggest challenges of managing a business is getting the workforce to adhere to the company’s rules and regulations. Big corporations have structures to detect non-compliance of their employees to the ethos and standard practices and also have corresponding punitive measures. Apart from external assessors, some companies have a separate unit that ensures compliance.
Small companies must also fashion out ways to ensure employees uphold ethical standards and adhere to established rules. This will help track unprofessional conduct that can put customers or shareholders off, thus jeopardising the business’s interests.
Critics of corporate governance practices say that it can be bureaucratic and expensive, but its benefits far outweigh its setbacks. Sometimes, the money business owners are trying to save by forgoing such practices can be lost through lax systems and shoddy practices within their own businesses.
While up-and-coming businesses cannot implement corporate governance practices on the scale of established corporations, imbibing and adopting these five practices will help sustain their business and propel them to achieve their goals.
Some consultants are able to design specific models to achieve any of these practices, and business owners who feel they need this assistance should not hesitate to get the required help.