Education

SME Governance and Risk Management

"Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

OECD

What is good corporate governance and how can it help small enterprises?

Often management teams of small business are so focussed upon tasks at hand, they have not set up surrounding governance structures.

Good corporate governance for small businesses can include appointing directors, or external advisors, to provide oversight to ensure the interests of shareholders and other stakeholders are balanced with daily actions of the management team.

Directors or advisors can increase the management team's credibility, improve probability of success and minimise risk. The external 'buy-in’ to the organisation's aspirations can signal that the founding team is increasing their capacity to execute to stakeholders or investors.

Establishing and documenting internal business processes and communications is not only attractive to investors, but also provides practical benefits for small enterprises. Investing time and resources to implement governance practice can address many key issues often faced, examples may include;

  • Clear policies and structures can reduce reliance on key individuals.
  • Family-run businesses can increase the chance of survival through succession planning.
  • Clarity of roles and expectations can reduce conflict between stakeholders.
  • Experienced directors or advisors can provide business connections for increased sustainability.
  • Governance practices can help founders or management control the business without direct oversight of all operational decisions.

The complexity of governance structure should be reflective of the maturity of the business, for establishing or small enterprises where leadership wears ‘multiple hats’, this may be as simple as an external advisor outside the founding team to ask questions or offer external advice. However, regardless of the size of the enterprise, the underlying principles to lead the establishment of structures and guide decision making should be constant.

  • Transparency: Internal and external clarity of operations and performance.
  • Accountability: Clarity of decision making, with processes ensuring the right people have the right authority.
  • Stewardship: Enterprise wide recognition that the organisation is managed for the benefit stakeholders, internal and external.
  • Integrity: Commitment to ethical behaviour and compliance with the law.

Governance and decision making.

A lack of clarity of who makes decisions and what they are accountable for can cause confusion, frustration and hinder an organisations productivity.

Corporate Governance is the framework of rules and guides through which an organisation makes business decisions. For small enterprise, this may be understanding how decisions should be made following processes, creating accountability and transparency. This can give confidence to stakeholders, investors and decision makers.

As a simple guide, decision makers can ask themselves; What would an average member of the community, knowing all the facts, believe to be the appropriate exercise of stewardship?

Small businesses can establish frameworks to guide decision makers, this should include;

  • Clear lines of authority to inform individuals on decisions they can and cannot make without guidance
  • Concise and easy to understand policies to legitimise decisions, reduce risk and allocate staff appropriate responsibilities.

Compliance and risk management for local enterprises.

Compliance is about ensuring the business, management and staff have the knowledge and the capability to abide by laws and regulations applicable to the business.

In business, we often refer to a compliance program that is designed to prevent and detect breaches of any laws, regulations, standards or codes with which business must comply. For many small businesses this could be a checklist that is reviewed on a regular basis to ensure ongoing compliance with for example, worker compensation, tax (GST/PAYG), workplace health and safety, bullying or any industry specific regulations, licenses or permits.

A risk is any event or circumstance that can have a negative effect upon your business. Exposure to some levels of risk may be essential to a business’s success or viability, however overexposure to some may be harmful.

Some of the common types of risks that many enterprises are exposed to include;

  • Environmental – external events beyond business control.
  • Operational – internal and administrative procedures.
  • Strategic – decisions of your business objectives.

Small businesses should establish a risk management plan to identify and reduce the likelihood or severity of negative impacts upon your business. An appropriate risk management plan be beneficial in fuelling investor confidence and lowering your cost of capital, as well as:

  • increased likelihood of achieving business goals.
  • reduced chance of legal action against a business.
  • reduced compliance costs.
  • reduced likelihood of budget blowouts.
  • lowering insurance costs.

"Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

OECD