HR & Management

Why corporate governance matters

5 min read

25 July 2012

Throw away the old notion that governance stifles creativity. Corporate culture lies at the heart of your business - no matter what size.

Recent events at two of the biggest names in banking and the G4S Olympic Games fiasco have brought the roles of CEO’s, chairmen and boards into sharp focus. 

Failure to ensure that a positive corporate culture lies at the heart of your business can cause significant damage to more than just your reputation. 

I’m sure we’re all aware that having proper corporate governance in place is vital for large companies and failure to do so can cost millions. Then why do so many businesses still don’t bother? 

In large companies there is a separation between ownership of the company and control on a day-to-day basis. The need for proper corporate governance is clear, isn’t it? A framework is necessary to achieve transparency and fairness and to hold management accountable to the company’s shareholders. 

For many SMEs, however, there is no distinction between management and ownership and on that basis many directors would argue that corporate governance is an expensive and unnecessary luxury in these difficult times. Why introduce systems which impose limits on how they conduct business? They could impact profitability, creativity and speed of response.

The answer is quite simple: value creation. For any growing mid-sized business, putting in place an appropriate corporate governance regime from the outset will have significant benefits. 

Funding 

A proper governance system will improve the company’s ability to obtain external funding, be it from banks, angel investors or VCs. Investors are prepared to pay a premium for shares for companies that are properly managed. Banks are more likely to fund businesses with good systems in place. Form their view, proper governance practices provide the internal discipline within an organisation to regulate the relationship between all its stakeholders.

Conflict management

Corporate governance in an SME situation requires a set of rules and guidelines that allow all stakeholders to understand how the organisation will be managed. A clear understanding by all staff of the operating processes and who is responsible for what should result in a reduction in internal conflict, allowing more attention to be paid to achieving the company’s growth strategy and ongoing profitability. 

Forward planning

One of the biggest challenges for SMEs is coping with forward planning and strategic direction. Many young companies fail for this reason. A properly constituted board of directors is vital. 

The presence of external board members can be of great assistance, bringing balance to the views of the executives and introducing additional skills, resulting in better strategic management decisions. 

Innovation 

Some would argue that corporate governance stifles creativity – but is there really a reason why this should be the case? With the help of all employees, the board can add value to the business by encouraging and supporting the pursuit of new opportunities for the company within a framework by way of R&D, cost reductions, potential JVs or collaboration. None of these can be achieved by the board alone.

Reputation

Reputation in the market is key. G4S is just one of the most recent examples of where a lack of proper governance has damaged the brand. Whether your company is large or small, reputation matters and in this area corporate governance is just as important for SMEs as for companies in the FTSE 100. 

Compliance with the full range of corporate governance regulations applicable to larger companies is not appropriate for an SME, but there is no doubt that taking the time to think about what systems are needed and putting these in place increases the long term value of the company and its potential for properly funded growth. It reduces risk, saves money and strengthens reputation; three key benefits to be ignored at your peril.

Catherine Feechan is a partner in the corporate team of law firm Brodies LLP.