Corporate Governance – why this stuff matters
05 Aug, 2016
According to the OECD, in its publication “Principles of Corporate Governance”:
“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.”
Whilst that might sound laudable, the mention of corporate governance for most organisations of any size causes much rolling of eyeballs and sharp intake of breath before arguing that, whilst applicable to larger organisations, the political correctness of corporate governance box tickers is a waste of time in the case of the company in question.
We at Finance For Guernsey would take a very different view, that corporate governance is of vital importance to all organisations, from the very smallest to the very largest. It needs to be applied proportionately but the core objectives are the same for all organisations. In my view this should flow from the appointment of a Board of Directors from which the panoply of other aspects of corporate governance flow. The Board should be diverse and of independent mind, able to consider what’s best for the company as a whole, not any particular stakeholder or groups of stakeholders. I have written before on the critical issue of Board diversity, a bit of time spent on considering Board structure correctly can reap huge rewards in the longer term.
So, what are the key things that an effective Board can bring to an organisation? I would highlight four key areas that are of value to all organisations, but particularly smaller and earlier stage ones:
- Independent oversight;
- Contacts; and
- Dealing with problems.
Independent oversight is not checking up on everything that the management team is doing, but rather providing constructive challenge to the strategy that, whilst no management team relishes, is an important way to validate its plans. If you can’t explain the strategy and have approval for it from a supportive Board of Directors, it is unlikely the strategy actually makes sense. Ensuring this oversight is from a Board of diverse backgrounds will avoid groupthink and ensure standards are not allowed to slip in pursuit of higher growth. I have seen effective independent Boards adding significant value to the strategy of businesses in which I have been involved, through providing management with an alternative viewpoint, that sometimes throws up potential new directions, sometimes avoids expensive mistakes and sometimes encourages the company to do even more of what it is already doing. What a Board must never do is delve into the minutiae of day to day management decisions; I have sat on a Board whose effectiveness has been stymied by the determination of certain Board members to literally discuss issues such as whether or not to buy a new photocopier, rather than focus on the strategy of the company.
Experience is partly brought to bear in the independent oversight, but beyond that is something that avoids common mistakes and pitfalls, not only in strategy but also in structuring an organisation itself. Growing beyond the founders of a business that have boot-strapped it, through to being a grown up organisation means facing challenges that are common across every business. Being able to draw on experience of the process can allow the management teams to focus on running their businesses.Additionally, independent Directors may well be able to introduce people to work either full time or part time within the early stage business to help with the transition. Input into the tricky process of fund raising can also short-cut the process and significantly increase the chances of success. In my experience, most pitch decks produced by early stage companies are naïve in their optimism and fail to appreciate how many of similar sounding pitches investors get every day.
Contacts is something that will cover a far wider range of activities than most early stage companies realise. It’s not just a case of “introduce me to a couple of VCs”, as is often assumed, because a decent business should be able to sell itself to capital providers (particularly after input into the pitch, referred to above). To my mind, contacts should cover a far wider range of professional advisers, but also businesses that have been through the same issues in the past and can provide some ad hoc advice, based on their own experience. Often I have telephoned a CEO of a larger company on behalf of a smaller company for a little guidance as to how they dealt with a particular challenge. I have always found that CEOs are very happy to share their experiences with someone they know, but for the start-up itself to knock on the front door and ask they would get short shrift.
Last but by no means least is dealing with problems and crises. Every business has these, and few early stage businesses will have the resources and perspective to deal with them internally. Having a structure that provides outside input will optimise the chances that the issues are identified and dealt with in an optimal manner. It draws on all of the points above, providing the oversight of the crisis management, drawing on experience of previous crises faced, and introducing specialist contacts, in areas such as PR and legal, that would not be known to the early stage company but can be called upon by an experienced independent Director.
So if good corporate governance makes sense, should every business have a Board of Directors that is majority independent, committees to oversee Risk, Audit and Remuneration etc etc? Clearly this would be over the top for a start-up, and implementation needs to be at an appropriate level for the size of business, but every business however big or small should put corporate governance at the heart of its strategy to optimise its success.
For those wanting more on corporate governance, the OECD has also published a corporate governance factbook, covering more than 40 jurisdictions, including OECD, G20 and Financial Stability Board members, and for those wanting, chapter and verse on Board governance I recommend The Handbook of Board Governance by Richard Leblanc.Return to Blog Posts »