For entrepreneurs, this can be a difficult concept to digest. Bates highlighted that while many small and medium enterprise business owners will know the exact returns they get on an investment in rental property, for example, they have no idea what their returns are on their investments in their own business. Why? Because of the emotional attachment entrepreneurs have to their companies. “Our baby, our business, is a different story. And we wonder why we don’t achieve the results we want to achieve.”
Making the business about more than the founder
For a business to be an enterprise, it has to be able to exist without the founder. To become an enterprise, business governance needs to be implemented, said Bates.
“In business there are three hats: the role of shareholder, director and manager. The problem is in our own businesses we think we can wear all of them… You have to have people wearing different hats in your business… You might be the best person to be the manager of your business but what the law of three hats says is that you have to have – sitting in the middle – independent non-executive directors who hold management accountable for their performance and ensure a general investment is delivered to shareholders. And as business owners you have to understand what an engagement of a board actually is,” he explained.
Bates said he often argues this concept with SME owners who think it doesn’t apply to them, mainly because of the emotional attachment they have to their companies.
“We think, as small and medium business owners, that the best thing we have is the fact that we own our business and our emotional engagement. I want to challenge you and suggest that it might not be as much as of a positive strength as you think it is. Yes, it’s a strength, obviously it’s a strength but it is also a weakness… For those of us who are also a manager, we think – as shareholders in our businesses – that by some divine right we are the best person to be the manager and always will be. We think it’s like the game of Survivor on TV and because we are the shareholder we wear an immunity idol in the role of manager in our own company. We don’t think that having someone hold us accountable will improve our performance.”
However, Bates said he can guarantee business owners that the moment they allow independent, non-executive directors into their companies to make and enforce decisions, company performance will improve.
“I’m not talking about coaches, I’m not talking about mentors, I’m not talking about a board of advisors – I’m talking about people who are legally liable directors of the company with the ability to fire you as the CE of your own business. The moment you choose to step into that game, the performance of your organisation changes… it changes because we start to play by the game.”
He added that the law of shareholder wealth creation says that until business owners treat their investment in their own businesses exactly the same as they would an investment in someone else’s company, they have “lost the game”.