Why SMEs shouldn’t ignore corporate governance

Corporate governance, a system by which businesses are directed and controlled, is often frowned upon by small and medium enterprises (SMEs) owners due to its association with red tape. However if introduced successfully, corporate governance can in fact be a cost effective growth strategy for SMEs.

This is according to Christo Botes, executive director at Business Partners Limited, a specialist risk finance company for formal SMEs, who says that many entrepreneurs have the perception that corporate governance is unnecessary and costly, instead of thinking of the system as a guideline that will add structure to a business and assist the entrepreneur in steering the business in the right direction for growth.

“Entrepreneurs often feel that corporate governance takes up precious time and energy that they would prefer to put into running their business. However, without a structure in place and goals to work towards, this additional time poured into the business isn’t necessarily going to result in long-term growth.”

Botes says that often a business grows beyond the entrepreneur’s control, and often it is during this stage that mistakes creep in and losses accrue on projects, simply because the correct planning, coordination and governance methods were not used. “As a business grows more structure is needed, and eventually it is necessary for the entrepreneur to adapt and implement an organised structure within the business.”

He explains that a corporate governance framework is the set of policies, rules and procedures put in place – agreed upon by the business’ main shareholder, most likely the entrepreneur – that will assist with transparency, accountability, ethical behaviour and ultimately profitability within the business.

“Corporate governance assigns rights and responsibilities among different individuals in the business. Generally there are three layers of individuals involved, namely the investors / shareholders, board of directors and a management team. Shareholders require a return on the investment that was made into the business. The board of directors, which are appointment by the shareholders, ensure that the management team within the business are adhering to their mandates and responsibilities, and then report back to the shareholders on the return on investment.”

Botes adds that corporate governance ensures a formal business structure, and that the sole entrepreneur is no longer occupying all three roles of the business. “Often the entrepreneur plays the role of sole shareholder, director and management of the company and differentiating between these roles can become blurry. This results in the entrepreneur running from day-to-day and job-to-job, and letting other aspects of the business be overlooked, such as budgets, returns and employee structures.”

In order to create discipline within the company, an organised structure needs to be introduced. Botes advises that businesses introduce corporate governance sooner, rather than later, and says that even smaller businesses can benefit from implementing structure into the business.

He advises to firstly introduce a mentor into the business, an individual that will guide the entrepreneur and ask the right questions, such as what business’ goals are for the next one to five years, whether the budgets have been drawn up and whether the business should be sharing more or less risk. “A mentor will also ensure the business’ focus doesn’t fall on operation issues, but rather strategic issues. He or she will also be able to provide a helicopter view of the business, while an entrepreneur may just be looking internally.

“This process will slowly make the entrepreneur understand that there is more to think about than just delivering the goods out of the warehouse and into the client’s hands.”

A common perception among SMEs is that corporate governance is costly and many smaller businesses assume they can’t afford it. Botes says that these entrepreneurs should start small management teams initially, consisting of themselves, a mentor and perhaps a spouse or factory manager or team leader. “This team will be responsible for the different areas in the business. Regular team management meetings should then be held where progress is reported. The mentor will be responsible for overseeing all such meetings to ensure sufficient progress is being made.”

He adds that a management team plays a big role in businesses, especially growing companies. “A management structure is crucial to not only manage a growing team of employees, but also to ensure each individual is clear on their job objectives and role within the company. By setting these roles, all employees within the business are challenged to work towards, and meet, a common goal, rather than the entrepreneur being solely accountable for productivity.”

As the business continues to grow, and generate more money, a board of directors can slowly be introduced, says Botes. “Corporate governance is a natural progression and while the full structure may not be suited to all businesses, a certain degree of structure needs to be implemented in order to ensure business growth. Corporate governance enables entrepreneurs to grow their business and turnover without taking on more risks, and rather grow organically through efficient planning and management of the company’s workforce,” concludes Botes.