Small Businesses: How Can You Benefit From Corporate Governance?

There is a perception that corporate governance applies only to government bodies and the large corporates. This is false as, in essence, corporate governance is the process of acting in the best interests of any business and its stakeholders.

The Risk…

In many small and medium sized businesses (SMEs) there is no separation between the owners and management of the entity – they are what is termed owner managed. It often becomes difficult for owners of owner managed businesses to distinguish their personal interests from those of the business.

Recent research supports the dangers inherent in this. For example in over 90% of cases where SMEs became financially distressed, the businesses were owner managed. The research also found that these entities did not have independent board input and most did not comply with legal requirements.

…..and the Remedy: What you should do about it

Designing and implementing simple policies can set this process in motion. Ideally, these should cover –

Areas where there is potential conflict between the owners and the business such as the amount of their salaries or the amount of withdrawals they can make,
A checklist to ensure all laws are complied with,
Recruitment of independent director(s), and
Aspects of the business where outside help will be needed such as technology.

Once this has begun it can be expanded as business needs dictate.

Finally, the research also showed positive results where independent directors were recruited. These led to enhanced profitability and growth of the business.