Governance for Small & Medium Sized Businesses
There is a great deal written about governance in the global business world with many commentators suggesting that the adoption of good governance by organisations both large and small will create a successful business.
The current crisis is making business leaders think outside the box and in many businesses, innovation is happening at a speed that was unthinkable only a few weeks ago. With normality unlikely to return for many months if at all, businesses that want to survive will need to become increasingly innovative and as a result, accept a greater degree of risk.
To minimise the risks associated with innovation, leadership teams should consider putting in place at some speed systems and processes that allow the progress of such innovations to be monitored.
Fact: All Companies already use a governance system
For those very few companies that are listed on one of the UK’s stock exchanges, there are a raft of regulations that require the directors of those companies to establish formal governance systems, although in many cases this has now largely become a compliance exercise.
The point however is that every company already operates a governance system to some degree or another.
The pertinent question is therefore whether that governance system is fit for purpose to operate the organisation in the new environment we find ourselves in?
Good governance will be one of the most important skills the management team must master if the business is to remain innovative and therefore sustainable.
Why? The simple truth is that governance is the process used to deliver an organisation’s activities at a profit.
To be clear, it is not enough for the leadership team to have a thorough understanding of the product or service, because as the business grows the number of people required to operate it also grows meaning that the leadership team become increasingly remote from the day to day activities.
As a result, organisations are a collection of individuals drawn from a range of backgrounds and motivations that interact not only with each other but also with third parties. These individuals need to be moulded into an effective team which requires leadership and a system. As employees continually leave or join organisations, messaging about the system should also be constant, clear and relevant.
Let’s look at five specific scenarios where there are indications of organisations that are under some stress:
You are tied up dealing with everyday problems so that there is no time to think about the future
The delivery of your products or services is not consistent leading to an irritating number of complaints from customers or clients
Employees do not seem able to complete even basic instructions without constant supervision
There are always cash flow issues which require ongoing additional financing, which is proving difficult to obtain
The owner is reaching retirement age and is thinking of an exit strategy, but the valuation falls short of expectations.
In all these cases it is the organisation that is showing signs of stress rather than failures in individual performances, because there will almost certainly be more than one reason behind these scenarios and the issue is therefore how to address this problem without investing further significant cash resources.
Well a significant part of the answer lies in establishing a governance framework.
A Governance framework
Set out below is a simple five-step governance framework that business leaders might like to consider:
1. The Plan
The first action to take is to establish a plan. Even if you have one. remember the plan is not for you and needs to be communicated and understood by all. The plan is created to provide a map so that everyone else knows what is expected of them whether they are customers, employees, suppliers, or financiers. The plan does not need to be complicated or follow a format but make the targets specific and measurable.
For example: I want to grow my revenues to £10 million in five years and be operating in three international markets. Once you have decided the goal, the skills and resources needed to achieve that become much clearer
2. Clarify the roles of the senior members of management
Second, establish the roles of each member of the management team and then consider other key employees as far down the organisation hierarchy as possible. The reality is that as the organisation has evolved over time individuals agree to take on new tasks to meet specific needs. While these tasks were temporary, over time they have become the expected norm, but without the necessary scrutiny as to whether they are still required. This needs to be addressed because a huge amount of time can be spent fulfilling needless tasks.
3. Management Body
Now that you have identified the roles, you need to create a small team of senior executives that have the range of skills necessary to effectively be able to monitor the delivery of the product or service which will include not only operations but also the supporting functions in areas such as finance, sales & marketing, HR etc. all of which will be needed to deliver success. This team should make the time to meet once a month to review progress against the plan and agree actions to improve performance. It must not become a talking shop to air unsolved grievances.
Depending on the size or complexity of the organisation, it might be helpful to have an outside mentor to help the team in its professional development in managing organisations.
There are in fact two sets of accounts. First there are the financial accounts that provide a picture of where the organisation has been, and these are the ones that are audited and filed for tax purposes. Second there are the management accounts that forecast where the organisation is going based on future activities and market research. Most organisations need both skills, but many only have the skills to produce the financial accounts often leading to uncertainties over the actual selling price and associated costs leading to poor cash flows.
5. Internal Controls
Many entrepreneurs do not like to focus on organisational skills such as delegation, because they fear they will lose control over it or worse, create a bureaucracy thereby losing the entrepreneurial spirit, which was the reason many set up their business in the first place.
However, by establishing effective internal controls that report progress on the measurable targets set out in the plan and establish processes that mitigate the effects of potentially harmful events, the leader not only retains control over their business without having to be there all the time, but more importantly allowing employees to get on with their jobs.
Good Governance is not about compliance with regulations, it is about understanding how the various elements of your organisation deliver the objectives by effectively working together and then establishing monitoring systems to make sure that the targets set out in the plan are actually being delivered.
The beneficial side-effect of establishing such a governance framework is the freeing up of valuable time for the leadership team to concentrate on thinking about tomorrow.
If you would like to discuss any of the aspects covered in this article, please call us on 020 7965 7216 or email us.