Corporate governance encompasses the systems, processes, and principles by which companies are directed and controlled. Corporate governance is often associated with large corporations, but its principles are equally vital for small and medium-sized enterprises (SMEs).
At Equil Advisory, we encourage our SME clients to integrate these governance principles effectively into their operations. Effective governance can drive growth, improve transparency, and build trust among stakeholders. This article explores key aspects of corporate governance tailored for SMEs, highlighting how they can benefit from adopting robust governance practices.
The 8 Principles of Corporate Governance and why you need them
The ASX Corporate Governance Council outlines eight fundamental principles of corporate governance. SMEs should adopt these principles to strengthen their governance framework.
1. Lay Solid Foundations for Management and Oversight
Clearly defining roles and responsibilities within an SME’s board and management team is essential. When done right, it can lead to streamlined operations and better alignment with strategic goals. For instance, one SME that clearly outlined the duties of its leadership team avoided conflicts and improved decision-making. As a result, the company was able to focus on growth initiatives without internal distractions.
However, the absence of defined roles can lead to serious issues. Another SME faced chaos when responsibilities were unclear, leading to duplicated efforts, missed opportunities, and frustrated staff. This lack of clarity not only slowed the business down but also led to poor performance and a decline in morale. By establishing clear boundaries and regularly reviewing performance, SMEs can maintain effectiveness and accountability, preventing these pitfalls and positioning themselves for success.
2. Structure the Board to be Effective and Add Value
An effective board is crucial for any business, regardless of size. When SMEs assemble a board with a diverse mix of skills, knowledge, and commitment, the results can be transformative. For example, one SME that brought in board members with expertise in finance, marketing, and technology saw rapid growth and innovation. The diverse perspectives helped the company navigate challenges and seize new opportunities, leading to a significant increase in market share.
However, getting it wrong can have dire consequences. An SME with a poorly structured board, lacking diversity in skills and perspectives, found itself unable to adapt to market changes. This misalignment led to poor decision-making, stunted growth, and eventually, financial losses. By assembling a board that adds real value, SMEs can benefit from strategic insights, support growth initiatives, and ensure robust oversight, all of which contribute to long-term success.
3. Instil a Culture of Acting Lawfully, Ethically, and Responsibly
Building a culture that prioritises lawful, ethical, and responsible behaviour is vital for any SME. When done right, it can create a strong foundation for trust and long-term success. For example, one SME that invested in regular ethics training and established clear policies saw a significant boost in employee morale and client loyalty. This commitment to ethical behaviour also attracted new partnerships and created a positive reputation in the industry.
Conversely, neglecting this aspect can lead to serious repercussions. An SME that overlooked ethical standards found itself embroiled in a legal scandal due to shady business practices. This not only damaged its reputation but also led to financial penalties and a loss of key clients. By fostering a culture of ethics and responsibility, SMEs can protect their reputation, build stronger relationships with stakeholders, and create a sustainable path to success.
4. Safeguard the Integrity of Corporate Reports
Accurate and reliable corporate reporting is essential for maintaining stakeholder trust. When SMEs implement rigorous processes for financial and non-financial reporting, the benefits are clear. For example, one SME that prioritised transparent reporting and regular audits gained significant investor confidence. The accuracy of their reports led to a successful round of funding and strengthened relationships with key partners. Additionally, when it came time to sell the business, the well-maintained, accurate reports made the due diligence process much smoother and faster, attracting more buyers and achieving a higher sale price.
However, failing to safeguard report integrity can be disastrous. Another SME that neglected internal controls and skipped audits found itself in a financial crisis when discrepancies were discovered in their reports. This eroded trust with investors and customers, leading to a sharp decline in business. By ensuring reports are accurate and timely, SMEs not only build confidence among stakeholders but also protect themselves from potential financial and reputational damage.
5. Make Timely and Balanced Disclosure
Transparency is crucial in corporate governance. When SMEs provide timely and balanced disclosures, they build trust and strengthen their reputation. For example, an SME that consistently communicated financial performance and strategic changes with its stakeholders saw increased investor confidence and customer loyalty. By openly sharing both successes and challenges, the business managed expectations and maintained strong relationships.
On the other hand, failure to disclose relevant information can backfire. An SME that delayed sharing critical operational changes faced backlash from investors and customers once the news broke. This loss of trust led to a drop in business value and strained relationships with key partners. By committing to timely and balanced disclosure, SMEs can foster transparency, manage stakeholder expectations, and support their strategic direction with confidence.
6. Respect the Rights of Security Holders
Respecting the rights of stakeholders is crucial for any SME. When businesses ensure stakeholders have access to relevant information and a voice in decision-making, the relationship strengthens, leading to long-term engagement. For example, an SME that actively communicated with its stakeholders and encouraged their input saw increased support and loyalty, resulting in smoother decision-making and better overall performance.
Conversely, neglecting stakeholder rights can damage relationships and trust. An SME that failed to address concerns and withheld information faced backlash, leading to strained relationships and a loss of key investors. By prioritising open communication and addressing stakeholder needs, SMEs can build a strong foundation of trust and support, which is essential for sustained success.
7. Recognise and Manage Risk
Establishing a robust risk management framework is crucial for SMEs. When done effectively, it can protect the business from unforeseen challenges and support growth. For example, an SME that proactively identified and addressed potential risks—such as market fluctuations and operational vulnerabilities—was better equipped to navigate disruptions and seize new opportunities. Their proactive approach enabled them to remain resilient and competitive, even during economic downturns.
In contrast, an SME that ignored risk management faced severe consequences. Without a clear framework, the business struggled when unexpected risks materialised, leading to significant financial losses and operational setbacks. This lack of preparedness hindered their ability to grow and adapt. By implementing and regularly updating a comprehensive risk management strategy, SMEs can safeguard their operations and enhance their ability to handle challenges and capitalise on opportunities.
8. Remunerate Fairly and Responsibly
Fair and responsible remuneration practices are essential for attracting and retaining top talent. When SMEs align their remuneration strategies with company values and long-term goals, they can create a motivated and engaged workforce. For instance, an SME that offered competitive salaries and performance-based bonuses saw higher employee satisfaction and lower turnover. This alignment with company values not only helped attract skilled individuals but also drove better performance and business success.
In contrast, an SME with poorly structured remuneration practices experienced high turnover and low morale. By failing to offer competitive compensation and neglecting performance incentives, the company struggled to retain key staff and maintain productivity. This misalignment resulted in disrupted operations, stunted growth and increased recruitment costs. Ensuring fair and responsible remuneration helps SMEs motivate employees, support long-term goals, and contribute to overall business success.
Implementing Corporate Governance in SMEs
Integrating corporate governance in SMEs can significantly drive growth, enhance transparency, and strengthen stakeholder trust. Begin by establishing clear governance structures, defining roles, and fostering a culture of ethics and transparency. Implement processes for accurate reporting, risk management, and ensure that remuneration practices align with company goals.
By adopting effective governance practices, SMEs can improve operational efficiency, navigate challenges, and build a strong foundation for long-term success and sustainable growth in a competitive environment.
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For more detailed guidance, refer to the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, 4th Edition February 2019.
