Corporate governance is a hot topic, and it is usually failures in governance that hit the headlines. Recent stories to have made the press concern the ‘extremely disturbing’ working conditions at Sports Direct, cheating emissions tests at VW and the extraordinary admission, from P&O Ferries’ Chief Executive Peter Hebblethwaite, that he wilfully broke employment law to sack almost 800 crew with no consultation. These examples, and many besides, demonstrate that, regardless of sector, deficiencies in business controls cause major problems – and the buck stops with the board.
Corporate governance requires board level action whatever the company size. When large companies do not have robust systems in place, do not follow their systems, or have not established an effective and diverse board of directors, the number of people affected by these failures make it a matter of public interest. However, the same principles of good governance are relevant for SMEs.
Though they are not subject to the prescriptive requirements faced by large companies, SMEs can be just as vulnerable to exposure to risk and just as likely to benefit from good governance, processes, and risk management.
What Do SMEs Stand to Lose and Gain?
In recent years, we have seen a marked increase in expectations of smaller businesses from a range of stakeholders. This is coming not only from the more the traditional sources like investors and potential buyers, but also from customers, suppliers, insurers, employees and societally. Increasingly, the standards for larger businesses are becoming norms that SMEs are expected to regard as good, or even standard, practice.
It is increasingly common to see large sections of tenders, for example, asking businesses to demonstrate good governance and compliance. Businesses that cannot respond with clarity and credibility will fall at the first hurdle. Procurement exercises by larger corporates involve a higher level of rigour – not just asking detailed questions about compliance and governance frameworks but seeking documented evidence in support of answers provided. Suppliers will be discounted from these processes, even if they have a preferable product and price, if they cannot give comfort on the controls that they have in place. Suppliers that are successfully appointed, regularly face verification exercises (e.g., audits) and feel the financial pain of any deficiencies that are found.
As if missing out on opportunities were not enough, poor governance is often the root cause of exposure to existential threats to a company and its board. We see thriving businesses devastated not just through inadequate financial controls, but by failure to look after data properly, overlooking health and safety risks or falling foul of modern slavery rules. Quite simply, it is worth investing in quality controls rather than seeing governance and compliance as a mere tick box exercise.
Good governance will increase your standing with all your stakeholders, and potential partners or customers. In a very difficult insurance market, showing that you understand your business and its risks is likely to favourably affect the premiums you pay. A well-managed business is also more able to bring in outside expertise, retain its best employees, attract funding, and ensure long-term sustainability. It really pays to get this right.
What Governance is Suitable for SMEs?
What processes and measures you bring in will depend on the nature of your operations and, as a smaller business, it is important to rightsize your governance. Not everything demanded of listed companies will be appropriate, but some of the practices and principles will help you prioritise what is important and relevant for you.
You already know how your business works and the regulatory environment in which it sits. You’ll likely already have a strategy, a business plan and good governance in some areas already. The skill is in leveraging and augmenting these, so you have clarity and understanding of risks and who is doing what to manage them. You’re always going to accept some risk – what’s important is to be deliberate and aligned about the choices you make.
We would also advise that you look closely at – and really challenge yourself about – the structure of your business and its board. If there are clear reporting lines, and employees and directors fully understand their roles and responsibilities, there will be more transparency and accountability, making it more likely that potential issues will be flagged earlier. Try to be searingly honest – if you or those around you can’t point quickly to documents that “prove” what they believe to be the position, the chances are there are meaningful gaps in clarity and understanding.
Various codes (e.g., the UK Corporate Governance Code), though designed for listed businesses, articulate principles that are relevant and useful for smaller companies and provide good foundations for best practice in this area. You can also have a look at our new guide, as this lays out some of the practical measures you need to consider and steps you ought to take. And for an engaging and informative discussion on the topic, listen to Episode 6 of TLD Talks with CEO Ed Simpson and Corporate Governance expert, David Bolt.
If you are unsure what is appropriate for your business, please do get in touch on 020 3056 8538 or info@thelegaldirector.co.uk. As discussed, the ramifications of non-compliance can be significant and we, at TLD, are very experienced at establishing good governance for SMEs and can help you build processes that support growth, manage risk and ensure compliance.
