Partner Article

Value in governance

For business owners and entrepreneurs energised by the question of how to make sure their businesses keep growing and even accelerate, the need for good governance might feel like a boring distraction.

But if you think governance is all about painfully long meetings in stuffy boardrooms, think again; what we’re really talking about here is a means to make better decisions while managing risk more effectively. In other words, good governance helps businesses grow more quickly and enables business owners to sleep more easily at night. When you then want to sell your business, it should come as no surprise that if it’s well-run, a buyer will pay more.

To make these connections come alive, it helps to think about the impact that different types of failure - preventable with good governance - would have on your business. What would the immediate cost of a failure be in financial terms? How would an undetected problem impact on the value of your business should you ever choose to sell? Consider four different types of governance in turn:

• Commercial governance. It’s remarkable how often businesses suffer a setback or disappointment and then realise they don’t know how they got into the position in the first place. Young businesses need to establish rigour around commercial decision making early on. Agree what decisions are made at board or management level and what can be delegated. Hold structured meetings, chaired well, to make key decisions and document the discussions. Monitor the quality of the paperwork around decision-making so that people can be held accountable.

• Financial governance. The best thing any growing company can do to ensure it is credible with investors, bankers and other stakeholders is to set a budget and to stick to it. That requires structures for measuring and reporting financial performance throughout the business. You also need processes in place that everyone understands. How big a discount can the sales team offer without checking with management? What costs can line managers incur without authorisation? Businesses with clear rules and responsibilities across the whole profit and loss account, spanning sales, margins and costs, will be much more likely to avoid financial problems.

• Regulatory governance. All businesses must comply with certain rules set out in national legislation or industry-specific regulation - everything from health and safety standards to anti-money laundering laws. If a buyer’s due diligence team were to look at your business, would it get a clean bill of health in every area? The answer is often no, despite the considerable cost of fines, penalties and reputational damage for businesses that fall foul of the law. But the earlier a business gets on top of its responsibilities, the easier it is to implement processes and practices that ensure compliance - and to embed these behaviours in the company going forward.

• Legal governance. Taking good-quality legal advice right from the start will pay dividends. Too few businesses take sound advice on how to draft contracts with suppliers, customers and employees, leaving themselves exposed to considerable risk if a relationship goes wrong. Skimping on legal fees is very likely to prove a false economy.

How, then, to achieve better practice in each of these areas? For many entrepreneurs, building structures and processes that establish good governance is much less of a passion than planning for future growth. Fair enough, but if that’s the case, hire someone whose responsibility it will be to focus on these areas. A chief operating officer can take on the role of ensuring the business set-up is fit for purpose while the chief executive focuses on its commercial ambitions.

Advisers and non-executives can provide valuable support too, assuming you hire the right people. Look for individuals who insist on the need for good governance while contributing to the business’s growth plans too.

The bottom line is that good governance is not simply a “nice-to-have”. With the right approach to governance, driven by someone who is practical and principled about what is required, these processes and systems will provide the solid foundations from which the business can build for the future. Good governance will increase its value and likelihood of success, and you will find that you will have made better decisions more quickly.

This was posted in Bdaily's Members' News section by Steve Cordiner .