Corporate Governance For Small Businesses

Corporate Governance For Small Businesses

May 27, 2022

 

When a new business is scrambling for funding, staffing, and a product-market fit, best practices of corporate governance tend to be far down the priority list. These start up challenges notwithstanding, the role of good leadership in any business is fundamental to its success whether big or small. In the corporate world, leadership can take many forms, and it is often changing and evolving with the needs of consumers, employees and shareholders. In order to ensure that a business is able to develop a solid leadership structure that can also responsively adapt to success or failures, many owners and investors find that a focus on corporate governance is required.

According to Investopedia, Corporate governance is defined as the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.

Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. In startups, where the companies are privately held and the shareholders are substantially the same individuals as management, the role of the directors really is mostly to act as a sounding board, to provide different perspectives, to have a conversation about strategy and deliverables. While for a public company, even a small one, good corporate governance means the board is providing that independent perspective as well as oversight to make sure that the interests of shareholders and the stakeholders more broadly are being appropriately balanced with the day-to-day actions and judgments of the management team.

The key principles of corporate governance are security, transparency and shareholder primacy;

 

  1. Shareholder Primacy: one of the most important principles of corporate governance is the recognition of shareholders first as people who buy the company’s stock/shares to fund its operations and secondly as people who the company is responsible to. The Board’s major objective is to always seek the best interests of the shareholders and recognize the policy of allowing the shareholders elect the directors of the company. The company’s Board of directors is responsible for hiring and overseeing the executives who comprise of the team that manage the day-to-day operations of the company meaning that shareholders have a direct say as to how the company is run.

 

  1. Transparency: Shareholder participation is a major part of the corporate governance of any business and it in this light that shareholders will work towards developing a relationship with the community in which they operate. Members of the community may not necessarily hold an interest in the business but can nonetheless benefit from its goods and services and this in turn promotes its transparency.

This also means that all members of the community- those directly or indirectly affected by the company and the members of the public or press get a clear sense of the company’s goals, tactics and how it operates generally.

Transparency also implies that anyone from outside or inside the company can choose to review and verify the company’s actions and inactions. This will in the long run foster trust and encourage more individuals to patronize the company and possibly become investors as well.

 

  1. Security: As data security becomes a more prominent topic in our society today, companies have to comply with the relevant laws put in place that affect their business sector. It’s important that customers/clients feel confident that their personal information is not being leaked or accessed by unauthorized users. It is equally important that a company’s proprietary processes and trade secrets are secure.

Loss of investor’s trust which equals losing access to capital due to data breach can be very expensive for any business as it weakens public trust. This in turn can affect the overall growth of the business. This is why it is important that everyone in a company, from entry-level staffers to members of the board, need to be well-versed in corporate security procedures such as passwords and authentication methods.

 

CONSEQUENCES OF POOR COPORATE GOVERNANCE

The major purpose of corporate governance is to create a system of policies, rules and practices for a company – in other words, to account for accountability. This system made up of the company’s shareholders, the board of directors, the executive management team and the company’s employees is meant to make each branch responsible to the other, thereby keeping all of them accountable. A part of this responsibility of accountability is the fact that the board regularly report financial information to the shareholders and conduct regular board meetings as this reflects the corporate governance principle of transparency.

 

Poor corporate governance is best explained with the Enron Corp example where many executives used shady tactics and covert accounting methods to cover up the fact that they were essentially stealing from the company. Erroneous figures were sent to .the board of directors, who failed to report the information to the company’s shareholders.

With responsible accounting methods gone out the window, shareholders were unaware that the company’s debts and liabilities was much more than the company could ever repay. The executives were eventually charged with a number of felonies, and the company went bankrupt. It killed employee pensions and hurt shareholders immeasurably.

 

When good corporate governance is abandoned, a company runs the risk of collapse, and shareholders and even innocent employees stand to suffer substantially.

 

In summary, the principle of corporate governance can be summed up as follows;

 

  1. Corporate governance is a system of rules, policies, and practices that dictate how a company’s board of directors oversees and manages the operations of a company;
  2. Corporate governance includes principles of transparency, accountability, and security without which a company cannot function properly;
  3. Poor corporate governance, at best, leads to a company failing to achieve its stated goals, and, at worst, can lead to the collapse of the company and significant financial losses for shareholders.

Team 618 Bees

Sources : insights.som.yale.edu, corporatefinanceinstitute.com, www.investopedia.com, www.justia.com

 

 

The information in this blog post (“post”) is provided for general informational purposes only, no information contained in this post should be construed as legal advice, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through this post without seeking the appropriate legal or professional advice from the particular facts and circumstances at issue from a lawyer. This post is protected by intellectual property law and regulations. It may however be shared using appropriate sharing tools provided that our authorship is always acknowledged and this Disclaimer Notice attached.

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