Simplifying governance for SME’s
An SME is not a corporate and cannot be treated like one. This makes the implementation of governance in SME’s uniquely challenging.
By Carl Bates
SME’s often have little or no history of formal governance in their business. As a result there is no governance culture in existence and no basis on which to build and develop the governance framework.
This does not mean, however, that SME’s can avoid the key principles of King III and the basic elements of good governance. For example, many SME’s will state that because they are small, with a limited number of shareholders who are often all involved in the business, the requirement for independent non-executive directors is either less important or not necessary at all. In reality, this is not the case.
The biggest challenge in implementing governance in SME’s is the emotional involvement of the shareholders, who are also the directors and managers. Effective implementation of governance in an SME requires that you create a framework around the roles and responsibilities of the individual involved, in plain language. Ensuring a clear understanding of the different roles of shareholder, director and manager exists, and being very strict in operating from that perspective, is critical. For example, while the managing director may also be the only shareholder, in the board room their ‘ownership’ of the company has to effectively be ignored.
A primary example of this is the tendency for a business owner to make statements such as ‘in my business...’ around the board room table. In such instances the board should remind him or her that this is not language that is conducive to creating an effective governance culture for the organisation. While this may seem an insignificant issue, it is in creating these clear foundations that we enable an effective governance framework to be built up within an SME.
Here are some specific requirements that our organisation, Sirdar South Africa, applies to ensure effective governance, and in turn, successful growth in an SME:
Independent non-executive directors: An SME requires a minimum of two independent non-executive directors. Remembering that a significant number of SME’s have only one or two shareholders/directors/managers, having only one non-executive director does not support governance discussion. If a company has more than three owner-managers, we challenge them to consider whether they all should be ‘directors’. This creates an interesting debate and egos definitely come into play in the process of establishing who should sit around a board table. Being part owner of the company does not automatically make you the best person to represent the company on the board. If the company is to achieve extreme business success, it has to have a governance team that reflects the requirements of the company itself.
Monthly board meetings: Every director will have a view on the regularity of board meetings for a business. Many of you will read this ‘requirement’ and consider that it is surely too much for an SME to handle such regular meetings. From Sirdar’s experience in implementing governance in SME’s worldwide, particularly those starting the journey for the first time, this regularity provides a focus point for the governance process. If the meetings are less regular, it is far too easy for the ‘business owners’ to fall back into old bad habits, making decisions by themselves as they always have, but which should now be determined by the board process.
Formality of the board meeting: In SME’s that do hold board meetings, often the formality involved is minimal, if not non-existent. In our implementation process we set clear and specific standards for the timeliness of board papers, the distribution of the board pack, language to be used in the meeting, quality of the minutes and the occurrence of the independent directors and chairman/chief executive pre-board meetings (both monthly). The independent directors meeting provides an opportunity for these directors to discuss the performance of the company without management present and the chairman/chief executive meeting is a key element in developing the relationship between these two individuals to ensure an effective governance process. Often in SME’s where the owners are the directors, and hold what they call a ‘board meeting’, the action points and minutes, if they actually create them, are written by one of the directors present. This also does not support good governance. Instead we require that SME’s have a minute taker complete this task against a predefined standard.
Like anything else where there is no basis to start from, implementing governance in an SME is not easy. It requires that you start from something as basic as ‘what should our minutes look like?’, through to determining who should sit around the table. While in corporates these answers are clear because of the culture and history on which their governance process has been built, SME’s should seek support to get this right. Without the basics in place, which I have merely touched on above, governance in an SME will not deliver results that are sufficiently effective.
Sirdar Group
+27 21 418 0752
http://www.sirdargroup.com/
SA Franchise Warehouse
http://www.safw.co.za/
By Carl Bates
SME’s often have little or no history of formal governance in their business. As a result there is no governance culture in existence and no basis on which to build and develop the governance framework.
This does not mean, however, that SME’s can avoid the key principles of King III and the basic elements of good governance. For example, many SME’s will state that because they are small, with a limited number of shareholders who are often all involved in the business, the requirement for independent non-executive directors is either less important or not necessary at all. In reality, this is not the case.
The biggest challenge in implementing governance in SME’s is the emotional involvement of the shareholders, who are also the directors and managers. Effective implementation of governance in an SME requires that you create a framework around the roles and responsibilities of the individual involved, in plain language. Ensuring a clear understanding of the different roles of shareholder, director and manager exists, and being very strict in operating from that perspective, is critical. For example, while the managing director may also be the only shareholder, in the board room their ‘ownership’ of the company has to effectively be ignored.
A primary example of this is the tendency for a business owner to make statements such as ‘in my business...’ around the board room table. In such instances the board should remind him or her that this is not language that is conducive to creating an effective governance culture for the organisation. While this may seem an insignificant issue, it is in creating these clear foundations that we enable an effective governance framework to be built up within an SME.
Here are some specific requirements that our organisation, Sirdar South Africa, applies to ensure effective governance, and in turn, successful growth in an SME:
Independent non-executive directors: An SME requires a minimum of two independent non-executive directors. Remembering that a significant number of SME’s have only one or two shareholders/directors/managers, having only one non-executive director does not support governance discussion. If a company has more than three owner-managers, we challenge them to consider whether they all should be ‘directors’. This creates an interesting debate and egos definitely come into play in the process of establishing who should sit around a board table. Being part owner of the company does not automatically make you the best person to represent the company on the board. If the company is to achieve extreme business success, it has to have a governance team that reflects the requirements of the company itself.
Monthly board meetings: Every director will have a view on the regularity of board meetings for a business. Many of you will read this ‘requirement’ and consider that it is surely too much for an SME to handle such regular meetings. From Sirdar’s experience in implementing governance in SME’s worldwide, particularly those starting the journey for the first time, this regularity provides a focus point for the governance process. If the meetings are less regular, it is far too easy for the ‘business owners’ to fall back into old bad habits, making decisions by themselves as they always have, but which should now be determined by the board process.
Formality of the board meeting: In SME’s that do hold board meetings, often the formality involved is minimal, if not non-existent. In our implementation process we set clear and specific standards for the timeliness of board papers, the distribution of the board pack, language to be used in the meeting, quality of the minutes and the occurrence of the independent directors and chairman/chief executive pre-board meetings (both monthly). The independent directors meeting provides an opportunity for these directors to discuss the performance of the company without management present and the chairman/chief executive meeting is a key element in developing the relationship between these two individuals to ensure an effective governance process. Often in SME’s where the owners are the directors, and hold what they call a ‘board meeting’, the action points and minutes, if they actually create them, are written by one of the directors present. This also does not support good governance. Instead we require that SME’s have a minute taker complete this task against a predefined standard.
Like anything else where there is no basis to start from, implementing governance in an SME is not easy. It requires that you start from something as basic as ‘what should our minutes look like?’, through to determining who should sit around the table. While in corporates these answers are clear because of the culture and history on which their governance process has been built, SME’s should seek support to get this right. Without the basics in place, which I have merely touched on above, governance in an SME will not deliver results that are sufficiently effective.
Sirdar Group
+27 21 418 0752
http://www.sirdargroup.com/
SA Franchise Warehouse
http://www.safw.co.za/
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