The idea behind corporate governance is simple - well run companies produce better results. Much of the emphasis has been placed on the best practice of managing formal external relationships, establishing transparency and emphasising legal, timely and trustworthy information. Research suggests that those companies that have better corporate governance are more valued than others with less sophisticated systems.
There are a number of suggested approaches to creating this framework, with the OECD guidelines being the most commonly quoted. The problem with almost all attempts is that they are not practical they fail to define what needs to be done and how.
External relationships are also only one measure of corporate governance - non financial controls being just as important as financial, generating trust and commitment from other stakeholders. Catastrophic failure in one plant through lack of health and safety controls can be just as serious as fraud; the lack of a contingency plan can break enterprises.
Placing a layer of gloss paint of "corporate governance" over a disorganised enterprise does not change a fundamental lack of coherent internal policies. It makes more sense to consider a step by step development of corporate governance, with larger companies required to implement more and more checks and balances, reflecting the increasing complexity of their corporate environment. Installing best practice (both legal and operational) will build in further value into the organisation as it grows.
Many of these topics can be usefully managed with a standard operating procedure or
SOP.
Implementation of the step by step development of corporate governance
Corporate governance components for the micro enterprise
Core governance problem: control
Advisers. Problems regularly arise for which the enterprise does not have the internal skills selecting the right advisers for each stage of development will be a vital first stage in best practice and one that will have to be regularly reviewed.
Articles of Association/ Company Statutes. Defining what the enterprise can do is another vital first stage in development one that tells management what is permitted and what is not. Standard terms and conditions exist which function for the early stage organisation but which again will need to be regularly reviewed.
Shareholders agreement. In small organisations, with a limited shareholder base, conflicts can easily arise. Documenting how shares can be transferred, what rights each shareholder has, and how they are valued, is important in reducing the potential impact of disputes. This shareholder agreement will no longer be valid once the shares are more widely traded.
Record keeping. Best practice insists that the enterprise should maintain comprehensive records, both financial and non-financial. Computerisation provides both advantages and disadvantages, but which need to be backed up digitally and with hard copy.
Conservative accounting. Many of the problems of public corporate governance develop as a result of creative accounting approaches. Establishing conservative accounting guidelines at an early stage and maintaining them throughout the development of the enterprise will control this tendency.
Business plan. Controlling rather than reacting to the environment is a sign of good corporate governance, and one that demands a formal planning procedure supported by effective monitoring. This will become more detailed and comprehensive as the business grows, with the incorporation of benchmarks and key performance indicators or
KPI.
responsibility and is accompanied by a code of conduct, discipline and grievance procedure and pension rights.
Code of conduct. Every code of conduct can of course be ignored. Nevertheless it is useful in defining what the organisation sees as acceptable and non- acceptable behaviour, which individuals can risk breaching but which create clear barrier conditions. Topics include: absenteeism, alcohol, appearance, bribery, conflict of interest, credit management, data protection, discrimination, drugs, expenditure powers, external promotion/PR material, entertainment, forgery, fraud, gambling, gifts, harassment, health and safety, insider trading, intellectual property ownership, monopolistic behaviour, misuse of business assets, moonlighting, nepotism, private use of business computers/ telephones/ photocopiers, public service during working hours, purchasing policy, security, smoking, travel expenses, truthfulness, violence, waste management, whistleblowing.
Discipline and grievance procedure. Again a legal requirement in many countries. The discipline and grievance procedure sets out how disputes will be handled and what the employee and employer can expect.
Pensions policy. Different countries differ on pension provision within the enterprise and how it should be managed, though it is best practice to make it clear to the employees how they will be affected.
Health and Safety. An increasingly important control over all organisations. Clearly establishing what the health and safety issues are, and how they are managed will again be a necessary early step in the creation of a comprehensive corporate governance environment.
Supplier and sales contracts. Formalising relationships with suppliers and buyers will be part of the essential business platform building which will move the enterprise from its starting position into a steadily larger organisation.
Creating timelines for legal reporting. Any enterprise needs to establish deadlines for the preparation of official documents, including sufficient time for review and re-working.
Customer satisfaction survey. Best practice requires any organisation to have an idea as to its strengths and weaknesses to ensure that problems are corrected, many of which will be organisational in nature, and require modifications to corporate governance.
Contingency plan. Even for the smallest enterprise, the contingency plan has value. It focuses attention on what can go wrong (which include many items of corporate governance); identifies how the problems can be minimised or entirely designed out; and revisits the information system to ensure that early detection is possible.
Additional corporate governance components for the small enterprise
Management team development. Decision making requires diversity and depth improving the management team will be a priority for the growing enterprise which tends to be relatively narrowly based in terms of expertise.
Standard operating procedures. With the increased size of the organisation, it becomes important to both standardise procedures in many areas, but also to incorporate experience and to provide training, all of which are part of the creation of a standard operating procedure.
Regular formal reviews. As the number and importance of decisions grows, the formalisation of the reporting system needs to increase. To improve control, management meetings need to include formal agenda, supporting documentation, formal voting and records of the meeting decisions. This will often need to include for major projects an investment and risk appraisal.
Internal audit. With increasing complexity of control, an internal audit system which reviews procedures will become a steadily more important element in corporate governance and control.
Impact analysis. In common with the development of a formal reporting system, a structured approach to the analysis of market driver change and the implications for the enterprise will clearly identify changes that senior managers need to take.
Purchasing policy. As turnover grows, the need to formalise rules and approaches to purchasing will become more and more important both to improve quality and profitability, but also as a major element in reducing potential corporate malfeasance.
Team building for major projects. With the complexity of tasks and the level of investment rising in the more important projects, a move towards team based systems will generate better returns than the reliance on single individuals to effectively complete projects on time, budget and specification.
Recruitment. Standardising recruitment policy will both improve the quality of the recruits and their diversity, but will be central to moving the micro enterprise onto a new level. This recruitment policy will also include the recruitment criteria for senior management.
Quality circles. As the organisation grows, the need for internal discussion of operating procedures becomes more and more important, as does the need to ensure a growing quality of performance as part of building competitive advantage. Incorporating quality circles as part of an integrated approach to quality performs this function as well as improving internal communication.
Manpower planning. With increased numbers of employees, a formal manpower planning system will provide greater impetus to corporate development, lower labour turnover and generate a greater employee involvement in enterprise development.
Appraisal. Accompanying a formal manpower planning system, the introduction of a structured appraisal system will help to identify the strategic direction of the organisation in building on existing staff strengths.
PDP. The introduction of an appraisal system should be linked to the creation of personal development plans for key staff, as a further component in building employee strengths for future development.
Bonus systems. With the increasing number of employees, the development of a formal bonus system will become more and more important. Best practice in bonus system is well established: it should be broadly based, transparent in application, based on factors that groups or individuals can impact, and related to key performance indicators.
Further elements of corporate governance that should be considered for the medium sized enterprise
Core governance problem: encouraging and maintaining diversity
Separation of powers. With the increasing workload of the growing company strategic, operational, personnel considerations and stakeholder relationships, the separation of powers between a chief executive and a chairman is both important to provide a check and balance within the organisation, but also to improve operational performance.
Directors trained in corporate requirements. With the growing complexity of the business, it becomes more important that the board of directors has a clear understanding of corporate governance and the actions that need to be taken to ensure best practice. Most directors lack this expertise and require relevant training.
Compliance officer. The wider number of stakeholders involved with the medium sized enterprise suggest that the appointment of a corporate governance compliance officer is a sensible measure, with regular (at least six monthly) reports on the quality of corporate governance.
Communication policy established for each stakeholder group. As the complexity of the stakeholder relationships increase, the need for separate communication policies becomes more and more obvious. Better communication improves transparency and builds trust, both essential best practice components of corporate governance.
Auditors required to comment on corporate governance. The introduction of additional external checks on corporate governance will assist the work of the compliance officer in identifying problems and threats.
Industrial relations policy. Formalising staff relations into a standard and transparent industrial relations policy with regular and established review meetings will improve organisational performance and reduce the potential for damaging conflict.
Independent appeals system. As the enterprise grows, the gap between senior management and operations staff widens. There is a universal tendency to support management against staff in all disputes a dangerous policy. Introducing an independent appeals system which operates outside the enterprise will greatly enhance the standing of any appeals process.
Independent whistleblower system. Whistleblowing is damaging in any enterprise to the individual involved, but is important for senior management to be aware of potentially threatening problems. Creating an independent whistleblower system (which can operate alongside the appeals system) has many advantages in ensuring that issues are properly identified and analysed.
Environmental audit. Legislation on environmental management continues to strengthen, with the requirement for organisations to complete a comprehensive and regular environmental audit as part of their corporate governance.
Additional coporate governance developments in the large organisation.
Core governance problem: centralisation vs decentralisation
Simplest structure consistent with operational requirements. Complex structures produce opaque reporting and control.
Profit centre emphasis on corporate governance. Think global, but act local. Maintaining responsibility for the majority of corporate governance activity at the local level will both improve the responsiveness of the entire organisation but ensure that key activities are modified for local legal and stakeholder requirements, while meeting overall corporate guidelines.
Succession planning. With the devolution of power into profit centres, an emphasis on succession planning and corporate governance training will be required to create the pool of staff able to manage the increasingly complex enterprise relationships.
Employee satisfaction survey. Even with high quality management emphasising management by walking about (MBWA) rather than management by memo (MBM), a comprehensive understanding of employee requirements and attitudes will become more and more difficult to realise unless some form of sampling such as employee satisfaction surveys, supported by exit interviews is conducted.
Auditor rotation and removal from non-audit work. Conflicts of interest with external advisors need to be minimised to improve the objectivity of the advice offered.
Major project management. A similar problem of conflict of interest can be reduced with other suppliers by separating the design, execution and control phases of major projects and ensuring that they are managed by separate enterprises.
Specialist board committees. Best practice suggests that certain functions of the company should be transferred to committees with a substantial element of non-executive (external) directors especially compensation and audit. This will only work if the non-executive directors are truly independent.
Supervisory board. Integrating a range of stakeholders into a supervisory board provides another check and balance for the large enterprise, and is becoming part of future corporate legislation in many countries.
Corporate governance is only as good as the people that run the system. Good business monitoring and
contingency planning will help in identifying problems early as will impact analysis. But every system can be manipulated.
