Governance requires understanding

Good governance builds better buisnesses.

Governance challenges need to be better understood

Challenges facing the Small Medium Business (SME) and not-for-profit (NFP) sectors require good governance practices to be in place. Financial sustainability is a top priority and many will need to change their business models to ensure their long-term viability. There is an increasing awareness that governance continues to evolve and mature. While this can be said of all sectors, the SMEs and NFPs continue to shake off the perception that their governance is poor.

Governance, or corporate governance as it is often called, has received much attention in recent years, partly due to financial crises, market changes and recent corporate sector scandals. Governance is the responsibility of the Board of Directors, the Management Team. It refers to leadership, quality decision making, values and following the rules and laws of the country.

Business and technology alignment must exist

You can hardly browse a technology publication these days without reading at least one article on “business and technology alignment”. Clearly, someone has figured out that successful technology management is more about the business and less about the technology. Ask most executives about information technology and communications (ITC)  governance and chances are they’ll respond with a frustrated roll of their eyes.

Although a few organisations have had success in this area, creating effective programs for determining ITC priorities can be hard. Establishing reliable procedures for oversight and defining meaningful metrics for its performance still appears to be in the minority these days.

The ability of business owners and managers to maintain a clear focus linked to reality can be life and death priority. Maintaining focus is not easy in a business, it takes time, courage, commitment, mental discipline, and a little help from your friends. Corporate Governance is the responsibility of the Board of Directors, or Management Committee and the Management Team.

The basics of governance refer to the following:

  1. Leadership.
  2. Quality decision making.
  3. Values.
  4. Following the rules and laws of the country.

Governance is defined as “the processes that need to be followed in a successful business, organisation, department, team, or project”. In this post we will shine a light on governance practices and challenges and the need for good governance, even is very small businesses and organisations.

Poor management and governance

Many a report on business failures cites poor management as the number one reason for failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and managing employees. Opening a business requires more than the desire to be in business, it also requires the possession or practical business skills including the ability implement.

Unfortunately, many seem to discount the value of business knowledge and practical experience to avoid business failure. Without prior experience, training or education, the new owner or management team are normally ill-equipped to manage a business. This is particularly so in NFPs as their management teams and boards are mostly made up of well-meaning volunteers.

Unless you recognise what you don’t do well and seek help in areas you are unfamiliar with, businesses and organisations soon face disaster. Some people are buried in their thoughts. They may have good ideas but are rarely able to translate their ideas into action. This is where good governance can provide the catalyst and experience needed to take the necessary decisions. Acquire the desired resources to motivate the required action, as struggling needs to stop,  http://goo.gl/iSo0jO.

Neglect of good business governance can also be its downfall. Some people seem more concerned about the process than the result of their activities. Care must be taken to regularly study, organise, plan and control all activities of the business. This includes the continuing study of market research and customer data. An area which is prone to be disregarded once a business has been established and the owners and managers feel comfortable.

A successful governance team should also have good leadership skills

They create a work environment that encourages productivity. They are also skilled at strategic thinking, able to make a vision a reality and able to confront change, make transitions and envision new possibilities for the future. When people do not think clearly about a problem but go with the first solution that pops into their heads, you can be sure there are bigger problems looming.

Their continued impulsiveness, or in some cases indifference to solving a particular problem, can slow the business down. It can inhibit the performance and drive others to the point of leaving. At best people stop applying themselves and lose their capacity to perform.

Be concerned with those reluctant, or unable to initiate a project because of fear, laziness or just lacking the capacity to make a decision. Also be concerned about people who never finish anything and who hate deadlines.

Look to surround yourself with people. People who know how to finish well and do a lot of things well. Some people, through lack of perseverance and commitment to the vision and objectives of the business, concede defeat and give up too easily. Others are unable to stop even when the mission will clearly be unsuccessful.

Splashing out is a no, no

No sooner than a business begins to succeed in terms of income, the owners begin to think of changing their standing in the community. They buy a new car, change offices, go on an overseas trip, all from the capital in the business and not the profits. The business should pay you, the proprietor, a salary like everyone else and you must learn to live within that salary.

The problem usually emerges when initial capital is given to the business and the owners start to celebrate the huge success of their business. Good governance ensures that best practices are implemented and adhered to.

Accepting personal responsibility

All too often the governance or good running of the organisation is left to chance. Everything seems to be left to the other person, no one is accountable for their actions and performance.

Your business or organisation should be committed to maintaining high ethical standards in the conduct of its business activities. Expect everyone to have a personal commitment to meeting these standards and values. This should go beyond compliance with laws and regulations. As a guide, good governance is best served using an external independent chairperson. Also with half the board members being independent. External board members become the organisation’s extra eyes and ears in the community.

NFP Corporate Governance

Good governance is particularly important when government funds, business and public donations and volunteers are concerned. Without good governance, the funding will quickly dry up and so will the volunteers. Often volunteers are ill-informed, left to their own devices, or left hanging around. They are given poor instructions and are not trained in the procedures to follow in the organisation.

There is a need for a greater focus to be placed on diversifying income sources. Particularly from corporate philanthropy and the local business community. This is largely due to the recognition that government funding will continue to decline and the need for a more collaborative relationship with government. NFPS have to have endured, doing what governments are largely responsible for.

Mergers and collaboration continue to be a hot topic for directors and boards. Importantly, mergers are not only being discussed by boards, they are actually happening as NFPs seek to maximise the use of their incomes, which are often difficult to maintain.  Mergers are not the solution to every NFP’s problems, but working collaboratively and sharing resources certainly has a lot of merits. There should be a desire to work in ‘partnership’ with other NFPs and businesses to help solve the big issues facing your communities.

Sometimes there appear to be so many problems

Some of the problems seem so formidable that they are simply ignored. Amazingly enough, even with poorly performing boards, most non-profit organisations still manage to deliver their programs and services pretty well. Although this is often attributed to the tireless work of a hand-full of volunteers.

This suggests that contrary to the fears of some board members, the organisation will not fall apart. If the board redirects it’s time to building its own capacity to provide effective governance and leadership. On the contrary, the act of self-reflection might produce an immediate benefit in terms of a reduction in micro-management. It can also free up the CEO to concentrate on the organisation’s programs and services.

The environment in which the board operates is never static

There are continual and unpredictable changes in directors, staff, volunteers, government policies, liability concerns and clients. Employee problems, frustrations, wants and needs and investor and donor interests, also continue to change. Building the board’s capacity to address issues, demonstrate leadership and governing effectively is a never-ending element of the board’s job. This job is made more difficult if the board is less than effective in the first place.

Building board capacity, in putting some stability and predictability into the future programs will make it easier for the board to accept and implement. Keeping a development program going will help to focus the board on governance issues. And also provide direction to its work leading to continuous improvement in the board’s performance and that of the organisation itself.

Always take the time to select the best board members available and ensure there is a diversity of interests, experience and skills. The last thing you want is a board that always agrees with you.  Are you fearful of your Non-Profit (Not-For-Profit) situation? http://goo.gl/NKzXaR?

Key governance issues

The leader should ensure the team develops a viable set of team rules and procedures for good governance. They should also ensure that the team members understand the rules and do not feel intimidated by them. A good facilitator can be beneficial in establishing an initial set of rules and guidelines.

Some of the governance issues that need addressing are:

  • Who picks team members because that will have an impact?
  • How are team members rotated or replaced because members can’t go on forever?
  • Are necessary skills and knowledge represented on the team so there is a balance?
  • How are time off from meetings and allocated tasks handled?
  • How is the team leader chosen and for what term?
  • Who is responsible for minutes so they are an accurate recording of meetings?
  • How often will the group meet and for how long?
  • What represents a quorum?
  • How will team member’s excessive absences from meetings be handled?
  • Will individuals other than team members be invited and notified of meetings so they can have input?
  • What represents a consensus? How is it attained? How will voting be handled?
  • Does anyone have veto power?
  • What is the ‘team recommendations’ report format?
  • What part of the team’s work, if any, will be conducted individually, or by using subcommittees?

Role of the Board of Directors and its Committees

The board of directors or the management committee, or both is usually responsible for the following with respect to the organisation:

  • Maintaining good governance so obstacles are overcome and failures averted.
  • Setting the strategic direction, reviewing and monitoring progress and refining the direction where considered appropriate.
  • Approving and overseeing policies and financial objectives.
  • Maintaining a good set of congruent values because chaos reigns if you don’t.
  • Monitoring the financial performance of the organisation is a critical function of the board.
  • Provide and maintain adequate resources to operate the organisation
  • Delegating an appropriate level of authority to senior management, because the board can’t do everything.
  • Establishment of other committees to consider and report on special matters or transactions of particular importance.
  • Appointing and assessing the performance of the CEO and monitoring the achievement of goals and targets by senior management.
  • Ensuring compliance with regulatory and ethical standards so fines and litigation are avoided.
  • Providing adequate risk oversight and management processes, including internal controls and external audit reporting.
  • Maintaining an ‘Investor Ready’ status should be a key requirement.
  • Approving any mergers or acquisitions.
  • Nominating and appointing Directors when vacancies arise or where special skills and expertise are required.
  • Reviewing the performance of Directors.
  • Reporting to other stakeholders and the market where appropriate.
  • Other matters expressly required by law or regulation.

Everyone has a responsibility to be well informed about the organisation and more importantly the parts that require fixing.  Good governance focuses attention on all the factors that help to achieve its desired future. Translate the Vision and Mission into Strategies and Actions that can be measured and scored. Success will come easier by using performance measures, commonly known as Key Performance Indicators (KPI).

Install a Board of Directors as part of good governance 

In preparing your business for the future, you should give serious consideration to installing a board of directors. Perhaps you may feel you alone, know enough to adequately manage the business and that the costs and time involved in supporting a board of directors is a waste. You would not be alone in that opinion as most small, medium and family business owners feel the same way.

boardroom-needs-to-be-functional

Board rooms don’t need to be flashy, but they need to be functional.

 

In setting a business up for the future, you need to consider the viewpoint of the stakeholders and what they would find attractive in the business. The objective should be to take away from the stakeholders and more particularly the investors, any misgivings. Hesitations about the operation of the business as well as reducing the anticipated costs and delays of changing the ownership of the business, should that occur.

Stakeholders will be concerned about inherent risks

If the business has systems and processes for reporting to an independent board. It will indicate to the stakeholders that the owners and management are prepared to be accountable for performance. As well as being prepared to review the business operations with external parties.

If the process is done properly. Stakeholders can be confident that the underlying systems and reporting processes enable better management. If the board’s ‘reporting pack’ includes operational as well as financial performance measures. They will have more confidence in the quality of the business and its potential.

A big concern of many stakeholders and financiers is the fear that the business rests on the personal knowledge and contacts of the owner. To the extent this exists, they take the risk that the goodwill and corporate intelligence will be lost with the departure of the owner.

To the extent the business has a knowledgeable and independent board of directors. The stakeholders can have confidence that the underlying systems are in place to monitor business operations. And that some of the corporate intelligence is shared among the board. Thus they have the option of keeping some of the board members for a period of time to ensure knowledge is transitioned to new management.

Perhaps the greatest benefit of having a board in place is that it indicates to the customers as well as stakeholders that governance is seen to be important. It also shows there are disciplines in place for longer-term planning, risk assessment and accountability. All very good signs of a well-run business.

Quotable quotes

“There never is a good time for tough decisions. There will always be an election or something else. You have to pick courage and do it. Governance is about taking tough, even unpopular, decisions”. Jairam Ramesh

“People are concerned about corporate governance.  Separating the CEO from the chairperson role certainly could help to quell some of the dissents”. David Mantell.

 

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