Anthony Davidson

Getting governance right

A key challenge facing business owners is making the transition to a more effective governance structure to enable and support growth. Many businesses are set up without an adequate governance or risk management process. But as your business grows, so does your potential liability.

A recent review of governance requirements for a client highlighted just how easy it is for owners to not fully appreciate their responsibilities as directors, and how important it is to understand and separate your roles as a shareholder, director and manager.

For growing businesses, this separation of roles is often seen as overkill. However, the reality is that separation of roles is a key driver of business success because it enables Boards to focus on strategy, governance and risk, rather than getting caught up in operational matters. And it enables management to focus on what they best – execution and delivery.

While this may seem like commonsense, the transition to creating an effective Board and management team can take time. The first challenge is typically deciding who should be on the Board. It’s natural for shareholders who are active in the business to nominate themselves as a director because it reinforces a sense of ownership and control over the business. Often this is not in the best interests of the shareholder, business or the Board if that person lacks the prerequisite skills. A better decision may be to nominate a proxy who has specialist skills needed by the Board.

The second challenge is deciding whether to appoint an external chair or independent directors. The current trend is to leverage external expertise where possible to give the business fresh perspectives, new insights and better-informed decisions. This can be problematic for business owners and managers who have been used to running the business their way. But if the goal is to increase the value of the business values, it should be viewed as an opportunity. An alternative is to consider the merits of an advisory board.  

A final challenge (although there are others) is to create an effective working relationship between the Board and management team. Again, choosing the right management team and the right person who can lead this team is critical. The CEO/GM needs to have the full support of the Board to lead the business and execute the plan. And the relationship between the Chair and the CEO/GM will ultimately determine whether this happens.

The problem is that many business owners are still active in the business in management and operational roles. In fact, the CEO/GM is often a business owner. Should you hold a Board position and be the CEO/GM, or on the management team? Although it happens, it can lead to role confusion, conflict of interest, and ineffective functioning of the management team and Board. So avoid it. The goal is to separate shareholder, Board and operational roles.  

#governance #externalchair #advisoryboard