For most SMEs there is no distinction between management and ownership and as such they would argue that corporate governance is an expensive and unnecessary luxury. Why introduce systems which impose limits on how they conduct business? They could impact profitability, creativity and speed of response.
For many companies happy with what they are, then the questions are probably right. But for any SME looking to grow putting in place an appropriate corporate governance regime or culture from the outset will have significant benefits.
A proper governance system will improve the company’s ability to obtain external funding, be it from banks, angel investors or VCs. Investors are prepared to pay a premium for shares for companies that are properly managed. Banks are more likely to fund businesses with good systems in place.
Creating a positive Culture
Corporate governance in an SME situation requires a set of rules and guidelines that allow all stakeholders to understand how the organisation will be managed. A clear understanding by all staff of the operating processes and who is responsible for what should create a positive culture and a reduction in internal conflict, allowing more attention to be paid to achieving the company’s growth strategy and ongoing profitability.
Planning for the Future
One of the biggest challenges for SMEs is planning for the future and providing strategic direction. Many young companies fail to take advantage of using external board members. Non Executive Directors. NED’s can help to balance the views of the executives and introducing additional skills, resulting in better strategic management decisions. Employing NED’s on a part time basis is also very cost effective!
With the help of all employees, the board can add value to the business by encouraging and supporting the pursuit of new opportunities for the company within a framework by way of R&D, cost reductions, potential JVs or collaboration. None of these can be achieved by the board alone.
Whether your company is large or small, reputation matters and in this area corporate governance is just as important for SMEs as for companies in the FTSE 100.
Systems and processes in a SME have to be appropriate to the size of organisation. But there is no doubt that taking the time to think about what systems are needed and putting these in place increases the long term value of the company and its potential for properly funded growth.
Any company looking to sell, introduce investor finance or to list on a market needs to start prepare reliable, consistent and trust worthy management information. Appropriate Corporate Governance helps the SME to gain credibility over these reporting and information processes and as such add value to the business.