An Article by Patrick  Sutton, partner of O’KellySutton in the Sunday Business Post August 2013

The CEO of a rapidly growing hi tech company recently asked me about the importance of corporate governance for SME’s. A company shareholder had highlighted certain weaknesses in this area to him and he was a little taken aback by it. I address herein some issues the CEO needs to consider.

The term Corporate Governance refers to the system or framework by which companies are directed and controlled. The Board of Directors is responsible for the governance of the company. There are lots of guidance and codes of best practice available in the public domain on the subject both from a legislative and non legislative point of view, www.odce.ie is just one good reference point.

Transparency, disclosure, accountability and fit for purpose are terms commonly associated with good corporate governance framework. The degree to which companys observe the basic principles of good corporate governance is an increasingly important factor for bankers, shareholders, prospective investors, and employees, and even customers and suppliers. It is ultimately the board of director’s responsibility to ensure stakeholder’s interests are protected and that the company is operated in a fitting manner. If for example a company is trading whilst insolvent it is the directors who may ultimately be held personally responsible depending on circumstances of the case.

 

It is when SME’s start to look for outside funding that the makeup of the board and how they operate is really scrutinised. If the company is not run effectively and in accordance with best practice the board is leaving itself open to challenge and disagreements.  Some pointers for SME boards are:

  • Boards should be fit for purpose in view of the business and challenges that lay ahead. The directors should have appropriate experience and have the necessary skills between them to deliver success. There should be set protocols for identifying and selecting new board members. Board members should be able to commit themselves effectively to their responsibilities.
  • Board members should always act in the best interest of the company and the shareholders as a body.
  • Proper functioning boards will hold regular board meeting’s, prepares agendas, document and circulate board minutes.
  • Boards are responsible for preparing, reviewing, and guiding corporate strategy to ensure the long term success of the business and ensuring all stakeholders know exactly what direction the company is going in.  This includes outlining major plans of action, risk policy, annual budgets and business plans; Every board should have a strong professional chairman who can guide and direct the board.
  • Effective monitoring of the CEO and management. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.
  • Setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures
  • Ensuring the integrity of the corporation’s management reporting, accounting & financial reporting

systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

  • Board members should have access to accurate, relevant and timely information. Ignorance is no defense when it comes to looking back on who knew what. If you’re a board member it’s your responsibility to get access to the information.
  • Accountability to shareholders such as holding of AGM and EGM where necessary and informing shareholders of key events in the business. Remember basic shareholders rights should include access to relevant and material information on the company on a timely and regular basis, and

electing and removal of members of the board;

Where there are external shareholders involved there should always be a shareholders agreement in place, even if it’s only two friends who set up a company together. In a very tough economic environment there is increasing amounts of fall outs between directors and shareholders in SME’s.  The shareholders agreement is often left or forgotten about to the long term detriment of the company.

When considering the makeup of the board SME’s should consider what outside expertise they need to bring to the board. This can often be quite a challenge given the limited resources SME’s often find themselves in. However increasingly more and more SME’s are looking to outside or non executive directors. These are directors who are seen as independent and can give guidance on certain critical areas within the board i.e. strategy, finance, human resource, technical, industry expert, legal etc, depending on the company and its requirements. Non executive directors can add hugely to the overall success of the company for little investment.

SME’s have varying degrees of success in adhering and implementing good corporate governance. In general SME’s don’t pay enough attention to it, with a perception that corporate governance is only applicable to larger entities. In my experience SME’s that do pay more attention to corporate governance tend to be the better run and more successful company’s which is hardly surprising.

Patrick Sutton, O’KellySutton, Accountants and Business Advisors, Kildare, Sutton@okellysuttoncrosby.com