Importance of corporate governance for SMEs

Corporate governance is one of those phrases which has come into relatively common use in recent years, but which has no set definition or legal framework (for smaller companies at least)

So what is corporate governance?

All organisations of pretty much every size need to organise and control themselves – that is governance.  This applies just as much to a company or business (the corporate) as to say a club, society, or a charity.  At its most basic, corporate governance is about a company or a business organising and controlling its affairs.

Why is this important?

Even a small business will take hundreds, if not thousands, of decisions in a year. Practical examples might include whether to hire someone, whether to take on a new customer (and if so, how much to charge them, and on what terms), whether to buy something important or expensive, and whether to pay cash for it, or to lease it on a contract.

Each one of these decisions needs to be carefully considered and signed off at an appropriate level to ensure that the business continues to operate in a controlled way. Without these control mechanisms, everyone would be able to do exactly what they liked, rapidly increasing the chances of business failure.

So while corporate governance is often talked about in the context of business failure it is really about organising yourself to achieve long term success and value creation. For smaller businesses this is about having clarity around where responsibility for decision making lies, and who makes those decisions on behalf of the business.

A couple of practical examples…

To give two recent real life examples we’ve been involved with;

  1. A customer went to the Bank to draw out some money: on arrival they found out that their Bank account was frozen as their company had been struck off the Companies House register. The business had been sent various reminders to file accounts and confirmation statements, which had been studiously ignored by management. Since there was nobody in the business with responsibility for such tasks, and no controls in place to catch any failings, the result was that the Registrar of Companies dissolved our client’s business!
  2. A client was transferring a pension fund from one manager to another. Unfortunately the money got sent to the wrong bank account. All was not lost luckily and the mistake was spotted; the funds were quickly returned. Unfortunately for our client, the transfer involved exchanging funds into a different currency, and in the time between making the payment and having the funds returned, the FX rate moved substantially, resulting in a six figure loss for our client. Had there been a procedure in place for authorising and checking large payments, the mistake would never have occurred and the loss could have been prevented.  Unsurprisingly the shareholders of the business quickly implemented controls over large payments soon afterwards, including training all staff on how to check and sign off payments effectively, as well as putting in creator and authoriser limits with the bank to ensure all material payments are signed off at the most senior of levels.

There are lots of other examples we could give – but the fact is that these kind of mistakes cost businesses real money, and more importantly, are wholly preventable.

corporate governance
OK – so what should I do?

Good corporate governance should be part of all businesses to avoid some of the mistakes and problems outlined above, and should be part of the day to day operations of your company.  Some suggestions which every business should have in place are:

  1. Have regularly scheduled management meetings. Make sure these meetings happen and are documented with formal minutes. That way there is a record of who said what, what was decided, who takes responsibility for certain actions, and when they should be followed up.
  2. Have an organisation chart. It may sound like overkill, but having a formal structure to demonstrate who reports to who is vitally important, and stops people acting above their level.
  3. Have clear roles and responsibilities assigned to named individuals (job descriptions for instance), and set limits on those responsibilities that are clearly recorded and understood. An example of this would be that a named person can authorise recruitment of a new staff member up to a salary budget of £25k, but above that level would require board approval.
  4. Have some clear internal controls and risk management procedures – for instance, who is responsible for dealing with companies house correspondence, tax correspondence, IT security and GDPR just to name a few? Make sure those processes are documented and it is clear what the procedure is if things go wrong.
Where can we help?

Any system of governance needs to be proportionate, and should be designed to focus on the key areas that matter to your business. We work with hundreds of businesses of all shapes and sizes, and our staff spend a lot of time assessing and testing internal controls and processes for our clients. All our professional staff have real world experience in what makes for good corporate governance, and our partners spend much of their time recommending how to implement good governance to our clients. Several of our senior team have held director level positions in industry, and have a great deal of real world experience in what a good corporate governance set-up should look like.

We can help across a range of areas – from acting as your outsourced company secretary (maintaining the statutory books for you), through to acting as Board Level Advisor where we attend or even organise and run board meetings, plus everything in between.

For more information

For more information on our corporate governance, please contact Scott Harrower, or call us on:

01483 416232