Why governance matters
Decision making based on value added analysis
Essentially, Directors should be working with management to increase shareholder value. Improving performance leads to better results, which puts more value into the business. This value is measured by an increase in the company’s overall worth, but also in its perceived value, which can help win contracts, raise capital and improve relationships at the bank.
A lot of business owners are happy with a lifestyle business to give them a steady income, while other owners want to continually improve performance, in order to build a sustainable and valuable venture that will outlive them.
Being an effective Director, in pursuit of improving business performance means making tough decisions. A business’ Directors and Executives should be aligned in its focus to constantly identify and stop things that are not working and do more of the things that work well.
Making these tough decisions requires having clear and proven facts, and details on the current finances of the business.
Establishing a board and working with experienced independent directors will ensure formal steps are put in place to measure and improve performance. Directors need to know what the bottom line is and what the projected financial future looks like. This leads to an increased value of the business.
Discipline delivers results
Boards meet with their management teams on a regular basis. The executive team will present reports like:
- a simple (ideally two-page) summary of progress against the strategic goals
- an overview of risks and issues you’re managing
- a financial summary
For owner/operators and SME’s, just knowing the meeting is coming up can be a great spur to get everything in order. Being accountable to the board usually adds a welcome pressure on and helps them re-prioritise the work they spend ‘on’ their business, instead of ‘in’ it.
The board will also want reports on key aspects of the company’s operation that are critical to the success of the business. These elements are key performance indicators (KPI’s). Some standard KPI’s:
- financial performance
- human resources
- marketing activities
- product or business positioning
- social and ethical responsibilities
- legal and regulatory issues
- organisational structure
- industry trends
Some boards choose for a report-by-exception format which means the report explains business as usual. Nothing new to report? Say it in a sentence. Things are going better than expected? Say it in a paragraph. Things are going worse than expected? Explain it in depth
A board should only be interested in historical information to help set the context, what they really want to know is what the outlook is. It is with this forward-looking information that a board can aim to make the most effective strategic decisions for the company.
Big picture thinking
The basic idea behind a board is to think about the big picture and seek answers to the big questions so that the future strategic vision of the company is clear and achievable.
Focus on strategic issues
As the company grows, the board must focus on the strategic issues, such as:
- industry trends
- new means to increase productivity
- technology breakthroughs
- new markets
A board fosters the type of thinking which requires the time and space to take a step back and consider all the issues.
Working ‘in’ or working ‘on’ the business
Business owners often struggle to find the time to work ‘on’ the business, making the idea of a board to help deal with this area very attractive and a means to lessen the load. Having a board is first and foremost about understanding the big picture and should be filled with expert individuals who can read a map and plot a course while someone else drives.
Long-term view of the business
Keeping ahead of the day-to-day demands of a business often means making short-term decisions, rather than decisions that consider the future of the company. A board of directors takes a strategic, long-term view of the business.
Experienced directors will have lived through the life cycle of a company before, and will:
- understand the trials and tribulations involved
- know the potential growth paths for the company
- foresee and avoid business pitfalls
- give confidence to make good decisions.
Joining the dots
The essence of big picture thinking is the ability to synthesize data. This means:
- identifying the overarching patterns and themes in the world outside the business
- ‘connect all the dots’ to see strategic insights
- develop the right responses to grow the company
Setting up and staying in business can be risky, and therefore understanding how to best manage that risk is really important. Having a strong board can play an important role in mitigating risk.
Only a few businesses grow if they are completely risk-averse, but reckless decision making also causes business failure. Effective risk management sits at the heart of good governance.
What is risk?
Businesses take risks every day, whether it’s launching a new product, hiring new staff, expanding into new markets, or setting up a new store. These risks are taken because the potential for reward outweighs the possibility of loss. That is not to say however, that robust debate, research and effort has not been done in order to make such decisions.
A board plays a vital role in ensuring a company takes the necessary precautions when dealing with risk, while also maintaining the pursuit for adding value to the company.
Managing risk is about gathering relevant information so you can make a trade-off between the likelihood of it happening and the consequences if it does.
Tapping into experience
Different industries have different risks, which pop up at different stages of a company’s life cycle. Independent directors are typically members of several boards. This brings:
- insight into different approaches to risk
- extensive networks that can be tapped into for specific expertise
- general know-how to fully evaluate a particular risk.
High risk, high return
As they say, “with great risk comes great reward.” However, governance and risk management need not put the brakes on a growing business as risk can often represent significant business opportunities.
Independent directors often play devil’s advocate and challenge conventional thinking when risk rears its head. They can help a board take advantage of something exciting at the same time as ensuring the risk doesn’t outweigh the benefits.
The ultimate responsibility for risk management resides with the directors or board, but the practice of risk management is the responsibility of the company’s executives. The management team should work hand-in-hand with the board.
Businesses need to take risks in order to make profits. Risk cannot be managed away; the important thing is to understand the degree of risk being taken.