Corporate governance refers to the set of internal policies, rules and procedures that a company regularly follows to ensure that it operates in a fair, equitable and appropriate manner for the benefit of management, stakeholders and the organization as a whole. The objective outcome of a corporate governance policy within a small business is to empower the company to set strategic goals, appoint leadership that can attain those goals, oversee management and report to key stakeholders on the periodic progress of the organization. But aside from goal setting and management, why do small businesses need strong corporate governance policies in place?
Policies and procedures protect not only the principals of the business but also investors and other associated organizations. Sound corporate governance documentation of policies and procedures provide all key parties with a roadmap of expectations as to how the organization conducts its business. And should a roadblock arise, those same policies and procedures can provide all affected parties with a way forward, as well as a dispute resolution mechanism should approaches to the roadblock prove irreconcilable.
Foster Employee Recruitment and Retention
Employees are your most valuable asset. Strong internal corporate governance policies are not only attractive to current employees but also a strong incentive for top candidates to join your organization. Moreover, after investing in your employees’ training, retention of that investment is critical. Sound corporate governance practices can ensure that performance and executive compensation systems retain and reward the organization’s top performers and future leadership. Additionally, a corporate governance system can avoid and reduce internal conflict, demarcate executive duties from administrative ones and improve employee morale and trust in the organization’s leadership.
Future Company Growth
Even a private company needs to have a sound corporate governance program, so as to remain attractive to potential investors and business partners. A small private company may one day decide to go public or may remain private but want to attract new investors and principals. Either way, a sound corporate governance program can make the way forward for growth smoother with formalized policies and procedures instituted early in the life cycle of the business. A culture of defined expectations readies the organization for growth, whether it remains private or expands into the public sector.
Ethics Are Highly Valued in Today’s Business Environment
Whether a small or large company, recent current events show that ethics, the foundation of corporate governance, are highly sought after by the consumer. A 2002 Hill and Knowlton study found that 79% of Americans take the ethical business practices of a company into consideration when debating a product purchase. (Cuizon, Gwendolyn. “What Is Corporate Social Responsibility”) Ethical business practices and internal expectations can only increase the reputational and financial value of your organization.
Manage Legal Compliance of the Organization
Today’s regulatory environment requires businesses, both big and growing, to stay on top of regulatory requirements. Regulations such as Sarbanes-Oxley and the Dodd-Frank Wall Street Reform Act necessitate that smaller businesses and organizations be aware of the regulatory requirements and hurdles that define today’s business environment. Accounting practices and consumer protection compliance apply to most if not all businesses in some way and it is important that your organization be aware of how these regulations apply to how it conducts business.
Large corporations often opt into corporate governance structures for different reasons than that of a small business. However, the result is hugely the same; transparency, structure and equitable business practices. For a small business that aspires to growth and profitability, these reasons can only propel it towards future success.
What’s the takeaway? Small businesses, whether priming for IPOs, looking for new investors, employees and business partners or solely looking to provide their organization with formalized policies and procedures, should devote the appropriate time and attention to their company’s corporate governance structure. The benefit to your organization’s leadership strength, employee morale and reputational risk profile and business stature among its peers will be immeasurable.