Corporate governance is not just for listed companies

SMEs are not obliged to implement formal corporate governance arrangements other than the regulatory requirements of the Companies Act 2006 however SMEs stand to benefit from implementing such practices.

Whilst for many high-profile corporate failures in the news the focus is on the failures, a corporate governance framework helps companies achieve long term success and for SME’s, the focus is more on improving performance rather than management actions.

Benefits from good corporate governance may include:

• Compliance with laws and regulations.
• Gaining confidence of investors and providers of finance.
• Increasing speed of transactions by streamlining of systems to improve efficiency and liquidity.
• Providing reliable information for management.
• Prevention and detection of fraud
• Reduction in the cost of the accounting process
• Reduction in the time for the due diligence process

Corporate governance framework

In simple terms a framework and related systems and controls should help achieve long term success by encouraging management to act in the best interests of the shareholders and other stakeholders such as employees, suppliers, customers etc. The Framework should include:

• Clear reporting lines and how decisions are made, and risks controlled and approved
• Define roles, responsibilities and limits of authority (balance between acceptable risk and reward)
• Incentives need to support the board strategies
• Internal controls related to risk
• MIS on performance and risk management

Let’s consider some of the main principles for good corporate governance.

The board of directors

Putting in place an effective board separate to the shareholders allows additional roles to develop as the size and complexity of the business grows. It also encourages decision making whilst protecting the company from risks by having a list of reserved matters for shareholders and separately directors and delegated matters for management.

The board should meet regularly to discharge its duties and be provided with quality MIS to support decision-making. Remuneration levels should attract, retain and motivate executives which may include long term incentives such as share options. Ongoing training and development of the board and senior management should be encouraged.

Research has indicated some correlation between the board composition and SME growth prospects.

Risk assessment and register

The board should develop a basic risk register to be reviewed on a periodic basis to include:

• A description of the main risks.
• The likelihood and impact if they occur.
• Planned response should they occur.
• Risk mitigation to reduce the probability of occurrence.

For example, consider a company holding stock, considerations may include:

Based on the assessment of likely impact the directors would then look at the business processes associated with the risk and required internal controls to mitigate that risk.

Policies and procedures

The Board should implement policies and procedures and maintain a compliance schedule for laws and regulations to include for example:

• Obligations relating to preparation and filing of accounts.
• Tax compliance.
• Banking facilities and covenants.
• Health and safety compliance.
• Employment compliance.
• Anti money laundering.
• Business continuity and insurance.
• Data security.
• Records management.
• Customer service.

System of internal controls

Internal controls should address the risk where there is higher probability or impact of occurrence and should consider operational, financial reporting and fraud. A system of internal controls is likely to include:

• Authorisation limits.
• Segregation of duties.
• Monitoring of cash flow.
• Staff training and development.
• Budgetary controls.
• Physical and access controls.

How can Barnes Roffe help?

At Barnes Roffe we advise many owner managed businesses on their compliance requirements and strategic objectives whether that is to grow the business, succession planning or an ultimate exit and can provide advise and support at all stages of SME lifecycle and evolution.

Contact us today to discuss corporate governance, compliance and reducing risk in your business.

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