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What is the importance of successful corporate governance?

Company size doesn’t matter when it comes to successful corporate governance.

ICAEW’s leading thinker and media speaker on corporate governance issues, Jo Iwasaki, shares her thoughts on the importance of good corporate governance in companies of any size.

Medium sized company case study

A member recently told me of one of his experiences with a non-executive director (NED) on the board of a medium size, hi-tec company where he was the finance director (FD).

The background

The member had to manage the finances as the organisation went through a difficult time – it was in the immediate aftermath of the financial crisis, and the company was facing a severe shortage of funds as previously committed tranches of finance failed to materialise.

The business environment was moving fast, and he needed to get the board and shareholders to agree on a series of measured decisions in rapid sequence.

The challenge

The main challenge he faced was the managing director: an overbearing visionary who had his own idea on how the company should ride out the storm.

The member found it indispensable to have a NED, who was unafraid to provide an independent viewpoint, and so balance an otherwise one-dimensional decision-making process. He was also there to lend his ears to the FD to listen to ideas and suggestions that the FD wanted to present to the board, supporting him in presenting a different point of view.

The company

The company was not listed so was not required to have NEDs – under the current corporate governance regime in the UK, the Corporate Governance Code only applies to listed companies. Some of its specific provisions do not apply to companies below FTSE 350.

However, there were a disparate group of shareholders (none with overall control) and the appointment of a NED to the board was stipulated by the shareholder agreement. The FD’s experience demonstrates that appointing a NED to the board should not be seen as an undesirable burden but as an opportunity to improve the governance and decision-making of a company.

The principles of corporate government

The principle ideas behind the Corporate Governance Code are fairly straight forward – principles have to be intuitive, relevant and easy to remember. After all, corporate governance is a means to an end, and the end is to help a board determine how to steer a company to achieve its business purpose. As much as that end is applicable to any company, so should the principles of corporate governance.

One of the papers published by ICAEW is What are the overarching principles of corporate governance? Here we identify five principles of corporate governance:

  • leadership – to steer the company to achieve its business purpose
  • capability – having a capable board to discharge their duties
  • accountability – to communicate to its stakeholders how the company is achieving its business purpose and other responsibilities
  • sustainability – to create value and allocate it fairly and sustainably
  • integrity ¬– to withstand scrutiny by internal and external stakeholders.

These might look aspirational, but to develop a robust culture in business aspiration is no bad thing. Principles are not really a matter of regulation but they enable companies to be better run. And as ICAEW Chartered Accountants we should be familiar with applying high level principles to practical realities.

In conclusion – size doesn’t matter

Corporate governance, in particular at a principle level, is as relevant for SMEs as for listed companies. Keeping these principles in mind can help issues that typically face SMEs: for example balancing CEO, and succession planning. Companies may organically develop, but there is a point where it makes sense to have a more formal structure.

Once we understand what drives these formalities, corporate governance can be a truly useful tool for companies of any size in responding to challenges of a rapidly changing business world while maintaining stakeholder confidence.