How Good Corporate Governance Improves Your Business

Posted on Aug 28, 2012 | 0 comments

What is it that determines business value?

At a basic level it is profitability and free cashflow. A discounted cash flow analysis or a recurring income multiple will provide an objective business value pretty quickly once the underlying figures are available.

But this doesn’t really answer the question because it doesn’t get to the root of things. The real value in a business is its client appeal and its resilience.

Client appeal is a shorthand way of explaining what it is about the business that clients see as adding value; it’s the reason that clients stay with the firm, the reason the firm gets good word of mouth and takes market share from others; it’s what drives future earnings.

Resilience is that characteristic of the business that allows it to sustain itself, to push through difficult times and changes in the environment and client tastes; it’s what allows the business to be recognisably the same even though its services and products may change (as they do given sufficient time).

It is tempting to say that these attributes, client appeal and resilience, are human attributes; that the success of the business is entirely due to the people in it. But as tempting as it is, that’s wrong. Of course some human, or group of humans, had to create the business and establish its systems but it’s the business systems and processes, its culture and its strategic capacity that give it the edge over other businesses; that make it worth more than the industry average.

Certainly none of this can happen without the people in the business, but it’s not simply the people in the business, it’s the combination of the right people and the right systems and processes. After all the business as an entity, if it has sufficient client appeal and is resilient enough, will long outlast the people who created it. Hewlett Packard, started by its two founders in Bill Hewlett’s one-car garage, for example, has outlived both men by more than a decade and seems well set for a very long life.

Small-medium growth business guru Verne Harnish says that routine sets you free. By this he means that once you have well defined, clearly purposive systems and procedures in place you need spend little energy in deciding what’s next or in working out how to do that next thing; it’s already been considered and planned so just follow procedure. The business systems (when properly planned and implemented) will have all the business’s intelligence embedded within them, meaning that the business is far more productive, and profitable, than it would otherwise be.

This also means that the managers of the business are free to be creative, that is to innovate, build relationships, better service clients and in a myriad other ways improve and build the business.

What is corporate governance?

Corporate governance is the system by which businesses are directed and controlled; in small medium businesses this is usually accomplished through the financial management structure. It specifies the distribution of rights and responsibilities among different participants in the business, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on business affairs.

Such specifications should be prudent, meaning “judicious, practical, wise, far-sighted and cautious”.

How then does all this tie together?

Simply this: corporate governance is just people following well designed procedures and processes. It exemplifies routine setting you free!

None of this means that the people in a business become automatons. Rather it means quite the opposite. Using good corporate governance to improve your business is about using the time and energy liberated by appropriate systems to free management’s collective mind for business improvement.

All that is needed is to extend the same principles of good governance to all aspects of the running of the business: management, operations, marketing, sales, client service and so on. If done over time this is perfectly achievable by all businesses.

See below for a short précis on guiding principles for good corporate governance.

How JWA Business & Wealth can help

JWA helps our clients navigate the unchartered terrain the business owner/manager must travel to determine and put in place the right procedures and processes for use in the business. A good deal of the hard work is done for the client in other words – not that this means the client won’t have to apply themselves to accomplish the end result but they will have an experienced guide to show the way.

Once the strategic plan and the necessary systems and processes are in place the future of possibility is open to the willing business owner.

Good Corporate Governance – Five Rules

Here are five rules suited to SMEs:

  1. Guiding principles – what is the business’s reason for being, its purpose (usually called theMission) and what principles will be used to guide its development for example personal ethos, client responsiveness, in general what you will and won’t do to develop the business – sometimes a ‘Values Statement’.
  1. Strategy – given the purpose of the business and the objectives that fall out from that, the business owner must have a strategy to reach those objectives and realise that purpose – the rule here is to have one and follow it, but ensure it is well founded.
  2. Organisational structure – there are a limited number of business structures, for example functional, multi-divisional, matrix, but the variations on the theme are extensive – the important factor is to ensure that the organisational structure supports the strategy.
  3. Culture – the organisation’s way of doing things and communicating within itself (that is, between the individuals in the organisation); we can only achieve things through others and business is all about people so make sure the culture is appropriately supportive of the people in the business.
  4. Alignment – this is about getting the right people on the right bus and in the right seats; about aligning objectives, strategy, structure and the individual and team aims all working to the same end – difficult but essential.

 

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