How Governance Supports SME Growth Without Growing Pains.

Corporate governance isn’t typically associated with small business. Rather, “bureaucratic red tape” is characteristic of large and public organisations.

Surprisingly, however, many more smaller organisations, and even start-ups planning for scale are adopting governance principles earlier on.

While it’s impractical for new firms to adopt corporate governance structures right away, many of the byproducts of good governance - including establishing efficient processes, capabilities for delegation, strong strategy, and capital for growth - are critical for the success of SMEs.

So, we’re looking at how, and when, SMEs should adopt various corporate governance practices to facilitate sustained growth.

What is Corporate Governance?

Corporate governance is established by a firm’s directors to define how legitimate decisions are to be made in the business. This includes the process of appropriate decision-making, who is accountable, and who is informed of decisions.

What Corporate Governance is Not.

Good corporate governance isn’t restrictive, nor does it replace people’s judgement skills.  Good governance principles must touch on all areas of the business to be effective, and integral to the company’s operations.

What Does Good Corporate Governance ‘Do’ for SMEs?

Governance represents a solid framework for healthy work practices, fostering business growth.

It does this by providing clarity and structure to the organisation, standardising decision-making processes and optimising transparency for stakeholders.

Key products of corporate governance for SMEs include:

• Positive corporate culture with documented plans, and healthy communication practices, including accountability and delegation.
• Workforce productivity and streamlined team growth with efficient employee onboarding processes and guidelines to develop and monitor employee performance.
• Optimised growth thanks to well-defined and efficient work practices and processes.
• Safeguards that reduce opportunities for corruption and risk of regulatory breach, business reputation, and unexpected costs.
• Responsiveness to market opportunities by establishing trust and cohesion among stakeholders, including staff, board members, alliance partners, and shareholders.
• Attracting capital for growth via traditional lenders and investors, alike.

Thus, SMEs with governance at the core of their operation have a healthy foundation and practices for sustainable, scalable growth. They’ve reduced risk factors and attracted capital for growth from banking institutions in addition to private equity firms, venture capitalists and investors.

How Can SMEs Implement Good Corporate Governance Structures?

SMEs need to strike a balance, building structures that facilitate the maturity of operations and business growth without creating rigidity and unnecessary administrative burdens.

For instance, micro firms and sole traders are often multitasking, and have little need for checks and balances. Initially, they typically don’t have enough time, resources, or the need to build a comprehensive governance structure from the very beginning.  Yet, every Australian business must have a working knowledge of various policies and regulations, including Fair Trade and Competition and Consumer Act, Income Tax legislation and Occupational Health and Safety laws.

Plan your Structure now as if it were going to be 100x bigger in the next few years.

Because SMEs vary in size from 1-200 employees, in addition to industry, and market conditions, a governance structure should be fit for purpose. There’s no ‘one size fits all’ corporate governance solution. Further, SMEs will not benefit from a scaled-down version of the governance structure for enterprise business. Rather, the business should grow into relevant governance frameworks, starting with a healthy respect for good governance before shifting to more structured and strategic practices.

Examples of Good Governance as SMEs grow.

Examples of Corporate Governance for Sole Director & Micro Businesses

• A solid business plan
• Sound counsel from advisers
• Relevant licenses, registrations, insurances
• Working knowledge of relevant legal frameworks (Corporations Act 2001, Income Tax, OH&S and Superannuation Laws)
• Timely accounting

Examples of Corporate Governance for SMEs Undertaking Hiring & Growth

• Basic operating policies
• Position descriptions and HR protocols
• Performance reviews
• Timely accounting and forecasting
• Formal reporting and financial schedules
• Formal marketing & sales, product strategies

Examples of Corporate Governance for More Complex SMEs

• Business development strategies
• More detailed plans and policies
• More formal management structures
• Development of an Advisory Board
• Greater controls to maintain staff performance & business reputation
• Working knowledge of all relevant legal frameworks (Fair Trade Act, Competition and Consumer Act, Income Tax ++)

The World Bank has performed extensive research to define an Evolution of Governance Topics.

This brilliant resource helps SMEs to identify a practical governance solution for their firm, according to particular characteristics, including the stage of growth.  See Figure 1.

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Corporate Governance for SMEs Why Now, Not Later?

Eventually, as your SME becomes bigger and more complex, your firm will require more corporate governance. Typically, this shifts from a focus on culture and commitment to good governance to activities around decision-making and strategic oversight to managing risk through internal controls.

By providing a strong roadmap for healthy business growth and frameworks for ‘good’ business, governance not only becomes an eventual reality for successful SMEs but paves the way for sustained growth. Similar to those early-stage SMEs that had already digitised the majority of their operations when COVID hit; the adoption of good governance principles before the small business suddenly needs them optimises growth, the resilience of SMEs and responsiveness to market conditions that underpin significant growth and success. Reach out today at enquiry@primefinancial.com.au to explore how we can empower your business to thrive in Australia’s ever-evolving economy.