Corporate governance and small businesses

Jan 04, 2011
<p>Staying on top of regulation, promoting an ethical atmosphere and exploring transparency is not only restricted to large businesses<br /><br /></p>

Corporate governance is not quite common in the small business realm. In fact, most companies feel that governance should be executed in large, publicly owned or traded companies, however that is not always the case.

In a recent Corporate Governance for Small Business report compiled by 4imprint, a company that provides in-depth, how-to articles based on research conducted by professionals and published experts who are familiar with industry trends- points out that small enterprises should start integrating corporate governance practices to best support its investors or multiple business partners.

‘It’s true that most small businesses are more concerned about viability and affordable business solutions than they are about corruption,’ the report says. ‘In a free-market business culture, corporate governance practices can bring stability to markets, strengthen institutions, promote investment and weaken corruption.’

According to Barbara Bowes, president of Legacy Bowes Group, a global reach and strategy firm headquartered in Canada, when a small business reaches the size of 10-20 employees its formal organization structure begins taking shape. ‘You will see that more and more small businesses are developing a code of conduct together with corporate values and are listing these right on their website.’

Some reasons for corporate governance

Small companies are always growing

The report suggests that small enterprises should implement a set of formalized polices and procedures ahead of time, which can eliminate future growth implications. Moreover, the study reveals that ‘small businesses following corporate governance procedures will be primed legally and culturally to make a successful jump from private to public.’

Legal aspects

Some businesses tend to encounter difficulties when trying to navigate its way through the regulatory maze, in order to gain a better understanding and meet the provisions of laws such as Sarbanes-Oxley and the Dodd-Frank Wall Street Reform Act, it is recommended by the Wisconsin-based company to have effective corporate governance practices in place.

 A few tips on how to achieve corporate governance on a small scale

Using data collected over time, the study shows that by establishing an advisory board- a business can reduce risks of mismanagement and conflict of interest that can occur overtime. To that extent, the advisory board will replicate the board of directors found in larger companies and nonprofits.
 
‘All businesses should look at their organizational structure and continually assess what will allow the company to perform in an optimal way,’ says Tom Niewulis, small business consultant. ‘The simplest way to implement this is to have an advisory board.’

The report further states that even though advisory boards hold no legal rights to a small business, they set forth a voluntary checks and balances system that offers mentorship to help small business gain momentum.

Make a plan for consistent financial reporting

Most large corporations are required to conduct third-party audits on an annual basis, which will be reported to stakeholders financial status reports. However, since some small businesses consist of a one to two person team, it is essential to roll out a plan for consistent financial reporting, the report said. Even if the process means having an auditor or an internal bookkeeping procedure, this will equip the organization with the resources it needs to closely monitor its revenues and expenses. More importantly, these records can be used to ‘hold staff accountable for actions while promoting transparency in operations, [which] are key tenants of corporate governance.’

Address compensation and benefits

While large corporations have been faced with excessive scrutiny regarding executive compensation, it is equally important for small business executives to have a protocol in place when determining how staff, owners or partners are compensated. The report highlights that this by using this practice a small enterprise will effectively promote transparency and fairness in the early stages of its developments.  

Overall, corporate governance is no longer limited to leading companies in fact many small organizations are slowly integrating these techniques to create a sound governance framework.

‘In many cases small businesses may not have shareholders in the strictest sense, but most have partners, investors, and other stakeholders,’ says Kevin Lyons-Tarr, president of 4imprint. ‘So in this sense, corporate governance does apply. Following these best practices, small businesses can set out on the path to more streamlined and accountable operations.’  
 

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