Corporate governance has become an increasing common discussion in financial circles over the past several years. With several scandals, frauds and unethical practices being unearthed at some of the largest firms in the world, most small business owners are very familiar with how a lack of strong governance can impact large global organizations. However, many don’t fully understand how governance practices can impact smaller firms and organizations. Strong governance practices often separate the firms that excel and grow from those that stagnate and are unable to expand their businesses.
Strong Governance Adds to Small Business Value
One key element of corporate governance for smaller firms is a defined corporate strategy. All companies should have a strategic plan, preferably documented, which should be shared amongst the leadership team. Decisions and tactical business planning should tie back to these strategic objectives at all times. Many small businesses fail due to a lack of focus, so managing to an outlined strategic document can assist business leadership in keeping their eyes on the ball, ensuring that decisions are made with long term objectives in mind.
After designing a strategic plan, small businesses need defined policies and procedures. While this doesn’t have to mean the vast documentation that many large organizations may undertake in this area, firms do need consistent ways to manage the day to day routines of their business. Having defined procedures and policies provides value by allowing seamless integration when new employees are brought on board, as well as providing benchmarks to measure gains or decreases in company productivity.
When building any governance system, there should be some thought given to risk management. Whether as part of the corporate strategy document or a separate plan altogether, business owners and leaders need to give thought to potential risks to the execution of their strategic objectives, and have in mind some mitigation strategies if these risks materialize. Having prudent risk management planning allows owners to prevent being caught off guard and unprepared.
The Limited Liability of a Corporation Rests Upon Good Governance
In addition to the value that strong governance practices can provide in terms of business operations and profitability, having the right set of governance policies is critical to maintaining a corporation’s limited liability. This is especially critical for small businesses where the lines between personal activities and corporate activities are often blurred. With a defined strategic plan and outlined policies that are consistently followed, small business owners can protect themselves from legal and financial liability through their corporate structures.
Corporate Governance is more than just an Exercise
As discussed, strong governance practices are critical for the success of even small or family businesses. By implementing a strategic plan, along with some policies and procedures, business owners can set a clear path forward for their firm. Building in some thought around risk management takes this to the next level, creating an environment where owners are prepared for eventualities that may impact their business value. All of these steps help create the clear distinction between personal and corporate activities that is required to ensure the limited liability protection of a corporation is maintained.
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