Governance - definition & overview

Governance, in the context of small businesses, refers to the system by which an organisation is directed and controlled. It is the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which businesses, and those in control, are held to account.

Good governance is not just about compliance, but also about creating a culture of best practice. It is about ensuring that businesses are run in a way that is ethical, legal, and transparent, and that they are accountable to their stakeholders. This includes shareholders, employees, customers, and the wider community.

Principles of Governance

The principles of governance provide a guide to what is considered good governance. These principles are often set out in codes of governance, which provide a framework for the governance of a business. They include accountability, transparency, fairness, and responsibility.

Accountability is about ensuring that those in charge of the business are accountable to those who have a stake in the business. This includes shareholders, but also employees, customers, and the wider community. Transparency is about ensuring that the business operates in a way that is open and understandable to all stakeholders. Fairness is about treating all stakeholders equally and without bias. Responsibility is about those in charge of the business taking responsibility for its actions and outcomes.

Accountability

Accountability in governance refers to the obligation of an individual or organisation to account for its activities, accept responsibility for them, and disclose the results in a transparent manner. It also includes the responsibility for money or other entrusted property.

Accountability in the context of small businesses can take many forms. For example, a business owner may be accountable to shareholders for the financial performance of the business, to employees for the working conditions and culture of the business, and to customers for the quality of products or services provided.

Transparency

Transparency in governance refers to the obligation of an organisation to operate in an open and clear manner. This includes providing all relevant information to stakeholders in a timely and understandable manner.

Transparency in the context of small businesses can involve a range of activities. For example, a business may provide regular financial reports to shareholders, hold open meetings where decisions are made, and provide clear and understandable information about products and services to customers.

Roles and Responsibilities in Governance

The roles and responsibilities in governance vary depending on the structure and size of the business. However, in general, they include the roles of the board of directors, the chief executive officer (CEO), and the shareholders.

The board of directors is responsible for overseeing the management of the business, setting its strategic direction, and ensuring it complies with its legal and ethical obligations. The CEO is responsible for the day-to-day management of the business, implementing the strategy set by the board, and reporting back to the board on the performance of the business. The shareholders are the owners of the business and have a role in holding the board and management to account.

Board of Directors

The board of directors is a group of individuals elected by the shareholders of a business to oversee its management and to protect the interests of the shareholders. The board is responsible for setting the strategic direction of the business, overseeing its management, and ensuring it complies with its legal and ethical obligations.

In a small business, the board of directors may consist of just one or two people, often the owners of the business. However, as a business grows, it may choose to bring in outside directors to provide additional expertise and perspective.

Chief Executive Officer (CEO)

The CEO is the highest-ranking executive in a business. They are responsible for the day-to-day management of the business, implementing the strategy set by the board, and reporting back to the board on the performance of the business.

In a small business, the CEO may also be the owner of the business. However, as a business grows, it may choose to hire a professional CEO to manage the business.

Importance of Governance in Small Businesses

Good governance is important in small businesses for a number of reasons. Firstly, it helps to ensure that the business is run in a way that is ethical, legal, and transparent. This can help to build trust with stakeholders, including shareholders, employees, customers, and the wider community.

Secondly, good governance can help to improve the performance of the business. By setting clear roles and responsibilities, and by holding those in charge of the business to account, governance can help to ensure that the business is run efficiently and effectively.

Building Trust with Stakeholders

Good governance helps to build trust with stakeholders by ensuring that the business is run in a way that is ethical, legal, and transparent. This includes being accountable to stakeholders, providing clear and understandable information, treating all stakeholders fairly, and taking responsibility for the actions and outcomes of the business.

For example, a business that is transparent about its financial performance, that treats its employees fairly, and that takes responsibility for its impact on the community is likely to build trust with its stakeholders. This can help to attract and retain customers, employees, and investors, and can enhance the reputation of the business.

Improving Business Performance

Good governance can also help to improve the performance of a business. By setting clear roles and responsibilities, and by holding those in charge of the business to account, governance can help to ensure that the business is run efficiently and effectively.

For example, a business that has a clear strategic direction, that holds its management to account for the implementation of that strategy, and that regularly reviews its performance against its goals is likely to perform better than a business that does not have these governance mechanisms in place.

Challenges of Governance in Small Businesses

While good governance is important in small businesses, it can also present a number of challenges. These can include the cost and time involved in implementing governance practices, the lack of expertise in governance, and the potential for conflicts of interest.

Implementing good governance practices can be costly and time-consuming, particularly for small businesses that may not have the resources of larger organisations. This can include the cost of developing and implementing governance policies and procedures, the cost of training and development for those involved in governance, and the time involved in governance activities such as board meetings and reporting.

Cost and Time

The cost and time involved in implementing governance practices can be a significant challenge for small businesses. This can include the cost of developing and implementing governance policies and procedures, the cost of training and development for those involved in governance, and the time involved in governance activities such as board meetings and reporting.

For example, a small business may need to invest in legal advice to develop its governance policies, may need to provide training for its board members, and may need to spend time preparing reports for its shareholders. These costs can be significant, particularly for a small business with limited resources.

Lack of Expertise

The lack of expertise in governance can also be a challenge for small businesses. Many small business owners may not have experience or training in governance, and may not be aware of the requirements and best practices in this area.

This lack of expertise can make it difficult for small businesses to implement effective governance practices. For example, a small business owner may not know how to develop a strategic plan, how to set up a board of directors, or how to ensure accountability and transparency in the business.

Conclusion

In conclusion, governance is a crucial aspect of running a small business. It involves the system by which an organisation is directed and controlled, and encompasses the mechanisms by which businesses, and those in control, are held to account. Good governance is not just about compliance, but also about creating a culture of best practice.

While implementing good governance can present challenges for small businesses, the benefits can be significant. Good governance can help to build trust with stakeholders, improve business performance, and ensure that the business is run in a way that is ethical, legal, and transparent.