Why good corporate governance underpins long term performance
06 June 2013
In the first of a series of articles de-mystifying corporate governance, Colin Coffey CDir looks at how it underpins long term performance and its relevance to start-up companies today.
When Paul Terrington recently succeeded Mervyn McCall as Chairman of the Institute of Directors, he remarked that the IoD had a role to play in educating and accrediting directors in “good corporate governance.”
I’m often asked whether good corporate governance simply means doing things right. Well yes it does; but it is not merely a box-ticking exercise.
At the most basic level, it is about complying with the law. Beyond that however, it is a continual and structured process for ensuring that you are managing your business effectively; in short, getting the best out of the company and the best out of the people.
Figures released at the end of last year showed that more than 100 directors in Northern Ireland were disqualified in just an 18 month period because of mismanagement and negligence.
Those 102 directors left behind them a £80m debt bill.
Therefore, it’s vitally important to get across the relevance of corporate governance to all businesses in Northern Ireland.
People understand ‘governance’, i.e. control and management, but ‘corporate’ seems to conjure up the idea that is it solely for large multinationals.
As a result, many directors of small businesses believe that corporate governance simply isn’t applicable to them and/or their company, but it really is.
Take the large number of start-up companies, especially in the digital sphere in Northern Ireland. When seeking financial backing from VCs and other funders for their ventures, investors will want to see a structure in place that assures them that good corporate governance is being adhered to. Without it, you can forget funding.
However, corporate governance has been defined as the structure through which any organisation is directed, controlled and held accountable.
And how pertinent is that in a region where the majority of businesses are SMEs?
Unquestionably, part of it is about ticking off certain boxes, for example, making sure VAT goes in on time, paying corporation tax, a health and safety strategy, employment handbooks.
But, corporate governance means you have processes in place to look at business efficacy and, furthermore, a review process to ensure you are continually improving as a company.
Without a doubt, it covers all facets of the business; the legislative side, the people side, the strategic side, the financial side.
It encourages you to ask the right questions, of the right people, at the right time and in the right manner.
Not only that, but it forces you to have the necessary information to subsequently answer those questions. The basis of that information can only come from continued dialogue within the company, for example, regular meetings with a proper agenda and suitable structure.
The Department of Enterprise, Trade and Investment states that disqualification proceedings are brought against those directors of failed companies who have “abused the privilege of limited liability status through negligence, incompetence or lack of commercial probity.”
Corporate governance, therefore, ensures that, from the outset, there is a defined framework of rights, responsibilities, procedures and relationships amongst all the various stakeholders.
The board of directors is at the heart of corporate governance and, given there are now extra demands on directors, a well-constituted board is a vital company lifeline.
The design of a credible framework involves key corporate governance factors including delegation of authority, profession decision making, fairness, accountability and transparency.
It is not necessary to have a formal qualification to sit on a board or run a company, but directors need to be aware of the roles and responsibilities required in order to be an effectual company leader.
There are many professional courses focusing on what can go wrong and the skills and attributes needed.
Indeed, the Institute of Directors regularly runs courses - both professional and learning based seminars - that look at the essentials of good corporate governance for SMEs and larger organisations.
There are also nearly 1,000 members from all sectors of the economy ready to offer advice. Some have been there and got the t-shirt, others continue to learn from the experiences of their peers.
The implementation of good corporate governance is not necessarily effortless, and may involve a significant change in culture and the way that companies think and operate.
As such, reflecting back to what the new IoD Chairman Paul Terrington said, the IoD must continue educating directors that “ticking boxes” is simply not enough, but that good corporate governance underpins long-term,
Colin Coffey is Director of Digital Venture Group Ltd and an IoD Chartered Director.