Small Enterprise Corporate Governance: The Structure of Sustainability

In turbulent times when clients are decreasing their budgets, banks aren’t lending, competition is becoming more hostile and threatening, and change is no longer variable but a fixed part of “business as usual” it often effects small companies much differently than large companies. A major reason for this is that larger companies (at least those that are solvent and long-standing) for better or worse depend on their infrastructure and internal systems to get them through tumultuous times. A major part of this system is the Corporate Governance Structure of the organization. This system provides structure in times of uncertainty, it provides a network of quality individuals who are familiar with the company and capable, as a group, of making logical decisions on matters that will determine the level of success or failure within that organization. Some may assume that small companies don’t require the same type of structure to succeed; in fact some may argue that this is the type of structure that would hold a small company back. Corporate governance come with large amounts of “Red Tape”, they take long times to make decisions, there is always bickering involved, and they can, at times, stiffen innovation. Structure doesn’t always have a symbiotic relationship with Innovation; but it ALWAYS has a symbiotic relationship with sustainability and success. The idea that a governance structure doesn’t benefit small companies is fallacious; the fact is without a governance structure there are only two possible ways of operating:

1)    As a corporate dictatorship, where one person (or one group) makes all the decisions, which can only work until one of those major decisions is wrong

2)    As an immature corporate “mad house” where nobody takes responsibility and there are no guiding principles by which the company operates. The fact is that small organizations can be built without this structure, they can create new and innovative products, and they can be successful for a short period of time without a structured governance model. However, unless the business is immediately sold there has to be a governance structure for a company to be sustainable for a long period of time. This is why small companies go out and hire CEOs after they have achieved a level of success, or why these companies bring in talented individuals to help run parts of the company. What is Corporate Governance? Corporate governance is an organization's ability to departmentalize key tasks; and use a logical structure to achieve success in its core competencies. Some people may equate governance to the executives and the board of directors, but it goes so much farther than that. To achieve success in the long term, the shareholders have to depend on the board to act in their best interests, the board must depend on the executives to run the company and achieve profitability, executives have to be able to depend on its managers to make intelligent decisions, the managers must depend on its staff to achieve its mandates, and so on. Corporate governance is a system that allows for decisions to be made and the company to be run on different levels. Very similar to an actual government, each branch of the government is tasked with different duties, and each branch is dependent on the other to do their jobs well. For small businesses this is not as complex as it is for major billion-dollar entities, but it is no less important. To be successful the CEO must be confident that the VP of Marketing is making intelligent decisions as it relates to the implementation of new marketing plans; the VP of Marketing is dependent on the Sales staff to work with the clients to determine what can be done from a marketing standpoint to increase demand. In a small organization, it’s not unusual for the President/CEO to want to make all of the decisions, but the problem with that is that it stifles growth. If they are required to make all of the decisions then there is no time for that person to handle their primary responsibility which is to grow the business. Furthermore it fosters a dictatorial environment where one person makes all the decisions and everybody else simply prays that they are the right decisions. As stated this can work for a period of time, but eventually this type of system will fail. To fully compete in the market, a company must be able to build its infrastructure in an environment that depends on the talent that is in place (if you can’t trust your talent to do their own jobs, then you should evaluate whether they are the talent you want in place), you must have well-defined roles within the organization that creates an environment of accountability, there must be a system of checks and balances, and success must be a shared commodity. Doing this will provide you a flexible and strong structure that can compete efficiently and effectively in the market in the present, and it’s a sustainable model that isn’t overly dependent on any one input, which will allow you to be able to compete and sustain the company in the future.  It isn’t suggested that small businesses should have large and complicated governance structures only that a structure (of some type) should be in place. Below, is an example of organizational chart, and each level of the structure is highlighted, while all companies may not have every level, most companies should (*This example assumes the presence of a board of directors and assumes that board represents the interest of investors, shareholders, and other non-present stake-holders).

 

 

Board Level – The board level in a governance structure has two primary responsibilities: Oversight – In an oversight capacity the board is responsible for reviewing the direction of the company and analyzing whether the company is achieving its goals as stated in previous plans and projections. While the CEO / Board relationship shouldn’t be adversarial, the board does have the power to vote the CEO out, if he/she fails to meet the stated goals of the position therefore providing the board with a fair amount of leverage. For this reason the CEO is required to provide the board with an open picture of the company’s health and is also required to explain actions pertaining to the sustainability of the company. Protection – It can be successfully argued that the primary function of the board of directors is to protect the interest of the stakeholders. The current climate of the global economic landscape has shown that this is not only vital to the shareholders but is vital to the stability of the global economic system. The board is responsible for protecting the shareholders from any entity that would be interested in undermining the company and leading to the possible failure of the company (WHETHER THAT BE EXTERNAL OR INTERNAL). When the board does its job correctly the type of fraudulent activities that led to the collapse of the world market won’t happen very often, and shareholders can have the confidence that they are protected and that confidence will inspire more investments in the future which is the ultimate protection of our investment systems.

Executive Level – From a governance perspective the executive level has one sole responsibility, and that is leadership. This is the level that is responsible for success, growth, and sustainability and is also the level that is accountable for the direction of the organization. Each member of this level is tasked with growing the company from different positions (operations, development, finance/investments, etc.) with the CEO responsible for being the central figure tasked with making the final decision on most major issues. At this level it is required that each member is able to delegate responsibility, while at the same time overseeing the actions of others within the organization. While this level is the “top level” of the organization they are responsible for reporting major issues to the board and ultimately can be replaced (even in a small entity with capital shareholders) if they are not performing up to set standards. It is vital to understand that performance at this level is 100% dependent on profitability and growth.

Operational Level – This level is tasked with taking the goals and the plans of the executive team and executing them. The executive team is required to develop strategies that will allow the company to succeed; the operational level is tasked with taking those strategies and building executable plans that implement them successfully into the operational capacity of the company. In a properly functioning organization employees at this level are departmentalized so that they know exactly what is expected of them. They are generally provided a lot of freedom to build and manage their departments as separate entities and are only required to show results relating to the tasks that they are provided. Perhaps the most notable comparison is with the military; if the executives are generals then those at this level are field colonels who are responsible for taking the generals plan and putting them into action on the battlefield.

Departmental Level – Using the same analogy, this is where we find your field lieutenants who actually go out and do the fighting. The departmental level is responsible for managing the staff and making sure that they do their jobs well. Employees at this level are responsible for the performance of those under them and are also tasked with making sure that the fundamental revenue-generating activity that is performed by the company is done and that the customers are happy. The decisions that these people make are directly responsible for making sure that the money keeps flowing into the company. As a Small Business, how does Proper Governance Benefit Us? Quite simply the ability to have a stable governance structure ensures that the decisions that are ultimately made by the executives are fully thought out. In this system those who make the decisions are provided multiple perspectives regarding the actions that may/may not be taken. Furthermore this system, when followed, allows for a system of checks and balances that is vital for the continued success of the organization. Finally, this system creates a detailed departmentalized organization where every person understands their responsibilities and more importantly they are held accountable for fulfilling their responsibilities. Doing this, especially in a small company, provides for a company that can grow and sustain itself because a system is in place to make sure that the overall success of the company is dependent on the whole and not on some of the parts.

 

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