When the owners of small to medium-sized enterprises talk about governance and boards, typically what comes to mind is a bunch of professionals in suits sitting around a big board table talking business and making decisions. It’s not surprising, then, that a lot of SME owners take the view that having a board is not for them. They think their business is not big enough to warrant having one, or that a formal board structure would not be appropriate for them, given their industry and current level of performance. In most cases owners believe their businesses are doing “well enough” and they are making a “good enough” living, so it’s not surprising to find the majority of SMEs are governed by the people who founded them.
There are other reasons SME owners shy away from setting up proper governance structures, such as not wanting to be held accountable, or perceiving the cost of paying independent board members as too expensive. But the main reason, I think, is they just do not realise the value that proper governance and a board structure can add to their business. They don’t know what they don’t know, hence they don’t realise the benefits these can bring.
There are a lot of self-governed SMEs that are doing well, but is “doing well” the same as “doing great”? And are they really performing well, or have they just been lucky? Running your own business is challenging. Most operators wear multiple hats within their business, forever trying to be everything to everyone. Unfortunately, at some point, something has to give, and the cracks start to show.
There are signs – often failings – that make it apparent when having a board would have made a difference to the success of a business. These will often directly relate to the set of skills that are not the strong suit of the founding owners.
Some examples of these signs are soured working relationships or resentment between founding owners, the inability to grow turnover or profit past a certain level, the retention of inefficient processes or unprofitable products, the failure to spot changes in the market, staffing concerns, or sudden and unexpected cashflow issues.
The benefits of having proper board and governance structures in place mean that most such problems could either have been identified and acted upon before they became serious, or they may never have occurred at all.
Accountability to the board ensures that all areas critical to the success of a business are addressed and get the right amount of focus. Risks are mitigated and opportunities are identified across all areas of the business, not just those the founding directors are comfortable or skilled at working in.
Another benefit is that the journey for the founding owners is less lonely, as there is the support and guidance of the board members, all of whom have the same mandate: to do what’s right for the business. The emotional element is taken out of the equation; decisions are made in the best interests of the business and are able to be substantiated.
Strategy is critical
Having a board also ensures that time is spent working “on” the business instead of “in” the business, which is an area that often gets muddy for working owners. There is a clear definition between what is strategic and what is operational.
A strategy is decided, a plan is created, resources are allocated and progress against the set strategy is monitored on a regular basis. Those tasked with implementing the strategy at an operational level are accountable to the board. Matters are dealt with, rather than put off or overlooked.
The SME sector encompasses many different businesses, all at different stages of growth, from the sole-trader new enterprise to the more established company employing staff. Given this, what does an appropriate board structure look like for a small SME with limited resources?
This is a difficult question to answer, but a good place to start would be to ensure that at the board-governance level there is access to the right skill sets required to manage the business. Typically, a balanced board is made up of people with experience in different sectors of the business community, such as legal and finance, compliance, and sales and marketing, as well as people with experience and success in the same industry.
If, when reading this article, you feel that some of the examples mentioned are describing some of the difficulties that you are facing in your business, and you have been going it alone, perhaps it’s time to consider setting up a proper governance and board structure. This may seem like a daunting process, but it does not need to be. The best way to begin is to start asking yourself some questions, so the following are some points to help get you started.
Where to begin?
Start by taking time to review honestly your business’s current position. Identify the areas that you have concerns about or do not feel confident in. What areas need attention now? What has held the business back? Balance this with also reviewing the areas of the business that are doing well. Why are they doing well? What are your operation’s core strengths? Be honest.
Once you have completed this, look forward and consider where you want the business to head. Do you have a formal strategy for the future already in place or do you need to create one? What challenges need to be overcome? What opportunities are available?
After listing these, identify what skills sets are missing from the business. Then consider what type of person would have these skills. What industries are they from? How much experience would they have? Do you already know people who may have these skills who would be open to being a board member?
Once you have completed this process, you should have a better understanding of the types of skill areas and people that your business needs.
From here, the right governance structure and potential board people can be identified.
The key point to take away from this is that if you are the founder of an SME and are currently going it alone, it might be time to consider that there could be a better way, with improved governance and a board structure. What have you got to lose?
Carole Pedder is a chartered accountant, business advisor and partner at Withers Tsang, specialising in client development, strategy and tax.