Tips for Setting Up a Governance Structure as an SME

Three weeks ago, I wrote on the importance of implementing corporate governance as an owner of a small or medium sized enterprise (SME). I have decided to expand my thoughts on the topic in the next few articles and share some tips for SMEs that desire to build a strong governance structure.

As someone who has worked in the startup space, I understand very well, the focus required to achieve profitability. In the early years, owners of SMEs have to focus on overcoming the hurdles of creating the right product, insufficient capital, and aggressive competition; leaving little or no time for building a sound corporate governance structure. The reason for this is not far-fetched. According to the statistics, only about half of small businesses pass the five-year mark. Beyond that, only about one in three small businesses get to the 10-year mark and live to tell the tale.

This is a sober and cautionary report for SMEs.

While recognizing the importance of finding the right product and ensuring profitability, a sound governance structure should not be ignored. According to the SME Governance Handbook published by the International Finance Corporation, the following issues (which are bad corporate governance practices) threaten the survival of business in the long term:

• ambiguity in business roles (with key personnel wearing multiple hats);
• an informal approach to business;
• family involvement at various levels, and
• an often insular leadership focus.

Based on this, it is clear that a bad product from a business is not the only reason why the business might fail. Research and empirical evidence have shown that good governance improves business performance and increases the chances of a company’s long-term survival.

An added benefit of implementing good governance processes is that it helps the business owner to be ready for external investment.

Everyone wants to be the next Flutterwave or Paystack but few are willing to put in place the kind of structure that will make an external investor comfortable enough to make that investment.

The SME Handbook states that, external investors consider the following when evaluating a company:

• Is key decision-making centralised?
• Who are the people with essential knowledge and expertise, and how do you plan succession for these key risk positions?
• What are the measures in place for managing risks?
• Does the Company have transparent decision-making?
• Are there readily available channels to access information about what’s happening with the company?
• How can potential investors be sure the information provided is correct and complete?
• What relationship do you offer to your shareholders?

How to Set Up Your First Board

The first step I would advocate for to having sound governance structure is to appoint a very good Board. Appointment of a Board is not a box-ticking exercise. The Board of Directors is at the centre of a solid governance structure for your company. The Board will help the Management to set the ethical culture and design the long-term strategy of the organization. The Board will also serve as a strong accountability partner for the Management team. A well selected Board can prevent a lot of heart ache by helping you to see landmines and icebergs that could probably end your business. A little side note when deciding the composition of your Board, I advise that you have a lawyer on early enough especially if you are yet to appoint a Company Secretary whose opinion you respect and a Person with sound understanding of finance.

The Board of Directors is at the centre of a solid governance structure for your company

So then, what key qualities should you look out for in choosing members of your Board:

• Integrity — this one is non-negotiable. Sometimes the lines can get blurred for you as a business owner in the quest to make profit, it is necessary you choose a Board that can serve as a check to you and to prevent you from making a short term seemingly good decision that would have long term consequences;
• Sound understanding of your industry — this is also non-negotiable. To be able to advise you on long term strategy and check your decisions, you need a Board that you are convinced understands the unique challenges of your industry. For example, if you play in the technology space, pick people that understand the challenges in the technology space;
• Respect and Trust — a Board that will work best for your company is one that you as a Management team can respect and trust. A lot of times the opinion of the Board may clash with what your plans as a Management team. If you do not respect the Board or trust its decisions, you will find it difficult to fully implement their directives or strategies;
• Belief — in selecting members of your Board, it is paramount to select Directors that have confidence in you as a person and who believe in the vision of the Company. Building a company is a marathon and you need to have Board members that will be partners to the fulfilment of the Company’s vision; and
• An understanding of what it takes to grow a business — Consider having entrepreneurs who have been successful in building businesses from the ground up. Such understanding will help particularly in employment decisions, cost management and determining strategic focus per time.

How about your Chairperson?

In selecting the Chairperson of the Board, you are not only looking for someone that thoroughly understands the nature of your business and industry but also a person of high integrity. The Chairperson sets the tone for the governance and ethical culture of your organization. A great Chair Person will prevent you as the Chief Executive Officer from making mistakes that could otherwise lead to a shipwreck of your business.

When is the right time to appoint your Board?

When you make your first million. I am just kidding. Once you are sure that you have a viable product and you are committed to doing the business, it’s time to take the next step and start constituting your Board.

To find out what comes next after setting up a great Board, watch this space. Until next time, take care!

REFERENCES

1. Chad Otar, What Percentage Of Small Businesses Fail — And How Can You Avoid Being One, https://www.forbes.com/sites/forbesfinancecouncil/2018/10/25/what-percentage-of-small-businesses-fail-and-how-can-you-avoid-being-one-of-them/?sh=292af1b843b5

2. SME Governance Guidebook, an International Finance Corporation Publication 2020, https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/resources/guidelines_reviews+and+case+studies/sme+governance+guidebook