How well do you understand the requirements of your small business?

By Bob Weir on July 20, 2016

In recent months a few of our larger clients, and smaller clients looking to grow, have been looking at whether they bring in additional shareholders and directors.  This has lead to broader discussions on better governance processes for small business.

In former roles I spent many years reporting to the board of a large corporate. I have also been a Chair, independent director and trustee of a number of boards. In doing this it has led me to consider what role good governance could play in smaller businesses and how governance can be simplified to help these small businesses.

A lot of what the corporates do in their governance processes would be an overkill for a small business. However, there are some very important aspects of governance that small businesses should consider, no matter their size.

Let’s first discuss the key roles in a company (where a company is a business that is registered with the companies’ office).  There are three distinct roles.

  1. Shareholders. They own the business and are usually the people who invest the money and face the risk of losing that money.
  2.  Directors. They are designated by the shareholders to oversee the running of the business and who have legal obligations under the Companies Act and often under other legislation, such as the health and safety act.
  3.  Employees.  They are delegated by the directors to manage and run the company on a day-to-day basis and report on how the business is performing.

In large organisations different people, with defined responsibilities, carry out these different roles. However, in most small businesses the same person does all three, namely the small business owner.

So what might good governance look like for a smaller business?

As a minimum, every owner of every small business needs to devote time looking at where the business is heading and how it is performing. This would be the role of the board of directors in a larger company but is the role of the owner in a small business.

Owners need to set aside time away from the day-to-day to look at the business’ strategy, its major risks, and the performance of the business. This is what any board would do in a successful business.

 If you are growing, you have multiple shareholders, or you need expertise to support you achieve your business’ goals, there are a few things to consider.

If you bring a new shareholder into the business (e.g. an investor, other family members, or employees) a shareholder’s agreement is critical.  

Look at who is best equipped to be a director and if you need directors who are not influenced by having a shareholding in the business. That is, they are independent directors.

If you don’t want new shareholders or to formally appoint people as directors, or you simply want to take a smaller step before setting up a formal board, a great alternative may be an Advisory Board.

Directors have clear legal requirements under the Companies Act and can directly influence key decisions. If they don't do this, they are not really doing their job. Using advisors in this capacity, rather than formal directors, still means they bring expertise the owner may not have, they can challenge the owner on critical decisions, and can mentor the owner.  However, the ultimate accountability still rests with the owner.  

Remember, bringing a best mate in or someone the owner likes who does not have the correct skills is fairly pointless, but it happens too often. The advice needs to get the owner where they want to go which, at times, can be uncomfortable. 

 In summary:

Even if you are the shareholder, the director and the employee/manager, you need to devote time on the strategy for the business, the risks it faces and it’s performance, as any good board would do.

Bringing expertise into these strategic discussions can add huge benefits to your development and the business.

An Advisory Board may be a good interim step as you grow, before a formal board comes into play and,

Seek good advice if you are struggling with the best governance options.

 A final quote that reinforces why high quality advice in delivering what you want from your business is so important:

Learn from the mistakes of others.
You can’t live long enough to make them all yourself
— Eleanor Roosevelt