Why corporate governance matters for SMEs

5 Minutes

Corporate governance is a hot topic, and it is usually failures in governance that hit the headlines.

Recent stories to have made the press concern the ‘extremely disturbing’ working conditions at Sports Direct, cheating emissions tests at VW and the extraordinary admission, from P&O Ferries’ Chief Executive Peter Hebblethwaite, that he wilfully broke employment law to sack almost 800 crew with no consultation. These examples, and many besides, demonstrate that, regardless of sector, deficiencies in business controls cause major problems – and the buck stops with the board.

Corporate governance requires board level action whatever the company size. When large companies do not have robust systems in place, do not follow their systems, or have not established an effective and diverse board of directors, the number of people affected by these failures make it a matter of public interest. However, the same principles of good governance are relevant for SMEs.

Though they are not subject to the prescriptive requirements faced by large companies, SMEs can be just as vulnerable to exposure to risk and just as likely to benefit from good governance, processes, and risk management. 

What Do SMEs Stand to Lose and Gain? 

In recent years, we have seen a marked increase in expectations of smaller businesses from a range of stakeholders. This is coming not only from the more the traditional sources like investors and potential buyers, but also from customers, suppliers, insurers, employees and societally. Increasingly, the standards for larger businesses are becoming norms that SMEs are expected to regard as good, or even standard, practice.

It is increasingly common to see large sections of tenders, for example, asking businesses to demonstrate good governance and compliance. Businesses that cannot respond with clarity and credibility will fall at the first hurdle. Procurement exercises by larger corporates involve a higher level of rigour – not just asking detailed questions about compliance and governance frameworks but seeking documented evidence in support of answers provided. Suppliers will be discounted from these processes, even if they have a preferable product and price, if they cannot give comfort on the controls that they have in place. Suppliers that are successfully appointed, regularly face verification exercises (e.g., audits) and feel the financial pain of any deficiencies that are found.

As if missing out on opportunities were not enough, poor governance is often the root cause of exposure to existential threats to a company and its board. We see thriving businesses devastated not just through inadequate financial controls, but by failure to look after data properly, overlooking health and safety risks or falling foul of modern slavery rules. Quite simply, it is worth investing in quality controls rather than seeing governance and compliance as a mere tick box exercise.

Good governance will increase your standing with all your stakeholders, and potential partners or customers. In a very difficult insurance market, showing that you understand your business and its risks is likely to favourably affect the premiums you pay. A well-managed business is also more able to bring in outside expertise, retain its best employees, attract funding, and ensure long-term sustainability. It really pays to get this right.

What Governance is Suitable for SMEs?

Various codes (e.g., the UK Corporate Governance Code), though designed for listed businesses, articulate principles that are relevant and useful for smaller companies and provide good foundations for best practice in this area. You can also have a look at our new guide, as this lays out some of the practical measures you need to consider and steps you ought to take.

The Legal Director

email: Kirstie.Penk@thelegaldirector.co.uk
call: 020 3053 8613
website: www.thelegaldirector.co.uk