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  • Governance in the Business Life Cycle: Business Edge August 2014

Governance in the Business Life Cycle

11 April 2016


Does your business have the right governance model to achieve its strategic direction? As a business grows, it needs to continually monitor its use of advisors and perhaps consider an advisory board or even full board to keep on the right track. When considering governance, management should consider:

▶ What is good governance

▶ When is the right time to get independent advice

▶ How and who is available to help

Below we discuss the considerations when choosing the right governance model for your business.

What is good governance?

Time, resources and money are the three elements that business owners and leaders are challenged to manage. Time is important in a growth industry as speed to market will have huge impacts on gaining market share. It represents the opportunity loss factor if not managed. Resources are also critical. Good people also needed to be used in the most effective way. The last element is money. Management is responsible for assigning its capital in a way that will maximise return.

Governance requires understanding all of these forces surrounding the business or organisation and making sure that management has plans in place to deal with them successfully. It is about setting direction, ensuring accountability and demanding execution.

Good governance can start small. For a start-up or SME, an independent advisor or advisory board can be a good starting point, providing information and support ranging from insight into local conditions, the social, legal, political and trading environment to helping form useful associations with influential and compatible people and positively influencing the company’s reputation.

As distinct from a board of directors which has fiduciary duties and is appointed under the Companies Act, an advisor/advisory board provides non-binding advice and there is a lot of flexibility in how it is set up

and managed. This has real value where business owners are reluctant to relinquish control and are wary of the fiduciary responsibilities of

governance boards. Indeed, it can help a managing director gain confidence with and training for the more formal structure of a board of directors.

An advisory board also act as a sounding board for managing directors, challenging ideas and assumptions in a supportive environment.

As a company grows and changes, inevitably there are things from the past or present that have to change to build the future which is where a formal board of directors will add value. Standing above the day to day running of the organisation, they often have a clearer perspective than management and senior leadership.

A board’s core value-adds cut across critical areas such as determining purpose and approving strategy, ensuring strong leadership and aligned vales in the organisation, holding management to account, driving tough decisions and ensuring financial and regulatory compliance including identifying and managing risks.

A board should also drive high-values practice with regular reporting on financial and non-financial measures, being involved in planning with analyses of the big strategic issues and decision-making for the organisation’s key investment and resource allocation decisions.

Knowing When to Seek Advice

When growing a business from nothing, it will eventually reach a stage when expert oversight and advice is needed to take it to the next level. This can occur at the outset when a business can draw huge benefits from having a formal board – presuming they are prepared to share decision- making and be challenged by an independent person outside the business.

Take tech company success story Xero which established a board from day one, clearly cognisant of the value of board governance in helping shape its strategic path and avoid some of the pitfalls of growing a business. That said, one of the most common issues for companies looking at building their governance chain is knowing when to take the next step.

Being able to spot the signs that trouble is looming in the business will help with that decision, yet it’s surprising how often management and boards are either insufficiently alert to the signs and symptoms or don’t have the requisite skills or knowledge to address them appropriately.

Tight cash flow – being undercapitalised, especially when the business is growing, can be the death knell

Poor or impartial decision making at board level – when the company’s directors are also its shareholders, suppliers and customers for instance, decision-making at board level can become swayed by the different perspectives of its members rather than collective interest

Lack of trust between shareholder/owners – making it impossible to deal with essential governance issues

Family business – tight control from founding patriarch or matriarch, desire to retain privacy. Indeed, recent research shows that 62% of family businesses do NOT have a formal board of directors. Of those

that do, 72% do NOT have a non-family executive on their board and 83% do NOT have a non-executive, non-family director on their board. The main reasons given are the desire to protect privacy 49%, and that the requisite skills exist in-house 29%.

She’ll be right attitude – a reluctance to engage with governance advisors can leave staff, business partners, investors and family financially vulnerable in the event of a crisis.

   ▶ Dysfunctional relationships – with senior management

Conflicting roles – not understanding that if you are wearing two hats, then you’ve got to wear the right hat at the right time and only one of them at a time!

Lack of succession planning, not only at a business level but in how the board itself manages succession and diversity of skills

How to seek advice

The key is to network and talk to other business owners, particularly those who have experienced challenges and worked through them. Successful professionals are always happy to talk about what has made them successful and can attest to the value of external advisory support.

When seeking advice you need to understand why you need it. Define your story and your needs within that context. What are the risks? What are the gaps? Keep the firm small? Take on volume jobs? Take on select jobs? How many projects a year? How to pay for capital items, equity, debt, short and long term. What sort of scale do you want to engage in.

You also need to be clear about what role your advisor will play. Be upfront about what’s the performance profile expected of them and cover off factors such as KPIs and reward structure.

What to look for and keep in mind

Experience/relevance – select advisors with experience and skills relevant to your industry and to the issues and opportunities facing the company now and in the long-term.

Independence - a good advisor should provide high-quality objective advice to support management and the board. So, as well as filling the knowledge gaps, look for an advisor who will challenge the thinking, provide fresh insights and be willing to play devil’s advocate with management.

Networks/connections – depending on your needs, selecting someone with strong and relevant connections is important, helping facilitate introductions or advocate with key players such as customers or stakeholders.

Formal agreement – it’s critical that an advisor/advisory board is established by way of a clear agreement in writing by the company management/board covering off a range of issues ranging from length of tenure, regularity of meetings, dispute resolution process, confidentially and remuneration.

To protect the company and ensure the advisor is acting in the best interests of the company, it’s also critical that this agreement includes a condition requiring the advisor to disclose any potential conflicts of interest.

Liability - while independent advisors do not technically have directorial liability under the Companies Act as do the directors of the main board, it is important that a clear distinction is made between their respective roles – namely advice and instructions/directions.

Unless this distinction is made, ideally in a formal charter outlining the respective roles and responsibilities of the main board versus the advisor, it is possible that a paid independent advisor could be held liable for the advice they give in an instance where there is a negative impact on the company.

It is critically important that an advisor or advisory board views it’s activities as value adding. Increasingly senior management within a business or organisation, together with external stakeholders such as a bank funder are looking for a demonstration of sound and competent Governance people and processes in place. There has never been a more important time that now to act in relation to an objective review of your Governance requirements. As our economy shows measureable signs of growth and improvement, the challenge is to achieve outstanding results for your business that can be celebrated across the organisation. The Governance journey is one to be celebrated and enjoyed!

If you require assistance with your governance requirements, please contact your usual BDO advisor.

  1. MGI Australian Family and Private Business Survey 2013