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Article:

Governance in times of growth

17 August 2017

New Zealand’s building and construction industry is experiencing a golden era, activity increasing by a minimum of 10% each year to reach unprecedented levels, but how well equipped are businesses to leverage it?

The Government’s challenge is to invest in the skills to support this rapid growth and ensure the regulatory environment maintains high standards of quality and speed.

The industry challenge – particularly for private and family owned companies in the building sector - is to ensure there is effective governance and leadership, a prerequisite for success particularly when times are busy.

In the midst of a surge in construction projects, my concern is that many businesses are not implementing sound corporate governance practices because of demands of and an over-emphasis on the operational matters.

A core responsibility of any board of directors, or for a smaller company, the sole director, is to ensure the sustainable future of the business enterprise. That is not feasible without taking time out to think strategically about the longer-term, the challenges, risks and opportunities.

Yet there are big picture issues to be considered and planned for not the least of which includes regulatory compliance, particularly with changes to health and safety regulations that will significantly increase leadership’s responsibilities for the safety of their teams.

There’s also the need to recognise and manage risk, establishing a sound system for identifying, over-seeing, managing and internally controlling risk.  

These issues are often neglected without a properly functioning board of directors. Even where an owner-run/family business operator believes they have all the skills required, an external, non-family and non-executive director or advisor will provide access to a broader base of skills or experience – as well as becoming ambassadors for the business across new networks of influence.

They are also able to provide support and guidance to business owners and even valuable mentoring to possible successors. The objectivity and professionalism they bring can also enhance family or shareholder harmony.

The risks of being a director in a company may be high due to potential personal liability.  Where that is the case, it is still worthwhile having an external person and that person will be an advisor to the board and still participate in the discussions but will not be a formal director and they will carefully define the boundary over which they will not cross so that they do not become deemed directors.

A good external director or advisor will start thinking and planning in a multitude of areas you had not previously considered.  Because they are external to the daily operations of the business, they will be particularly useful in the identification of risks to your business then assisting devise appropriate strategies to deal with those risks.

In the current surging construction environment, companies need to take extra steps to ensure they have the capability and competence to complete projects and manage risks.  A person from a different background will bring a fresh perspective as well as objectively challenging the status quo.

The likely starting point will be the three most common current risks:

  1. Are the balance sheet and cashflow sufficiently robust to cope during this period of greater activity?  Is there a sufficient buffer or a Plan B in the event of a delayed receipt, cost over-run or similar threat to financial strength.
  2. Is the organisation adequately resourced in terms of numbers and calibre of people to have both capability and competence to complete all contracts.  Margins are too thin for difficulties on projects.
  3. Are you attracting and retaining top talent?  Do you have strategies to ensure this?  Many sectors in the industry already face staff shortages and difficulty filling positions and focus on these issues is critical.

There are many opportunities and risks that we think about but do not have the time or discipline to prioritise.  The external director will provide the disciplined focus to make progress in these areas. 

Most building business owners have technical skills and qualifications in their particular area of construction, but not formal training or strong skills in all aspects of managing and growing their business.  Sometimes the missing skill sets are covered by employees but at a governance level, the right person will bring a further range of skills and experience which may not currently exist in your business.

How do you find the right person to serve on your board of directors? The local Institute of Directors can assist. Look for someone whose personality, values and culture you respect and believe will be a good fit with you and your company. Speak to your business advisers – accountants and lawyers – they are likely to have people in their network who might be a good fit for your business.

It can be a dilemma whether to get somebody from within the industry or outside.  Experienced and possibly retired industry veterans will understand best practice and the risk management but conflicts of interest need to be managed.

Once you have found the appropriate person they need to be properly briefed and given sufficient material to properly understand your business, your part of the industry and the market environment.  They need to know what the problems and challenges are so that these matters can be addressed rather than ignored and allowed to fester further. 

A good person will add structure and rigour to directors meetings and will challenge you.  This is likely to be a significant change from the way you have previously operated and should result in a significant improvement to the way the business operates and its performance. Structure the board to add value -

Remunerate fairly and responsibly - Ensure that the level and composition of remuneration   is sufficient and reasonable and that its relationship to corporate and   individual performance is defined