Why good governance is a must for SMEs

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Estelle Clark on the sofa explaining why good governance is a must for SMEs

Good governance is vital if businesses are to be fit for the future. Estelle Clark, of the Chartered Quality Institute, explains why size doesn’t matter when it comes to best practice

When governance in business hits the headlines it is often prefixed by the word ‘corporate’. This might lead you to think it’s not a big deal for a small business. Estelle Clark sees it differently.

“Governance is about making sure you comply with the rules that mean you can be in business and you can articulate what you are trying to achieve, not only to your investors but also your customers, your supply chain, your staff or your community,” she says. “That is as relevant for a company of five people as it is for 5,000.”

Clark is executive director of policy at the Chartered Quality Institute, the body for quality professionals – the people within an organisation who turn the principles of good governance into reality. “There is a joke that the collective noun for quality folks is a ‘quibble’,” she explains. “But quality folks are the people in the business who see the mile wide.”

Clark wants governance to be top of the agenda for every company, not just those listed on the Stock Exchange. SMEs now account for 99.9 per cent of the UK’s 5.5 million private sector businesses – many relying on each other through myriad supply chains.

And, she says, the reasons why a small business fails are no different to those of a large organisation. It could be market instability, poor cashflow or failures in governance. Indeed, it could be fallout caused by a collapse in the supply chain.

She outlines an SME’s criteria for good governance: “First and foremost, it is about making sure that you meet all the regulatory and compliance requirements. That’s effectively your right to operate. It’s also about making sure your business delivers its strategy, which is going to maximise the opportunities and minimise risk for the benefit of all its stakeholders. You then need to build that into your company.

“Next, you have to ask yourself does your strategy reflect the needs of all your stakeholders, or are you highlighting one and then worrying about remedying the others later on? You need to know that’s built into your operation. We’re talking about clarity of process, of purpose, of behaviour. I guess you could call it the business culture.

“Also,” she adds, “do you know that your organisation has a ‘change muscle’? When times are hard organisations have to make cuts; but often they don’t cut fat, they cut muscle because they don’t know where the muscle is, they can’t see the difference.

So it’s about knowing that when you make a change it will be beneficial, it’s going to sort out a problem that won’t recur next time round. Finally, you need to know that everyone in your organisation sees this the same way. It means being clear about what you’re trying to achieve and having the confidence and trust that the business is entirely focused on delivering what you decided.”

Future-proofing

Clark cites a mid-Wales start-up as an example of governance that is forward thinking in every sense: “I sit on the board of Riversimple, which produced the world’s most aerodynamic hydrogen car. They were able to change the way the governance works.

“There’s representation from all  stakeholder groups including an ex-member of the Welsh government who, as commissioner for sustainable futures, introduced the Well-being of Future Generations Act in 2015.

“I believe it’s the only government in the world where everything that happens has to be thought through in terms of what it will mean in 2050. So the people who know how to do this understand the link between governance and assurance as well as the link between assurance and improvement.”

In the wake of scandals such as those at Sports Direct and BHS, the government has announced changes it hopes will “put a spotlight on bad practice and lead to improved standards”. A huge concern for any SME, of course, is late payment.

From April, large companies and limited liability partnerships will have to publicly report twice yearly on their payment practices and performance, including the average time taken to pay supplier invoices.

However, Clark feels that governance in this area could go further. Research carried out in 2015 by the Chartered Institute of Procurement and Supply revealed that 66 per cent of UK supply chain professionals do not have a risk mitigation strategy that covers all tiers of their supply chain.

“It worries me the way in which certain retailers are putting pressure on the supply chain to cut costs, without thinking about the implications,” she says. “You may get the component at the price you’re asking but what is the effect of doing that? What is the equivalent of your horsemeat scandal? The CQI and the IoD are in conversation about extending the 2017 research into what happens in the body of an organisation. Because people need to start talking about what happens outside of the boardroom.”

But she also sees the fallout from recent scandals, as well as from Brexit, as providing an opportunity for UK companies that could benefit everyone in the long term and force businesses to think more carefully about how they mitigate risk.

She says: “You put in the most protection where there’s most risk. That means the risk of hurting people, risk of falling foul of regulation, whatever. If you’re not sure what’s going to happen with Brexit then agility is essential. In times of uncertainty that’s going to pay dividends.

“Again that is something all organisations, including SMEs, ought to be challenging themselves with – to get yourselves as fit as you can. That and your governance system, as in the decision-making piece, and how you enact that, is all part of how fit you can get.

“This is also a great time to think about ensuring your customers won’t walk away, even if they’re on the other side of the EU boundary, to make sure you’re really looking after them. It would be nice if the thinking coming out of the Department for Business, Energy and Industrial Strategy includes the idea that we will be known for good governance across all industries and not just the big guys.”

She concludes emphatically: “This would be part of ‘Brand UK’ – that we do governance properly and in a way that means it doesn’t get in the way of being competitive. We can be well governed and deliver and be lean. We can have our cake and eat it!”

The CQI collaborated with the IoD to produce the 2016 Good Governance Report. To read it visit iod.com/news-campaigns/good-governance-report

quality.org

CV

Education St Paul’s Girls’ School; studied economics and business at Sheffield University

1974 Joined IT giant ICL Fujitsu; became quality director in 1997

2000 Vice-president, business effectiveness, engineering firm ABB Alstom Power

2005 Quality director at the Financial Ombudsman Service

2006 UK quality leader of the year; European quality leader the following year

2007 Group safety and business assurance director at Lloyd’s Register

2009 Trustee at the Chartered Quality Institute, becoming chairman in 2015, then head of profession and executive director of policy

Awarded Women in the City lifetime achievement award by Coutts Bank

Other roles Chairman of technical and advisory board at Lloyds Register, and of stakeholder board at Riversimple

More on corprorate governance from Director.co.uk

Good governance putting UK business in order

The great corporate governance debate

More on governance from the Quality Institute (opens new window)

What is quality?

The CQI Competency Framework

The true meaning of good governance

Who are the top 10 companies for Good Governance? (IoD report link)

As Brexit nears, what does the UK stand for? (Estelle Clark’s focus on governance, assurance, improvement)

Riversimple: A case study in good governance (part 1)

The New Quality Profession Challenge ebook

About author

Ryan Herman

Ryan Herman

Alongside his work for Director, Ryan has written for SportBusiness International, VICE Sports, Populous, Audi and Gallop Magazine and was previously editor of Sky Sports Magazine.

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