Does corporate governance apply to small businesses?

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What exactly is corporate governance?

Corporate governance is a broad term that includes the oversight of an organisation’s business activities by its board of directors. It has become more important in recent years as businesses have become larger and more complex, making it difficult for one person to be aware of all aspects. Corporate governance applies to many different types of organisations, including small businesses. The question you may be asking yourself is whether or not corporate governance applies to your small business? The answer is yes. While your small business may not be as complex as a large corporation, it does still benefit from corporate governance practices if for no other reason than to ensure the continued success of the organisation and its employees.

What is corporate governance?

Corporate governance refers to the system of principles, processes and structures that are used to make decisions about the management and operation of a company. It is often associated with the board of directors and their role in the company. The goal of corporate governance is to ensure that a company is run for the benefit of its shareholders, employees and other stakeholders.

There are several key principles of corporate governance, especially good corporate governance, these include:

1.      Leadership

2.      Ethics and integrity

3.      Stewardship

4.      Accountability and transparency

5.      Roles and responsibility

6.      Participation

These principles combine to create a system of processes and structures that help hold businesses accountable and transparent when it comes to their dealings, stakeholders, and various shareholders – particularly employees and the public.

Why is corporate governance important?

Corporate governance is important as it provides a system of principles, processes and structures that are used to make decisions about the management/operation of a company. This ensures that decisions are made in the best interests of all stakeholders, not just shareholders.

Good corporate governance allows corporations and businesses to remain accountable to stakeholders and ensures that the business is being conducted ethically. While there are many benefits to corporate governance, not all organisations embrace these practices.

Do small businesses need corporate governance?

While a small business may not be as complex as a large corporation, it still benefits from corporate governance practices. Corporate governance can help to ensure the continued success of the organisation and its employees. Some of the key areas that corporate governance can impact a small business include:

·         Financial stability of the business;

·         Leadership and management of staff;

·         Risk identification and mitigation;

·         Compliance with relevant legislation or regulation (for example, tax laws).

The above highlights that corporate governance is not just for large businesses. While a small business may require less oversight than its larger counterparts, there are still benefits to ensuring your company adheres to certain principles, processes, and structures.

Is corporate governance relevant only to large businesses?

No, corporate governance is relevant not only to large businesses, but for all businesses, big or small. It has been said that small businesses need corporate governance to set out clear expectations, responsibilities and to instil good decision-making processes for the business whilst the team is small. The Australian government has routinely discussed the importance of corporate governance for all businesses – especially small ones.

Corporate governance helps small businesses create and delegate proper authority within your business – this helps your staff understand which decisions they can and can’t make on their own. As mentioned earlier, typically corporate governance structures combine policies, guidelines, and codes – these documents balance the needs of the business with the engagement of stakeholders. If you need help with implementing or creating business documents for your business, contact Business Kitz. Business Kitz is a legal document service that develops comprehensive, flexible and affordable document templates that suit your business needs. Click here to book a free consultation with Business Kitz.

Corporate governance also means developing policies and procedures to help you meet your business goals. Procedures help communicating steps to achieve goals for your staff, and proper policies should complement your business goals and objectives.

According to the Australian government, policies and procedures provide at least three beneficial outcomes in a business, especially a small one:

1.      They provide legitimacy to a decision;

2.      They guide behaviours through an agreed process;

3.      They reduce risk within your business.

Finally, good corporate governance for small businesses prioritises managing employees to ensure accountability. This means that it is important to develop policies and procedures that:

·         Assist managers to provide constructive feedback to staff;

·         Ensure better decisions are made in the future;

·         Provide staff with more responsibilities.

Corporate governance is for all business types, big, small, private or public.

Does corporate governance apply to private companies?

Corporate governance can be utilised by all business types, including private companies. In Australia, private companies represent approximately 99% of all registered companies in the country. Despite coming with a variety of benefits and being able to engage in private corporate behaviours, it is still in private companies’ best interests to engage in and enact corporate governance in their business day-to-day. A large part of corporate governance is holding businesses accountable to their shareholders and stakeholders. This means being transparent with their business operations, their mission, their goals and values, ethics, and upholding their corporate social responsibilities.

Whilst they may not seem entirely necessary for good and successful business growth, being transparent with your shareholders and stakeholders is an excellent way to practice corporate governance and establish a good business relationship with relevant parties.

Who needs corporate governance?

Whilst not mandatory, engaging in good corporate governance is highly recommended for all businesses that are looking to succeed and engage in good business practices. In this sense, everyone needs corporate governance as every business needs to have appropriate structures, policies and procedures in place to ensure that their business runs smoothly and effectively.

What are examples of corporate governance?

When looking at the key principles of corporate governance, there are several ways that these principles can implemented into your business.

Leadership:

When it comes to leadership, boards, employers and managers should aim to demonstrate strong leadership and clarity of vision to effectively control the vision of the business. This can look like clear communication between staff and higherups and regular meetings to clarify the goals of the business.

Ethics and Integrity:

In the 21st Century, customers and stakeholders are prioritising more and more the ethics and integrity when determining what businesses they want to associate with. It is more important now than ever to engage in corporate governance practices that promote the ethics and integrity of your business. This can look like having an environmental and sustainability policy, supporting certain charities, promoting your mission and values, and working to promote and respect employee rights.

Stewardship:

As stewards, whether you be on the board, the manager or the owner of the business, your job is to ensure the responsible overseeing and protection of the business’ assets, reputation, and the organisation’s ability to function long-term. Implementing this within businesses can look like introducing an integrated business management system, routine internal audits, risk management assessments, and good training management.

Accountability and Transparency:

When it comes to accountability and transparency, this is one of the most important principles of corporate governance and can be implemented in a variety of ways. A fundamental way to engage in corporate accountability and transparency is regular reporting of your business, this can be sales figures, employee surveys and more; this can be a costly process, however there are ways to navigate such costs. Whilst transparency towards stakeholders is key, internal transparency and accountability is also very important. This means being clear around the roles and responsibilities of your employees, and your own.

Roles and Responsibility:

This principle is heavily linked to the principle of accountability and transparency. Here, the principle of roles and responsibilities centres around clarification and commitment, in particular on the role of each party of a business and their responsibilities. For business owners, big or small, this looks like maintaining a strategic focus in the execution of duties and upholding responsibilities. Something to keep in mind here is legal responsibilities and duties such as the duties of directors and employers, such as fiduciary duties.

Participation:

This principle focuses on business owners identifying, engaging with and encouraging participation of its stakeholders in decision making planning. This is a great way to establish strong relationships with stakeholders which also promotes good transparency and accountability in the process. Another important thing to consider with this principle is having a diverse employee pool or board, this allows for multiple perspectives which is very important when promoting business success and growth. Governance experts have seen and documented the value of having diverse corporate boards and staff. This is because strong boards and staff include a variety of people, skills, talents, abilities, experiences and perspectives. This can help create a work environment that stimulates new ideas, growth, and overall success.

What is the basic principle of corporate governance?

Although there are several principles of corporate governance, the most fundamental principles are: fairness, accountability, responsibility, and transparency. Each of these principles are foundational pillars of good corporate governance and underpin every other principle mentioned in this blog. These principles ensure that everyone associated with the corporation or business is treated equitably and that decisions are made in an open and honest manner. They also emphasise the importance of corporate social responsibility, which requires companies to behave ethically and take into account the impact their activities have on society and the environment. Corporate social responsibility is one of the most important aspects of contemporary corporate governance.

All organisations, whether they are small or large businesses, should aim to adhere to these principles in order to maintain a high level of accountability and transparency. By doing so, they can ensure that their activities are conducted in an ethical manner and that they are responsible members of society.

What is the role of a board of directors in corporate governance?

The board of directors is responsible for overseeing the management of the corporation and ensuring that it complies with all applicable laws. They also have a fiduciary duty to act in the best interests of the shareholders and make decisions that are beneficial to them. The board typically meets on a monthly basis and provides guidance to the company’s management.

The board can also responsible for appointing executives, such as:

·         CEO (Chief Executive Officer).

·         CFO (Chief Financial Officer).

·         Chairperson of the Board.

This ensures that only qualified individuals are placed in positions where they can influence major decisions made by the company.

Conclusion

No matter what the size of your organization is, implementing corporate governance practices can help you achieve your goals. The fundamental principles of corporate governance- fairness, accountability, responsibility and transparency- should be adhered to by all businesses in order to maintain a high level of accountability and transparency. For small businesses, corporate governance can be especially beneficial as it allows them to be more competitive and pursue opportunities with a higher level of confidence.

By doing so, organizations can ensure that their activities are conducted ethically and responsibly to maintain a positive reputation in society. When it comes to corporate governance, small businesses need to be looking to apply its principles into their business models. Small businesses should be looking to follow the same good corporate governance principles as large corporations and not only implement them into their business models, but embrace them.

Legal advice

If you need assistance with your corporate governance, click here to book a FREE consultation with one of our highly experienced solicitors today or contact us at info@legalkitz.com.au or by calling 1300 988 954.

The above information does not constitute as legal advice and has been collected from relevant government websites and is subject to change. For the latest information regarding new or amended legislation, please refer to state and federal government websites.

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