Why corporate governance is a must
Without good corporate governance your business can be shut down.
Best case scenario, your business growth may be limited, you might get into legal trouble or be hit with unexpected costs or fines.
While definitions vary, the ASX Corporate Governance Council describes it as “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account” and acknowledges different entities adopt different governance practices.
For the smaller end of town, the Federal Governments business.gov.au website says it’s about “good decisions being made by the right person” and includes:
- creating and delegating authority
- developing clear policies and procedures, and
- managing employees and ensuring accountability.
One thing that is loud and clear is that corporate governance is crucial regardless of the size of your business.
Craig Stevens from CCASA (Company Compliance and Advisory Services Australia) says it’s like building a house.
“You need a great concrete foundation on which to build your walls and roof. If you haven’t got a good foundation, then your roof and walls will crumble at some point,” he says.
“I see the governance, like policy and procedures, as the foundation of your business.”
Stevens says most people, when they come into a business are great at building the walls and roof, which is up-selling a product or service.
“For example, if they run a café, they already know how to make coffee and sandwiches and know what they’re going to do,” he says.
Stevens finds that many business owners are unaware of their governance requirements including those of the Australian Security and Investment Commission (ASIC), which offers guidance on its website.
“So, what are their rights and responsibilities? Will they employ staff? What do they need to think about? Even down to small things such as staff are using hot water, so how do you prevent them getting scolded around the coffee machine?” he says.
“If a staff member breaks their leg at work and decides to sue you and you don’t have your policies and procedures in place, nor copies of agreements that staff members have signed, it’s going to be a pretty quick court case really.”
He cites the example of a successful WA company which was about to list on an overseas stock exchange and had all its corporate governance in place except one thing – it hadn’t paid the ASIC fees. The company was shut down just as it was about to list.
Corporate governance is an umbrella term for many different requirements and responsibilities for business.
For example, there are legal aspects, the corporate asset side, tax obligations and then it also varies depending on your industry and business structure.
“So, if you’re in immigration then you’d have certain governance areas around how you get people from international communities to Australia,” Stevens says.
“One company I work with has breaches because they don’t have proper records. So now we need to look at each individual issue, and the company’s responsibility towards each one, then we have to look at how to resolve those issues and get the company where it needs to be.”
Stevens says another company has been doing payments incorrectly to avoid fringe benefits tax and other tax implications and has a ‘host of other issues’, but many board members did not realise because it was not their area of expertise.
“Even if someone on the board doesn’t realise, they are accountable. The law, ASIC and the ATO treats every member of a board in the same way,” he says.
Hefty penalties can apply in some circumstances when directors breech their legal obligations.
“Another firm I deal with is in energy. They are brilliant at it, they know their product and what they need to do, they’ve got clients to support their product. What they’re doing is absolutely unreal,” Stevens says.
“But the company effectively needs to be shut down and rebuilt from scratch because they didn’t understand about corporate governance.”
Stevens advises completing a course or finding a mentor to find out more about your corporate governance responsibilities.
“A mentor will have an overview discussion with the business owners and then help them with things like policies and procedures, dispute resolution, even setting up their accounting software,” Stevens says.
His other ways to learn about corporate governance are:
Business plan: Have your business plan in place. While it’s not technically governance, it will help steer the direction for which you research your rights and responsibilities as a business owner.
Ask around: Find someone who understands corporate governance. It could be a company, a mentor or even someone you know who is running a successful business. But be warned, Stevens has seen many successful businesses without good governance, so you need to make sure they have it.
Understand: Follow other people’s records, their record keeping and the way they run their governance. Research and read so you understand.
Action: Then start getting it all written down.
“The law requires it. There’s legal ramifications in not having good governance,” Stevens says.