Corporate Success is more likely when a company follows the governance policies set out by its Directors

The Importance of Good Governance: # 3 in a series for entrepreneurs
Business Mentoring Series by C. Balagopal. Written  previously and reproduced here:

I have sometimes been asked by friends to study their companies that were facing difficulties, and to suggest ways of coming out of the troubles. I have found in several cases, that the problems were less of management and operations and more of governance. In many SMEs, little attention is paid to governance, under the mistaken impression that governance is something that is relevant only for large companies. 

What is governance? The word is derived from the verb ‘to govern’ which refers to ‘control, guide, regulate’. The management of a company is tasked with operational responsibilities such as manufacture, marketing and sales, finance, administration, and so on. At the beginning of the year, a business plan is drawn up and agreed on. Thereafter, each component of the management team goes about their tasks in particular areas. Is that sufficient? 

Starting with a vision: Each company is defined by the vision set out by the founders, which in turn determines the policies and strategies that will be pursued by the company to realize its business objectives. One company may opt for the highest quality, and be content to focus on customers willing to pay a higher price, while another may choose to make cheaper products to cater to a mass market. One company may choose to operate strictly according to the laws of the land, while another may choose to adopt an approach that is based on taking short cuts, wherever they can get away with it. It is the duty of the Board of Directors of the company to see that the company operates according to the governance policies set out by the Board. 

Directorial Duty: If the vision for the company is to be fully compliant with all rules and statutes, then it is the duty of the Board of Directors to monitor the progress of the company periodically to ensure that it is doing things in accordance with the vision. This is spelled out in clear policies that will lay out what is, and what is not, an acceptable way of doing things. This can apply to matters such as procuring business, dealings with business associates, dealing with people and staff, payment of taxes and other statutory dues, and other aspects of doing business. These are the things that define a company, and come to be seen as the ‘brand image’ of the company. 

Governing by vision not managing performance; Board meetings are therefore not management committee meetings, where operational performance is reviewed. While the operations of the company are no doubt important, the Directors will be interested in the aspects mentioned in the previous paragraph, and will require reports on those aspects to be given regularly to the Board by the management. Statutory compliance is usually a non-negotiable priority, and will require to be regularly reported to the Board. If the Board is serious about the vision and policies being followed, they will not stop at this report, but will engage third party auditors to study and report on key aspects of such statutes. For example, safety and occupational hazards are an important part of statutory compliance, and will usually be reported in terms of whether permits and licenses are current. If one really wants to know whether these are being observed not only in letter, but also in spirit,( i.e. whether the factory is truly a safe workplace), regular audits and mock drills conducted by independent auditors will be necessary. 

Defining ethical boundaries: Ethical dealings with business associates is another aspect that defines a company, and in fact affects business outcomes in many ways. Paying bills on time is not a quality Indian businesses are known for, and in fact, paying bills only after several reminders has become standard practice. In Japan, it is an insult to remind someone about a bill falling due in a few days! Repeated late payment obviously is not a viable business strategy, as the other party will factor in late payment for future contracts and will build that into the price. Taking refuge behind arcane contract conditions known as the fine print, is another favourite business tactic. But there are companies that will not argue with the customer, and will instead act on the complaint promptly, replacing items or giving a refund. 

Rule based management with humane flexibility: In dealing with employees, businesses can either stick to the letter of the rule, or can be flexible to allow for an unusual situation. Displaying a humane approach will not only not adversely affect the company, but will also turn into a huge asset in the most unexpected ways. The converse of this is that all dealings with employees where it affects their service conditions and promotions should be rule based, and transparent. If this is done, people will tend to accept decisions more readily, especially where they are adverse to their interests. 

The importance of rule based governance covering the interface between the company and its employees, the customers, the government and regulators, the bankers, and the public at large, is most important in the case of wholly privately owned companies. I find a deplorable lack of understanding of the need for governance in this category of companies, where some owners seem to think they can do what they want, just because the company is owned by them. Successful family run businesses were started by entrepreneurs who did not think in this way, and who instead acted in a way that made every employee think it was her company, that made the government respect the company and want to help it grow, that made members of the public proud of having that company in their panchayat. A good set of governance principles and guidelines will help steer the company on the course intended by the founders. 

You will then end up building a company that not only makes money, but becomes a responsible corporate citizen, and a wonderful place to work in. 

©Copyright C Balagopal. All rights reserved

Invitation to our dear readers:
CitizenzNews is setting up a group of entrepreneurs and prospective entrepreneurs who will receive special invitations to events and activities designed for entrepreneurs.                        

If you would like to be part of this special group please send your name, email address,  Whatsapp # and current occupation to

No comments:

Thanks for stopping by and caring enough to comment.Anyone with a Google account can comment.

Also, please subscribe to this blog if the content pleases you.

Powered by Blogger.