Should you make governance a priority?

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One criticism of US-based Zenefits was that it had a weak board - only four people. (Image via Barcinno)

During a recent visit to a client CEO’s office, a legal meeting was delayed because the CEO absolutely had to spend 30 minutes a day signing checks for all the company’s payables.

While some may see this diligent financial control, the lawyers present thought the opposite: delegating responsibilities such as spending authority can go a long way to liberating the busy entrepreneur's schedule so that he/she may focus on value-adding activities.

There’s no doubt that good governance is a key ingredient in the formula for sustainable growth.

Yet many entrepreneurs, and perhaps even some corporate managers, remain uncertain as to what the term actually means, and what they should be looking for when thinking about the governance of their businesses.

The following are three major elements every entrepreneur should consider when making governance considerations, be it putting together or updating a governance manual, or seeking shareholder or board approvals on authority and systems.

1. How the organization should look and function

The first pillar of good governance is identifying how the company is organized and structured, and who is responsible for doing what in the organization.

This involves clearly mapping the board and its authority, executive management and their domains, and the reporting lines for every department and division.

The key elements in building or structuring an organization are:

a) Roles and responsibilities of each management level

b) Clear reporting lines

c) The organization chart

Organizations that are not clearly structured suffer from decision bottlenecks, lack of accountability, and staff reporting confusion.

These problems often race to mind when the term ‘family business’ is uttered, where roles are mixed and the entire family team gets involved in all affairs.

But even for companies that are nothing like this extreme example, duplications of work, domain protection, and staff confusion are bound to happen without clear roles and responsibilities.

2. Managing the delegation of authority

The second pillar of governance is mapping who has the authority to make decisions and spend company funds within the company pyramid.

The constitutional documents such as articles, memoranda of association, and shareholders’ agreements delegate authority from the shareholders to one or two levels of higher management.

The further flow of delegation should be mapped, ideally in line with the roles and responsibilities of various positions in the organization. Every office from the CEO to the sales associate should know what he or she is authorized to approve and how much they can spend before asking for further approval. This includes hiring, purchasing, signing contracts, and directing work.

Entrepreneurs should pay attention to approval and spending authorities, noting that the two can be distinctly managed. For example, a CTO might approve a purchase, but the CTO and CFO must approve the transfer of funds to the seller.

They should also be aware of spending within and outside of the approved business plan.

3. Setting policies

The final part of a business’s governance is the set of policies and procedures the business follows in carrying out its daily activities.

These are very much driven by the operational needs of the business, but some are very common today and every business is expected to have them.

These common policies include an IT policy, email use policy, privacy and data maintenance policy, and vehicle use policy.

Entrepreneurs should assess which operations should be carried out uniformly across the company, and develop the set of policies to ensure that every employee adheres to same procedures.

Good governance helps growth

These three pillars will require forethought and documentation, but their benefits are immense to growing enterprises.

Governance is how founders can start feeling comfortable letting go of the reins of micromanagement to dedicated managers, how investors can feel safe that their funds are deployed followed principled verifications, and how staff can save time and frustration by knowing whom they can approach for making which decisions.

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