Does Governance Matter?

The headlines, seminars and business school classrooms are all abuzz about the need for stricter and tighter corporate governance.

However, their focus is aimed at public companies, the big corporations, financial institutions, Wall Street, etc. What is not discussed is small business. Does corporate governance have a place in a small, privately held company?

President James Madison pointed out very clearly that governance is a difficult problem when he wrote the following as part of the Federalist Papers in 1788.

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed and in the next place oblige it to control itself.”

Has anything changed? No—human nature is human nature. A business in the sense that Madison describes government is much the same. Executives of a company govern the entity and the employees, and must be enabled to do so. However, at the same time, the executive team needs to control itself. This is where corporate governance comes in, causing the following question to arise: is it necessary to have a governance structure in a small, privately held company?

To answer this question, let’s look at what we want to protect. The key behind governance is to force compliance and control on the protection of assets, and on transparent, timely and accurate financial reporting. Both of these key issues are as relative to a small business as they are to a large company. In fact, it could be argued that these issues are more important to a small company, as a large company has the wherewithal to handle a small breach, while a small company typically has no room to handle an unexpected loss of assets (theft of inventory, tools, equipments, cash, etc.) or false financial reporting. Clearly, the depth of governance policies and regulation is overkill for a small business; however, that does not obviate the need for governance.

All too often, senior managers are reluctant to implement governance and oversight structures in their companies for fear of what the backlash might be from the rank and file. The reality is that the lack of implementation is where the danger for disaster and potential for crisis stems from. Both management personnel and employees often fear and resist change due to the fact that change cannot be dictated, as there must be company-wide adoption and buy-in.

However, in every adversity, we can find opportunity. The fact is that now, more than ever before, employees are acutely aware of what has caused the economic tsunami and the collapse of the global economy. Therefore, there is no better time to implement stringent governance policies. Your employees may even be pleased, as a lack of governance policies in the company could cause major problems. Basically, if you implement creative strategies now, you may be able to create value for all stakeholders at the same time, which will ultimately make your business stronger in the long run.