Strengthening Your Business Through Good Corporate Governance
This article is provided by Muriithi & Ndonye Advocates.
Many believe that only public companies or established companies with many shareholders need to be concerned about implementing corporate governance practices. This is due to unfamiliarity of this concept of good corporate governance even to relatively large SMEs. The important factor to remember is that not all corporate governance practices can fit one organization or business. Therefore, there are a number of factors to determine the right corporate governance principles that is; the nature of the business; the organization’s size and stage of development; availability of resources; shareholder expectations; and legal and regulatory requirements.
II. Incorporation of good corporate governance in your business
Among the key challenges threating the existence of SMEs in Kenya, is poor governance. In order to strengthen your business, there is need to strengthen your organization’s management and governance systems through good corporate governance.
Corporate governance is defined as the framework or rules and practices by which management ensures accountability, fairness and transparency in an organization’s relationship with its stakeholders (financiers, customers, management, employees, government and the community). It is therefore important for a business to demonstrate that it is professionally run in order to access credit and gain the confidence of interested parties.
Examples of good corporate governance practices to consider in your business include:
1. Delegation of authority
An organization may soon reach a point in its development where the main shareholder is no longer able to fulfill the roles of shareholder, executive director and manager simultaneously. Therefore, there is need to develop a systematic approach to delegate authority.
2. Checks and balances
A basic principle of good governance is that no one individual should have unrestrained power over decision-making. Even the most capable of individuals can sometimes make mistakes or lose their ability to analyze issues in an objective manner. To minimize these risks, it is important to establish governance procedures that subject all decision-making to some kind of third party scrutiny.
It is important that each employee, manager and board member understands expectations about the nature and scope of his or her responsibilities. As the organization expands in size and complexity, explicit business conduct rules including ethical principles will need to be formalized. Once responsibilities have been defined, the efficient functioning of the system depends on proper oversight.
Directors, managers and employees are likely to give greater thought to their conduct if they perceive that they are being observed. A key stage in opening up your organization to external scrutiny is taken by the appointment of independent non-executive directors. This signals a company’s willingness to become more open and accountable in respect of its decision-making and performance assessment. The replacing of the owner-manager or founding entrepreneur by external management can also be perceived as an important step in this direction.
5. Conflicts of interest
Especially in small companies, it is important to recognize that the company is not an extension of the personal property of the majority owner. Therefore, through corporate governance, there is need to define credible mechanisms by which potential conflict of interest issues can be managed or resolved.
As you consider incorporation of principles of good governance in your business, remember that all organizations compete in an environment where good governance is a business imperative. It is our belief that this article makes good sense!
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