The value of good governance, being a director and the mindset required
Today I want to share with you the value of good governance, being a director and the mindset required.
I often get asked why I invest so much time and money into furthering my education! The answer is simple, you don’t know what you don’t know, so I go out and learn as much as possible so that I can be the very best version of myself and therefore I can provide my clients with absolutely the very best care and advice.
Why does good governance matter?
Good governance isn’t primarily focused on compliance with formal rules and regulations. Consider it more about determining a framework for policies and processes that add value to your business. They help build a reputation, manage risk and establish long term permanency and achievement.
Most small business owners have little if any governance frameworks in place and from my observation and experience because they don’t know what it means and how to put it in place. The reason for this; it sounds complicated and something reserved for big businesses only. This is simply incorrect!
Governance is about rules, systems, process and relationships.
- Internal which is how you operate, your board charter, your constitution and the values that guide your decisions.
- External which in Australia are the Corporations Act, Competition and Consumer Act and Work health and safety laws.
- Delegation of Authority
- Assurance mechanisms
- Performance management
- Risk management and compliance procedures
- This is the interactions and management of Shareholders, Managers and Directors.
Governance in small business is very much about the journey over time. It’s far from a one size fits all approach. Starting with an initial understanding of governance, establishing a structure, determining the duties of the directors and the benefits. Most often it evolves into redefining the goals, strategy and implementation plan to identifying risks, creating a management plan and mitigation strategy. You would proceed to the allocation of resources, budgeting and enhanced measurements and monitoring tools around strategy, risk and finance.
The outcome is better performance and growth due to structure!
Small business owners care most about performance, they are merely trying to survive and providing jobs for people and providing income for their families. This fixed mindset is causing you damage and good governance practices will protect your livelihood and investment for years to come.
I encourage all business owners to have an inquisitive mind and reach out to me or other professionals concerning the level or scope of corporate governance appropriate for their business.
Factors to consider are;
A plan can be easily established by setting out the initial level of corporate governance.
Please don’t make the mistake to think this is irrelevant, that would be foolish!
If you are a growing company regardless of size, good governance is not a choice but a requirement.
You see most business owners often feel isolated and like they have to do everything “solo”. Building a governance framework will help you realise that this is not the case and articulating your vision and structure is critical to your long-term success.
Governance is even more important when there are two or more directors but let’s be clear, as long as you are an incorporated entity and you are a director then knowing what you can and can’t do is a requirement by law.
Many founders fall into the trap of believing that being a director is a cool thing. Some believe that once their idea has been formed into a company and they have the title managing director – they have made it! This is a common failure. Your responsibilities have just increased and not being aware of them is not a legitimate excuse.
By the way, this thinking is not reserved for new business owners. In fact, in my experience, many experienced directors do not know their responsibilities. I mean most haven’t even read their company constitution, let alone the Corporations Act!
Let’s explore who a director is
According to the Corporations Act 2001, it defines a director as…
“Persons appointed as a director or alternate director, and persons not validly appointed, if they act in the position of a director (de facto director) or a person whose instructions or wishes’ actual directors are accustomed to following (shadow director)”
For me, this is particularly relevant because as an advisor and chair of several privately held companies I need to be very aware of the reference to being a shadow director and my advice needs to be carefully structured. It can’t be instructions otherwise I take on the same risks as the directors despite not being on the director register.
This becomes incredibly difficult as I value my clients deeply and I care about their business and always maintain a strong duty of care and act in the best interest of the company and its shareholders.
So, if you are a business owner or an advisor to owners take note of who a director is and how they operate.
In addition to the loose term director, there are three types Executive, Non-Executive and Independent non-executive. Put simply an executive director is someone who works in the business, a non-executive is someone who doesn’t work in the business but has a connection to the company often in the form of shares and finally, an Independent is someone who has no connection or ownership of the company and does not work in the business. A balanced board has a combination of three and this forms one of the good governance principles.
Remember this will evolve during your business journey and it’s a good idea to plan for it in advance. You can always adjust it as necessary.
I often hear the statement, I am just one director – not a board…. Sure, but you are still required to comply with the duties and responsibilities of a director role! If there was a light globe moment this would be it!
There are four basic director duties and they are;
- Act with a degree of Care and Diligence
- Act in Good faith and the best interests of the company and for a proper purpose
- Not to improperly use your position to gain an advantage for themselves or someone else
- Not to improperly use the information to gain an advantage for themselves or someone else
Additional duties include;
- Insolvent trading
- Financial information, keeping good records and reporting
- Disclosing directors’ interest
- Lodging information with ASIC
- Continuous disclosure
Remember you need to adapt to your business and its scale. Not knowing your duties and responsibilities is no excuse under the law. More importantly, understanding how your director role benefits your growing organisation is a critical outcome.
Note that there are consequences for breaching directors’ duties, and they include;
- Criminal sanctions
- Civil sanctions
- And Commercial consequences.
I know this can be daunting for some people but if you are currently a director, owner of a company or are planning on starting a company the content in this post is critical and you should take a deeper dive into some of the areas I have covered.
It’s important to note that directors do have rights and it’s your responsibility to protect yourself.
Directors have a right;
- To information
- To be advised
- To be heard
- And of Delegation
In terms of protection;
- Ignorance is no defence
- D and O insurance is available
- Vigilance is the best protection
- Know your duties and responsibilities
So, what are the essential functions that directors and members of a board play? We can group the functions into six categories, and they are;
- Strategic direction
- Accountability to shareholder
So how would all this benefit a growing company?
- An appropriate and effective governance framework will enable you to transition out of the day to day management and focus on growth.
- Having a framework in place and knowing your duties and responsibilities means you are articulating your vision and have clarity, therefore, it will help you retain your best employees, attract clients, new employees, finance and additional directors when you reach that stage in your business journey.
- It will help you identify risk which means it reduces your risk profile, including key person risk in sole director companies
- For most business owners it helps them sleep better.
Don’t forget governance is a “team game” and requires management and directors to coexist and work together.
Management is appointed by the board or solo director; they carry out the day to day operations of the company and are guided by strategic guidelines and policies created by the board or solo director.
A director or a board governs the company on behalf of the shareholders. They coach the CEO or GM as well as the management team. They do so by asking questions, challenging answers and providing clarity and direction. They must allow the management team the freedom to perform and not micromanage.
Essentially their responsibilities fall into two main areas which are;
So what mindset is required for directors and how does that differ from that of management?
A management mindset is…
- Action orientated
- Resource focused
- On the hook
- Operations are driven
- Leadership and team management
- KPI focused
- Managing multiple stakeholders from customers, team members, suppliers and the board.
A director’s mindset is…
- Leading through direction and clarity
- Judging and mentoring
- Focused on decision making
- Communicative in the form of engagement and control
- Sensitive to conflicts of interests
Do you have a clear delineation of roles between your director and management roles?
Director thinking is very different in management thinking and problem-solving at each level is dependent on that clarity of mindset.
If you’re in business and this message is ringing loud and clear between your ears and you’re experiencing some discomfort, who are you going to call? Help is available to you…
- Start by building and strengthening your team of professional advisors. Look at accountants, lawyers, business advisers, financial planners, family business advisors, debt advisers, risk professionals and governance advisers.
- Explore professional governance organisation such as AICD and look at doing the SME program
- Appoint an advisory board – advisory boards are not directors under the legislation and the roles depend on the terms of reference as constituted or how it acts in practice. They provide objectivity, insights and recommendations – every SME should have one, but often the cost is prohibitive in the early stages, so I highly recommend people join masterminds in the absence of their very own advisory board but choose wisely.
- Depending on your size and scale appoint other directors on a skills basis, fill the gaps, spread the risk and improve diversity and thinking
- You may be eligible for a government grant, but these are time consuming and limited.
Overall what’s critical is the value of independence that external directors or advisers can bring to your company. That external view with fresh eyes, different skills and experiences, and less reliance on you and key personnel.
Let’s wrap up by summarising the key messages so you can start to explore the value of good governance, being a director and the mindset required.
- Understand the governance framework that applies to your business and what’s available to you along your business journey
- Know how good governance can benefit your growing business
- Know your director roles, duties and responsibilities and who is a director in your business
- Understand the penalties
- Know your rights and protection
- Understand the difference between a director mindset and a management mindset
- Know that there is help available to you
If you need help with anything mentioned in this blog post, please get in touch.
Live with purpose,