Why Governance is important

Posted by The Icehouse on 8/11/2022 10:00:00 AM

First steps toward governance. An introduction…

As the owner of a growing business, you will have thought about what governance can do for you. If you haven’t, it’s definitely time.  

Governance is facilitated by either a board of directors or an advisory board, both of whom make strategic decisions for the business. More flexible and informal, advisory boards have no binding decision-making authority, and while they are expected to act with a duty of care, they don’t generally carry fiduciary duties as defined by the Company’s Act.

Blog_Why Governance is important

So why is governance important? It shapes the direction of the business, keeps people accountable, opens up new strategies and opportunities, and encourages working practices where the owner becomes freer to work ‘on’ the business rather than ‘in’ it. Governance is also linked to growth.

As SMEs evolve, the complexity and need for tighter internal control and capital intensifies. It’s common for early-stage businesses in New Zealand to have small multitasking teams which are largely informal and have few systems and controls. Their focus is on developing their offer and gaining acceptance. Often governance is not considered without outside investment.

High-growth businesses require investment in people and systems and typically start to formalise functions and authority. While they focus on sales growth, they need to develop systems to control costs and quality. Strategy, capital funding, decision-making rigour, objectivity and accountability for management are common drivers for governance in this phase.

Established businesses tend to develop professional management teams and have a high degree of formality through policies and procedures. In addition to the drivers for high growth; risk management, diversification, sustainability and succession planning are common considerations.

“What we're finding at The Icehouse is that businesses with advisory boards in place appear to continue to grow because they've got the setup where each month they're reporting to someone other than themselves,” says Gareth Bayliss, Sales Manager at The Icehouse.

“They are also agile at addressing issues as they arise now and in the future. And because they’re evolving fast and growing at a quick rate of change, they are able to move with more speed than previously – by having different insights and sounding boards fostering good decisions.”

There’s also a human side to setting up a governance structure. Inevitably, owners get to a stage where their skills, knowledge and passion are tested. Manu Burkhardt-Macrae, Managing Director, Far North Roading and OMP alumni, says: “We’ve created an advisory board. Again, just to give us a bit more of an outside perspective of what we're doing and to test what we're planning is right for the business… [Also] A lot of business owners share the same experience of isolation, poor sleep and so on. Now I look after myself more and manage my stress levels better.”

While the need to set the wheels in motion can seem daunting, establishing a good governance structure is less so – but only when you seek the best possible advice.

“Owners need to think about what is the purpose of an advisory board – don’t just do governance for the sake of doing it,” says Kim Hill, Icehouse coach, independent director, and advisory board member across multiple businesses and government organisations.

This advice will help kickstart a thought process around what an advisory board, for example, will actually do for you and the business, and how it will look.

As businesses grow, you surround yourself with people who really care about, and are invested in, your vision and aspirations as an owner. Advisory boards are no different. You want to pick a team to support you in meeting your financial, personal and professional goals.

As you take your first steps towards governance, think more about the kind of team you want in place, required roles, and the type of people who will bring experience and valuable insights to develop specific areas of the business – from new market entry to succession planning and M&A.

“Diversity is a key consideration, bringing together a group of people who have contrasting experience and personalities, with the confidence and courage to hold people to account (with respect), to challenge thinking and decision-making,” says Derek Young, Business Coach and Facilitator at The Icehouse.

Gone are the days when advisory boards tended to consist of owner, accountant and lawyer. Good governance structures can walk a tightrope between innovation, fresh thinking and experience.

“Then you're getting the right sort of strategic thinking around the table and not just ticking boxes. In my experience, most entrepreneurs and business people need that strategic thinker and innovator and an action-oriented person who gets things done,” says Kim.

An advisory board is a sound option for many businesses. The owner has a voice around the table, everyone is clear on the purpose and scope of the Board, and there are clear guidelines on how it will operate, align with the business, be structured and goals and priorities measured.

Now is the time to think about whether your business would benefit from good governance. Introduce yourself to the basics of governance, speak to your network, and contact The Icehouse. You’ll have more questions than answers, but next-step advice is out there.

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