What Is Corporate Governance for Small Business?

Corporate governance is the system of practices and processes that manage a firm or company. Corporate governance practices are crucial to a business's short- and long-term success. Developing good governance is essential for small companies as well as large ones.

Small businesses need good governance practices as much or even more than larger companies. The wants and needs of the stakeholders within the company are equally critical. In small and startup businesses, you're more likely to know your stakeholders personally. Governance issues affect your business immediately in small-scale operations.

What aspects of corporate governance apply to small businesses? You may not need a full Board of Directors, but you might want a few people making business decisions. This article reviews corporate governance from the standpoint of small business owners and their companies.

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Good Governance: One Size Fits All

A successful company needs internal controls. Corporate boards exist to ensure their companies are profitable and ethical and follow federal and state laws. Just because you're still building your company doesn't mean the same laws don't apply to you.

Startups sometimes make the mistake of "winging it" and thinking they'll put a management team and board together when they need one. With all that goes into starting a business, many small business owners don't have time to worry about a governance system. This is a mistake.

You may not have the luxury of a board of independent directors or stakeholders right away. Still, your small company should have someone protecting the interests of shareholders, even if you're the only one.

This is one reason companies above the level of sole proprietorships must file Articles of Organization with the state-level secretary of state. This formality forces business owners to think of themselves as a company and is the first step toward good corporate governance.

The Four Ps of Corporate Governance

Small businesses need all the help they can get when dealing with development and planning. Corporate management professionals have devised strategies to help smaller companies make the principles of corporate governance part of their daily routine. One of these is the four P's concept: people, process, performance, and purpose.

People

People includes anyone involved in your business: the owners and investors, your employees, and your customers. When creating a corporate governance scheme, you should also consider your vendors or suppliers, advertisers, and even competitors.

How you treat your people has an impact on your cash flow. The investors want a good return on their investment. That means you need to keep your profits up. One way to do that is to keep wages down, but that means your employees will be unhappy and won't treat your customers well. Another way is going with cheaper vendors. That means your product may be shoddy, and your customers won't be happy.

The decision-making process is a critical part of your governance structure. How you treat your people affects how your business functions.

Processes

Processes are everything you do to bring your business to the public. Advertising, marketing, and shipping are one type of process. How you hire and train your employees to present and sell your product is another. Your business operations processes are subject to regulatory oversight by government agencies ranging from the Department of Labor to the Federal Trade Commission.

Good corporate governance structures help ensure that your business processes are cost-effective and give your company the best return on investment. At the same time, your processes must comply with all federal and state laws. With a good governing body in place, you will have accountability for your business activities.

Performance

Financial performance is the primary metric of any business. At the end of the year, the business owners, investors, and other stakeholders want to know if the business is paying all its bills. If your company is a limited liability company (LLC) or corporation, no matter how small, you must file an annual report detailing your financial status each year.

Large companies may conduct an internal audit to locate problems in their finances. Smaller companies may only need a review of their financial statements if they are having monetary issues. Whatever method you choose, your performance is essential to your business governance program.

Purpose

Effective marketing requires having a company purpose. A big part of corporate governance is developing your company mission statement and ensuring your company output follows your mission. Even small companies can get a bad reputation for being greedy or putting profits ahead of customers or employees.

You don't have to "go green" or spend all your time on worthy causes at the expense of your business. However, how the public sees your business is just as important as the quality of your product or services. Your decision-makers are a big part of establishing your purpose.

Decision-Making in a Small Business

Having a board of directors in a 20-employee LLC can seem a bit silly. Do you need to sit down with yourself and one other person to have a board meeting every month when you've both been working in the same office every day?

It may surprise you, but you should. A legally registered company must submit financial reporting. You and your corporate officers should touch base often to discuss the company's focus and performance. Public companies must have an official board of directors, but every company should have a team of managers and decision-makers focused on the business.

Board of Directors

Shareholders elect a board of directors to represent them. Public corporations must have one. LLCs can have them if they choose, but it is a good idea. The board handles decisions about hiring and firing, executive compensation, and business operations. Your board is also responsible for:

• Financial risk management
• Accountability and transparency
• Ethics and professional responsibility
• Business practices and fiduciary responsibility

In a small business, board members may not be shareholders. Take care to avoid any conflicts of interest between board members and the company.

Management

If you have management beyond senior employees, they must have the power to be decision-makers. Your senior management is on the front lines of your business operations. They are aware of employee morale, customer satisfaction and complaints, and day-to-day operations and costs. Keeping your management part of your decision-making loop is critical in a small company.

Stakeholders

You won't have official shareholders until your company goes public, but stakeholders are just as important. These are investors, entrepreneurs, and other financial providers with a share or stake in the success of your business. If you got money from a family member or friend, they should have some input into your business, at least until you repay your loan.

Be wary of giving non-operational stakeholders too much say in your business. You may want to review any silent partnerships with a business law attorney on ways to limit the control a financial stakeholder has in your business operation.

Legal Advice for Effective Corporate Governance

Corporate governance applies to small and medium-sized businesses as well as big corporations. If you have questions about establishing your new small business, speak to a business law attorney in your area. They will help you comply with state and federal laws and get your business running.