Governance

Why implement governance?

1. To maintain, control and leverage scale
2. Cut through complexity and ensure key objectives are achieved
3. Provide clear communication between the leader and every stakeholder
4. Separate accountability from responsibility

Let’s take a look at each of these reasons in more depth, to discover the commercial value effective governance brings to a business.

There is a degree of jargon in use when talking about governance but we’ll cut through it to provide a practical understanding.

If you are already on board and can’t wait to start, jump straight to our article on How to start implementing effective governance.

Scaling for profit and commercial advantage ensures gross margin is maintained and enhanced. Measuring gross margin as a percentage of revenue is the best way to determine if your gross margin is improving or declining.

As a business increases scale, the usual commercial markers increase. These are,

• revenue
• costs
• employee numbers
• customer numbers
• type of customers
• geographic areas of operation
• digital reach

Along with this increase in scale and commercial markers comes complexity, specifically in the following areas:

Communication

The pace of operations for any scaling business creates tension between ongoing high levels of performance and consistent quality communication.

Scale increases the need for clear internal communication. Scale demands regular updates across the entire business, reinforced by more detailed communication at a team level. Communication must originate from the top, and be structured, clear, and regular.

Quality communication is directly-linked to business performance, good staff morale and healthy corporate culture. Effective governance plays a critical role setting up, improving, and monitoring quality communication within a business.

People

Your workforce needs to understand the big picture and your detailed expectations. This understanding impacts the success of a business, company culture and staff engagement.

People tend to perform better when they understand the business goals, and the contribution their role makes towards those goals.

Stakeholders

How, when and to what level to inform stakeholders, is critical to business success – along with the balance of proactive versus reactive communication.

Direction/leadership

Clarity of key objectives and their order of importance becomes more important as the size and diversity of your workforce increases.

Business culture and morale

As your business grows in scale and complexity, the challenge of maintaining and improving the culture you set out to create increase.

Turning complexity into a series of goals, actions, and business activities underpinned by clear communication, is an achievable goal for any business. It’s an area where many leaders find working with a quality business advisor can help.

Scarcity is the biggest challenge facing businesses trying to scale. It takes the form of too few people with sufficiently deep and wide knowledge to manage and lead.

It places increasing pressure on the small (and often comparatively decreasing) group of people in the business who possess this knowledge.

Scarcity can be managed by developing talent, either by growing internal talent or acquiring it externally. Either approach will ease the pressure on business leaders over time. Assuming that talent is enabled to learn, absorb, and gradually internalise the deep and wide knowledge of the business.

Easing scarcity pressure allows the business to continue to scale. At the same time, it improves communication and control systems, creating momentum and helping to improve business culture and morale.

Every business needs clear communication from the owners; not always directly but cascading through the levels of management to everyone in the workforce.

A business growing in scale or undergoing transition desperately needs clear communication to drive out any confusion and make optimism and progress possible.

The owners and leaders of the business need to discuss, evaluate and agree upon a foundation of clear communication.

It should take the form of statements outlining,

• Company values
• Company culture
• An adoption plan for the values and culture
• Customer and market value
• Strategy, tactics, and operations – all outlined in a clear plan. It must be updated and communicated to the business regularly (at a minimum annually), reinforced and supported with monthly check ins, and weekly focus sessions for teams.

From this foundation comes an understanding of the expectations business owners have of each person in the business.

Details of the support mechanisms available and how to access them also form part of the communication from the business owners. To reinforce the value of every person in the business as critical to its success. The tools and support needed to carry out their roles at a high level are provided – they must use them to achieve their goals to an agreed standard.

Effective governance can assist owners realise, address and separate the different roles of accountability and responsibility.

We often help business owners become more aware of the multiple hats they may be wearing in an area of the business, or around a key decision. Business owners may be both accountable and responsible, but they can then make balanced decisions if they consider these multiple hats.

Accountability

The Business owner is 100% accountable for their business results and for any failings it may have. It’s important for all businesses, and critical for those growing in scale or undergoing a transition, for owners to delegate as much responsibility as possible to their suitably qualified and experienced leaders, managers, and team leaders.

• Company Directors are both accountable and also personally liable, as well as liable to their business to ensure it is solvent, well run, operating safely, and profitably, as well as meeting the needs of its customers, suppliers, employees, and owners.
• Directors are liable in law to act in the best interests of their business. At times, this requirement can conflict with what is in the Director’s best personal interests.

Responsibility

• Leaders and managers who report to business owners should have delegated key responsibilities.
• Often in New Zealand, business owners delegate some key responsibilities to themselves. In this case, they wear multiple hats – both that of a business owner and a leader or manager.

This practice is at the very heart of effective governance. It means owners can work on the business as much as possible while allowing their key people to focus on achieving their responsibilities and goals by working in the business.