Here are three myths about corporate governance and why small and medium-sized enterprises sooner or later will come to apply its principles, not constrained by any particular law or regulation, but rather because
- the economic reality and competition on the one hand, and
- the need for a good internal organization, meaningful control and value added auditing process on the other hand, will impose them organically, as the business evolves.
- Corporate governance is only possible in large companies.
The corporate governance model became compelling with the increased business complexity, out of need for data transparency and decision efficiency, particularly for listed companies and financial institutions.
The separation of decision-making processes concerning main business directions with a long-term view, crystalizing the owners’ vision, from execution processes, was naturally imposed in the context of a competitive global economy.
However, this separation is perfectly applicable to medium and growing companies, since it can successfully adjust to their size. Indeed, in very small companies where the owners are also managers, the agent- principal issue is less likely to arise. Yet, if we look around to many family businesses we know, the shareholders are not very actively involved in the running mechanism of the business, and some tools may be required to protect their interest.
For small and medium companies, corporate governance is mainly about improving business efficiency and performance, and less about monitoring the actions of management.
- Corporate governance equals increased bureaucracy.
The division of “powers” within a company is not restricted to the set of rules and procedures which contribute to a smoother, more logical and more transparent flow of decision and executive processes, although said set becomes extremely instrumental for that purpose. This could be perceived as increased bureaucracy in the company.
The main point is first to develop a structure, framework – which we can call in a well-established language, organigram – of the processes, procedures, competencies and subordination of elements,
More precisely-the framework should promote better understanding of roles and responsibilities within the company, ideally overseen by a board, which could formal or informal. A dual board arrangement, with an “operational” board and separate “advisory board” addressing wider family issues would always be a plus.
This would only lead to the evolution of the company, strengthening a good reputation and long-term profitability.
- Corporate governance entails high costs.
Insofar as expenses are concerned, strictly speaking, the emergence of a new structure in the company will entail higher costs, without a doubt. However, the comparison with the era preceding the implementation of corporate governance principles is fruitless once the decision has been made within the company. It’s like comparing apples with pears. The comparison with the upcoming period or rather the reference to what will follow is the important one: in the long run we can envision the streamlining of processes, which in turn helps identify activities that generate high expenditures and measures to reduce them.
I believe that the main arguments, on which a plea for transitioning a medium-sized and even small company to a corporate governance model would be based, before a law or a decision of the Romanian tax authorities to impose this step, are related to a few major aspects.
First, the idea to protect the business against the risks of crisis stands above any other reasons regarding direct benefits for shareholders. We are concerned here with system crises, global or own financial crises, local (socio-political-economic) crises, personnel crises, market crises, crises of capital markets, or other sources of finance.
Corporate governance is the model that ensures this minimum and logical protection with its own principles, through which are clearly defined long-term business directions and the manner in which they will be implemented. That is, precisely that set of “rules and regulations” built for anyone who owns or runs the company. The set contains exactly those practices that are considered ideal for the company, applicable in crisis situations: decisions, reactions, measures.
Secondly, the accuracy and transparency of top management decisions, and the clear delineation of the decision area and the executive area. In this context, the role of the independent auditor also naturally emerges.
Thirdly, the long-term stability and sustainability of the business, supported by real-time analysis and control of the entire execution process, so as to avoid slippages, are the core elements that corporate governance-as a model of organization and leadership-can guarantee.
Appropriate corporate governance practices can contribute to the success of any companies of all types and sizes, including those that are unlisted or privately held.
A company, be it even medium-sized, transparently run, with clear principles and business vision, is more likely to succeed and grow in the long run, will consolidate its brand image over time and will undoubtedly earn a capital of trust both from clients and from potential investors.3