Governance in the privately owned business

Essentially one of the harder things to adapt to when you have started from scratch and built your business is to allow someone into your inner sanctum. Sound governance in the right environment where shareholder expectations are clear, will add value to stakeholders. There is a cost associated with implementing a sound governance structure, however, more important is an acceptance by the shareholders that the appointment of independent directors is in the company’s best interest. Sound governance is underpinned by a clear definition of the role of the shareholder, of the directors and of the management team.

The challenge for a small medium sized business (SME) and in particular the owner is the segregation of roles and responsibilities. So often the shareholder is also the director and manager who knows and does everything in the business. As a result to successfully create a governance structure in a SME, the shareholder has to understand the distinction between governance and management, the role of a chief executive officer reporting to a board and the general inactive role of a shareholder.

We have many clients who have moved into a formal governance structure and without exception those that have been most successful have appointed an independent CEO. When the owner manager has continued in the role as director and CEO, even when independent directors are appointed, achieving the potential of the company is more difficult. A carefully selected CEO appointment can enable a business to reach its’ potential much more efficiently and effectively.

Why do businesses hit the glass ceiling?
Regularly we see businesses exhibiting common characteristics of a driven and motivated owner, excellent growth, great diversity of clients and products, but with limited time to make the changes necessary to really take it to the next level. This condition, sadly, is endemic in many New Zealand SME’s. They simply run out of grunt to grow to a size of significance and become internationally competitive. This is where the independent CEO can come into their own. If they are carefully selected, they will be incentivised to ensure the company grows profitably in a way consistent with the shareholders’ expectations.

The CEO brings the future to the business, not the past.
When the CEO is incentivised in the long term to be rewarded with a share of the company’s growth, with little or no financial investment required, then everyone wins. Typically we see independent CEO’s comfortable with reporting to a board led by an independent chairman and they will accept measurement of performance as an inevitable consequence of the role. An effective board will more than pay for itself over and over by assisting with the strategy development and providing challenge to management on their performance. The board also takes ownership of the CEO appointment with a desire that he or she is successful.

Independent directors bring new skills, experiences and talents to the board table and when combined with the entrepreneurial flare of the owner and the energy of the CEO the result should be spectacular.