This is my 4th article in my Corporate Governance miniseries. To recap, my first article is the introduction of corporate governance followed by Parts 1 and 2 on the red flags found in financial statements and the importance of financial statements as a management tool. In this article, I am sharing the benefits of incorporating corporate governance in the daily operation of your business.
In general, the operation functions of any business could be overlapping, interconnected and will not be easily separable into clear independent defined categories. However, it is still very important to ensure that the functions should be carefully framed to avoid conflict of interests that ultimately would bring detriment to the business in the long term.
A good business operation process is able to instill accountability and transparency. Hence, let us look at the 5 basic elements below.
Power of Executive
Executive here means directors and top management personnel who are entrusted to make decisions to grow the business, preserve its assets, ensure proper fund utilisation and to find ways to sustain the business in difficult times. Any power given to the Executive should incorporate a check & balance strategy. In the Start-Ups and SMEs environment where limited number of persons are operating the business, it is important to have an independent capable ethical advisor to be brought in to provide check and balance to safeguard the interest of the business. Approving power should not rest upon one person unless it is a sole proprietorship. This is to prevent the wrongful use of power or undue influence on the board of directors.
Payment Approvals vs Payment Execution
Personnel with approving authority should not be involved in payment execution. This is a form of independent checking process and financial control transparency to ensure that payments are appropriately made. Any questionable cash movement can be detected early.
Accounts Recording & Independent Auditor
Many business owners may view financial recording is only to fulfil Government requirement for taxation purpose. However, it is essential that business owners must understand that an up-to-date set of accounts serves as audit trails to detect wastage of resources, incorrect recordings, financial irregularities, revenue and expenses patterns and as a management tool to sustain the business, promote its growth and monitor the cash flow. An independent auditor serves as a helpful investigative eye and provides good insights into the business.
HR – Hire & Fire
Hiring is a very important process to ensure only people of the right fit in terms of qualifications, experience, ethics, work attitude, their expectation in career growth and wages will join the company. In a situation where termination of employment is unavoidable, separate HR personnel should be brought in to provide a fair assessment of the situation. This strategy provides a fair chance for the employee in question to present his side of the story. When an HR issue is carefully managed, potential wrongful dismissal claims against the Company may be avoided.
First, it is important to understand that the business legal structure you choose will affect your personal legal and financial liability on business debts accumulated during the course of the business if your business could not pay its debts. If your liability is unlimited, you may lose all your personal assets to settle the business debts or even be made bankrupt by your business creditors.
Second, a well-thought business structure should incorporate important legal documents which are properly placed to help the business to minimise the negative legal effect or any future unwarranted claims. Important clauses to protect the company should be incorporated into agreements such as the merger and acquisition, investment in subsidiaries, joint ventures, employment and consultancy agreements, inclusion or exit of investors and shareholder agreements.
Third, legal agreements should contain terms and clauses to protect the interests of stakeholders but fluid enough to allow the business to grow. Any legal clauses which are overly restrictive may pose challenges to business expansion. A good balance should be achieved depending on the risk appetite of the business owners.
I hope this article creates your interest to find out more to benefit your business venture.