Corporate governance – key to business success
Rachael Maunder from our corporate team looks at the importance of good corporate governance in your business.
Many private limited companies are owned and controlled by a single individual or families. Whilst these companies may not be faced with the same issues of maintaining relationships between their board and shareholders as listed companies, corporate governance remains essential as a platform for growth and success.
Good governance is not just about compliance with formal rules and regulations. It is about establishing internal processes and attitudes that add value, enhance the reputation of your business, make your business more attractive to external investors and lenders and ensure its long term success.
Historically, there has been little guidance for unlisted companies on good corporate governance but awareness increased in 2010 following the publication of the Institute of Directors’ 14 principles of corporate governance. Highlights for private limited companies include:
Good constitutional framework
- The articles of association set out the basic management and administrative structure of the company. Consider updating your articles to take into account the changes introduced by the Companies Act 2006, in particular those which simplify matters for private companies.
- A shareholders’ agreement can be used to regulate relationships between shareholders, document expectations and legislate for the future by providing mechanisms to resolve disputes or govern the sale of the company.
Effective board of directors
- Establish a decision-making structure which sets out which decisions are to be reserved for the board, which for the shareholders and which can be delegated to management.
- Motivate individuals by creating promotion opportunities for those who excel.
- Consider whether key individuals should be incentivised through shares or share options.
Identifying and managing risk
- Use internal controls to keep risk in check and safeguard the shareholders’ investment.
- Identify the family’s values.
- Establish formal policies regarding the employment of family members.
- Establish a clear internal structure.
Successful businesses don’t get to the top by chance. They get there with the right people driving them forward with the right ethos, in the right market. But good corporate governance can also help companies achieve success faster as well as ensuring that the company is attractive to external investors and purchasers.