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Corporate governance is compatible with entrepreneurship

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Originally designed for big companies, corporate governance seems to be just about them. It only applies to listed companies for protecting the rights of shareholders and stakeholders. That corporate governance is provided with a framework for monitoring management activity and that the goal is to encourage better results. But this concept also applies to small and medium-sized entrepreneurs. Even if in many cases management is done by company owners and shares are owned by family members, corporate governance is of great relevance.

In companies where the owners are also executives, the management and exercise of property rights are aligned, but their interest may not coincide with that of stakeholders. Where not all family members are involved in managing the business, activating mechanisms to protect their rights is necessary.

From this point of view, adapting corporate governance to the size and level of maturity of the entrepreneurial company is helpful. Because corporate governance determines the role of each family member in the business, it structures the need for development by reporting to future generations that will take over the business, defines the role, structure and composition of management, and determines the impact of seniors on the business and the need for a succession plan.

Benefits of adopting corporate governance for SMEs

The International Finance Corporation shows that the benefits of adopting corporate governance and adapting it to small and medium business are as follows:

  • Less conflict between family members or other stakeholders involved in the company’s management and those not involved
  • Greater protection against fraud, embezzlement, or financial costs generated by poor internal control
  • Easier access to credit and generating faster business growth

The importance of refreshing the composition of the Board of Directors

The Board of Directors is an important component of corporate governance in large companies, but it is equally important in small and medium-sized companies. By co-opting in this decision-making structure of external directors, the company accesses the right skills, experience and correct management behaviors. In addition, it also benefits from a network of contacts that exceeds contacts’ contacts and owner expertise.

Refreshing the board of directors with external members opens the perspective on customers, suppliers or regulatory factors and provides a more objective viewpoint and analysis of strategy, performance measurement and process improvement.

Many researches show weak growth in companies that have a too stable Board of Directors and a membership of limited success. Instead, companies with external directors in the Board have the tendency to grow faster, especially by acquiring other companies. External directors have contacts that they can use when they want to make purchases, are better connected to market realities, and have up-to-date industry information.

In conclusion

The founders have a decisive role to reach a certain level of growth for the company that they cannot go through with the mentality that has helped them get there. They get tired of market changes and perpetuate the recipe that has brought them success. The business model gets outdated and the growth crisis appears. In times of crisis, corporate governance is helpful because it allows the infusion of new ideas, the opening of new perspectives, and resonating with the resonance box provided by the existence of external directors.

Companies today do not operate in a static environment but in a constantly evolving environment. It is therefore necessary for the founders of the entrepreneurial companies to raise their perspective to perceive the development of their business. Adopting corporate governance puts them at a point of observation that privileges the most advantageous decisions for their company and family.

Author: Florentina Șușnea, Founder & Managing Partner, PKF Finconta
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