Corporate Governance Essentials for Growing Businesses

By Demi Darbey & Tim Sadka

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In the context of an increasingly complex economic environment, recent changes touching on corporate governance have made a significant impact on small and medium sized enterprises (SMEs). From increased regulatory scrutiny to a push for digitisation, businesses are having to adapt to stay ahead of the curve. To adapt seamlessly, it is important for a business to have a solid corporate governance structure in place to act as a foundation to deliver sustainable growth, resilience and long-term success. Without a solid foundation, SMEs often struggle with compliance issues, and leadership conflicts often also present to slow down progress.

This article explores how corporate governance can help to solve common challenges for SMEs and facilitate scalability.

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What is Corporate Governance?

Corporate Governance refers to a system of rules, principles and processes by which a business is directed and controlled. It encompasses every level of a business, whether a limited company, limited liability partnership or other corporate structure, and sets out how members of a business will interact and make decisions. The key components cover accountability, transparency, fairness, responsibility, and risk management. When implementing these practices a business should balance the interests of the business's stakeholders. A business's focus on corporate governance can therefore serve as a guide to its leadership and promote the values of the business.

In short:

• Good corporate governance is an ongoing strategy that promotes ethical business practices, leading to financial sustainability.
• Bad corporate governance can destroy a business’s operations and profitability.

An example would be the Covid-19 pandemic. Those companies with solid governance structures bounced back more strongly and maintained their earnings in the years afterwards; and others failed, ending in insolvency related outcomes.

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Best Practices for SMEs and legal considerations

‍Decision-Making‍

Many SMEs fail to consider the implications of poor decision making protocols, this leads to disputes over roles and responsibilities which can cause internal conflicts and even legal disputes. In order to set clear boundaries and rules in place, a thoroughly drafted Shareholders’ Agreement, Partnership Agreement or Board Resolutions can help anticipate potential issues, prevent future disagreements and ensure key decisions are subject to an agreed process and that the business remains compliant with UK Law.

Compliance and Risk Management

Best practice in respect of corporate governance should ensure a business remains compliant with UK legislation including GDPR, employment regulations, and tax laws. An SME should have proper systems in place to keep matters under regular review to ensure the business addresses each legal requirement it is subject to; and such systems should be regularly monitored and updated to ensure consistent compliance. Regular compliance audits and company secretarial support can be used to help SMEs avoid costly legal mistakes.

Attracting investment and securing funding

When it comes to funding, many SMEs struggle to attract investors or secure loans because they lack formal governance structures, in some instances not being able to present a clear picture of their assets or legal transparency. Financiers do not want to risk getting involved with a business that may have exposed itself to potential liability. In order to maintain transparency and legal compliance, a business should have (a) a bespoke constitution e.g. articles of association, (b) clear and up to date share structure charts and cap tables, (c) well-drafted and negotiated investment agreements where investors become involved and, where debt is involved, (d) legal and accounting support to anticipate any due diligence process that may arise at the request of a lender.

Disputes

Disputes can derail a business, especially if they involve directors and shareholders. A well-drafted shareholders’ agreement is a crucial document for preventing/managing potential disputes between key stakeholders, especially by addressing voting rights, decision-making powers, exit strategies, and dispute resolution mechanisms. Having clear set out procedures, it can protect a business from disruption by allowing conflicts to be resolved legally, efficiently and hopefully cost-effectively.

Business Growth, Succession & Exit planning

A business goes through many stages throughout its life and, at the start of a new investment, succession planning and exit strategies may not be at the forefront of ones thoughts. For example, it is important to have a clear framework to ensure the business remains stable if there is a change in ownership. Areas of focus should include; updating business continuity agreements; structuring share transfers or buyouts legally; and ensuring any merger and acquisition activity is completed to best effect to ensure a smooth transition while protecting the interests of all stakeholders.

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Conclusion

Essentially, corporate governance is not only about internal processes, it is also about legal protection, risk management and business sustainability. Remember, as a business grows, the more complex its regulatory, compliance, and governance responsibilities become. Striking the right balance within the business should help to ensure corporate governance is monitored and nourished in a way that will help to give competitive advantage and allow a business the best chance to have long term success.

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Demi Darbey, Solicitor and Tim Sadka, Solicitor & Partner

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*Disclaimer, this article is intended to be used for informational purposes only. It should not be relied upon as legal advice and readers should not act on any of the information contained within the article without seeking professional advice.

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