Corporate Governance: The difference between good and great businesses!

If there is one subject that should be drummed into the head and heart of every entrepreneur, especially in this part of the world, it is corporate governance. It easily differentiates between good and great companies. Corporate governance is the only reason some businesses have survived the test of time, patience, adversity, fears and successes (successes could sometimes be overwhelming). It makes the difference between companies that span multiple generations and those that die with their founder.

Investopedia defines corporate governance as the system of rules, practices and processes by which a company is directed and controlled. It essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

In an environment where most founders/entrepreneurs are lords to themselves, you can understand why it’s difficult to implement proper corporate governance. Several entrepreneurs argue they have such systems in place by which the company is directed and controlled but what most fail to explain is how those systems are developed, enforced and monitored. The reason is simple – they are defined by the whims of the founder. The founder decides what those systems will be, how they will be enforced and how they will be monitored.

This is where the importance of having a board of directors or advisers comes to play, no matter how small the business is. The board gives multiple benefits to the business. Depending on the selection of the board, they can offer credibility to the business, provide leads, de-clutter thoughts, foresee threats, inspire confidence, generate ideas and weather occasional failures. I know a business that survived only because of its board. The promoter of the business got to his wits end and was ready to call it quit but the directors, even though they had no equity, encouraged him to continue despite odds and today his business is one of the fastest growing in its sector.

It’s very critical that the entrepreneur not only thinks through the business plan, but also thinks carefully on the selection of advisers or directors. And these advisers are usually not only motivated by equity in the business, even though you might have to offer either cash or equity to some but others will do it pro-bono just to encourage the business. The entrepreneur should seek out advisers with diverse set of skills that complements him. This assumes the entrepreneur understands his/her weaknesses and his bold enough to accept people who will think differently from him, hence, occasionally challengd his decisions. The entrepreneur must understand that he will not be able to make key independent decisions and must be willing to be answerable to people who have not put in sweat into the business.

With proper corporate governance, both definition and implementation, companies increase their chances of surviving significantly but it comes at a cost!

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