Background

The idea behind corporate governance is simple - well run companies produce better results. Much of
the emphasis has been placed on the best practice of managing formal external relationships,
establishing transparency and emphasising legal, timely and trustworthy information. Research
suggests that those companies that have better corporate governance are more valued than others
with less sophisticated systems, of obvious importance in exit planning. Studies also show that those
enterprises with good corporate governance are far less likely to be involved in survival and recovery
planning.

Other research suggests that there is a strong link between good corporate governance and:

lower levels of labour turnover;

improved levels of labour productivity;
improved terms and conditions from suppliers;
improvements in the ability to hold onto customers (the customer life value or CLV) and suppliers;
and lowered finance costs.

There is also some anecdotal data that suggests a link between improved corporate governance and
rates of growth. 

All these improvements in performance suggest that the enterprise should be continually reviewing its
corporate governance as part of its planning system within its business plan outline, with at least each
annual planning cycle requiring management to revisit corporate governance and match it to the
demands of the market and the size of the enterprise.

Corporate governance needs to change with the demands of the enterprise

Corporate governance can be considered as the glue that holds the enterprise together, both
internally and externally. For the micro enterprise the demands are far less onerous that for the large
multinational, suggesting that a step by step development of a corporate governance programme will
be the sensible approach, with each phase building into a more complex and demanding framework
as the enterprise grows.

Implementation of the step by step development of corporate governance

Four stages can be identified each with their own central problem that corporate governance should
be addressing:

The micro-enterprise with its central problem of control;

The small enterprise with its central problem of maintaining stakeholder relationships;
The medium enterprise with its central problem of encouraging and maintaining diversity;
The large enterprise with its central problem of balancing central functions against the demands of
decentralisation.

The corporate governance requirements for the micro enterprise

Advisers. Problems regularly arise for which the enterprise does not have the internal skills – selecting
the right advisers for each stage of development will be a vital first stage in best practice – and one
that will have to be regularly reviewed.

Articles of Association/ Company Statutes. Defining what the enterprise can do is another vital first
stage in development – one that tells management what is permitted and what is not. Standard terms
and conditions exist which function for the early stage organisation – but which again will need to be
regularly reviewed.

Shareholders agreement. In small organisations, with a limited shareholder base, conflicts can easily
arise. Documenting how shares can be transferred, what rights each shareholder has, and how they
are valued, is important in reducing the potential impact of disputes. This shareholder agreement will
no longer be valid once the shares are more widely traded.
Record keeping. Best practice insists that the enterprise should maintain comprehensive records,
both financial and non-financial, and that this should start at the earliest possible moment in the
development of the enterprise.

Conservative accounting. Many of the problems of "public" corporate governance develop as a result
of "creative" accounting approaches. Establishing conservative accounting guidelines (including those
based on accounting assumptions) at an early stage and maintaining them throughout the
development of the enterprise will control this tendency.

Business plan. Controlling rather than reacting to the environment is a sign of good corporate
governance, and one that demands a formal planning procedure incorporating effective action
planning and implementation. This will become more detailed and comprehensive as the business
grows, with the incorporation of benchmarks and key performance indicators.

Investment appraisal. Within the business plan, the enterprise needs to start to create a formal system
for making investment choices. This will involve a standard procedure for review including a company
wide hurdle rate, and board level approval for all major investments with all directors signing off on
expenditure.

Planning cycle. The creation of a formal planning cycle incorporating a planning period, quarterly
updates and monthly business monitoring will be a vital part of the continuing development of control
within the enterprise.

Registration/ certification. Ensuring that the business and product/ service has been correctly
registered will be a continuing requirement of corporate governance. These requirements include
intellectual property, tax, data protection. There will be a continuing requirement to ensure that
regulatory standards are maintained, which will demand the introduction of standard operating
procedures to provide an audit trail.

Contracts of employment. Most legal systems demand that the employee is provided with a contract
of employment which sets out clearly the terms and conditions of work. Best practice suggests that
this includes a clear job description, which defines authority and responsibility, places the individual
within the enterprise organogram, and is acompanied by a code of conduct, discipline and grievance
procedure and pension rights.

Code of conduct. Every code of conduct can of course be ignored. Nevertheless it is useful in defining
what the organisation sees as acceptable and non- acceptable behaviour, which individuals can risk
breaching – but which create clear barrier conditions. Topics include: absenteeism, alcohol,
appearance, bribery, communication (external, internal), company vehicles, complaints, conflict of
interest, credit management, data protection, discrimination, dispute management, dress code, drugs,
expenditure powers, external promotion/PR material, entertainment, forgery, fraud, gambling, gifts,
harassment, health and safety, humour, insider trading, intellectual property ownership, maintenance,
monopolistic behaviour, misuse of business assets, moonlighting, nepotism, overtime, physical
contact, politics, private use of business computers/ telephones/ photocopiers, privacy, public service
during working hours, purchasing policy, religion, security, smoking, timekeeping, travel expenses,
truthfulness, violence, visitors, waste management, whistleblowing.

Complaints policy. The need for a formal complaints policy for all stakeholders will be required early in
enterprise development so that all stakeholders can receive speedy and effective treatment when
problems exist.

Discipline and grievance procedure. Again a legal requirement in many countries. The discipline and
grievance procedure sets out how disputes will be handled and what the employee and employer can
expect, and will be part of the overall complaints policy.

Pensions policy. Different countries differ on pension provision within the enterprise and how it should
be managed, though it is best practice to make it clear to the employees how they will be affected.
Health and Safety. An increasingly important control over all organisations. Clearly establishing what
the health and safety issues are, and how they are managed will again be a necessary early step in
the creation of a comprehensive corporate governance environment.

Supplier and sales contracts. Formalising relationships with suppliers and buyers will be part of the
essential business platform building which will move the enterprise from its starting position into a
steadily larger organisation.

Creating timelines for legal reporting. Any enterprise needs to establish deadlines for the preparation
of official documents, including sufficient time for review and re-working.

Customer satisfaction survey. Best practice requires any organisation to have an idea as to its
strengths and weaknesses to ensure that problems are corrected, many of which will be
organisational in nature, and require modifications to corporate governance.

Communication policy. Creating and maintaining effective communication with the main interest
groups will maintain and improve the position of the enterprise. These interest groups will be
employees, financial stakeholders, non-financial stakeholders each of which will require the creation
of a different communication policy.

Contingency planning. Even for the smallest enterprise, contingency planning has value. It focuses
attention on what can go wrong (which include many items of corporate governance); identifies how
the problems can be minimised or entirely designed out; and revisits the information system to ensure
that early detection is possible.

Additional corporate governance requirements for the small enterprise

Management team development. Decision making requires diversity and depth – improving the skills
and abilities of the management team will be a priority for the growing enterprise leading to the
creation of knowledge centres which can drive competitive advantage through the maintenance and
development of core competences.

Standard operating procedures. With the increased size of the organisation, it becomes important to
both standardise procedures in many areas, but also to incorporate experience and to provide
training, all of which are part of the creation of standard operating procedures.

Regular formal reviews. As the number and importance of decisions grows, the formalisation of the
reporting system needs to increase. To improve control, management meetings need to include
formal agenda, supporting documentation, formal voting and records of the meeting decisions. Other
formal reviews should include both a planning effectiveness review, and a regular analysis of legacy
issues.

Internal and external audit. With increasing complexity of control, an internal audit system which
reviews procedures will become a steadily more important element in corporate governance and
control, especially to identify potential areas for cost cutting and to reduce the potential for fraud.

Legal review. As part of the audit procedures, small companies should start to regularly review their
legal agreements – such as sales and purchase contracts, covenants, leases, contracts of
employment, intellectual property rights, to ensure that the enterprise understands its legal obligations
and controls them to the greatest possible extent.

Impact analysis. In common with the development of a formal reporting system, a structured approach
to the analysis of market driver change and the implications for the enterprise will clearly identify
changes that senior managers need to take.

Security plan. As the operation becomes more complex, clear authority and responsibility needs to be
established for the creation and maintenance of a security plan, which will have many of the
characteristics of contingency planning.
Purchasing policy. As turnover grows, the need to formalise rules and approaches to purchasing will
become more and more important – both to improve quality and profitability, but also as a major
element in reducing potential corporate malfeasance. 

Team building for major projects. With the complexity of tasks and the level of investment rising in the
more important projects, a move towards team based systems will generate better returns than the
reliance on single individuals to effectively complete projects on time, budget and specification.

Recruitment. Standardising recruitment policy will both improve the quality of the recruits and their
diversity, but will be central to moving the micro enterprise onto a new level. This recruitment policy
will also include the recruitment criteria for senior management.

Quality circles. As the organisation grows, the need for internal discussion of operating procedures
becomes more and more important, as does the need to ensure a growing quality of performance as
part of building competitive advantage. Incorporating quality circles as part of an integrated approach
to quality performs this function as well as improving internal communication.

Manpower planning. With increased numbers of employees, a formal manpower planning system will
provide greater impetus to corporate development, lower labour turnover and generate a greater
employee involvement in enterprise development.

Appraisal. Accompanying a formal manpower planning system, the introduction of a structured

appraisal system will help to identify the strategic direction of the organisation in building on existing
staff strengths.

PDP. The introduction of an appraisal system should be linked to the creation of personal
development plans for key staff, as a further component in building employee strengths for future
development, including succession planning.

Bonus systems. With the increasing number of employees, the development of a formal bonus system
will become more and more important. Best practice in bonus system is well established: it should be
broadly based, transparent in application, based on factors that groups or individuals can impact, and
related to key performance indicators.

Dividend policy. Research suggests that those enterprises that introduce a progressive dividend
policy are more highly valued than those that do not, as it provides a regular communication channel
with the investing stakeholders.

Additional corporate governance requirements for the medium enterprise

Separation of powers. With the increasing workload of the growing company – strategic, operational,
personnel considerations and stakeholder relationships, the separation of powers between a chief
executive and a chairman is both important to provide a check and balance within the organisation,
but also to improve operational performance. 

Directors trained in corporate requirements. With the growing complexity of the business, it becomes
more important that the board of directors has a clear understanding of corporate governance and the
actions that need to be taken to ensure best practice. Most directors lack this expertise and require
relevant training. Such training is essential for the creation of the administration knowledge centre.

Compliance officer. The wider number of stakeholders involved with the medium sized enterprise
suggest that the appointment of a corporate governance compliance officer is a sensible measure,
with regular (at least six monthly) reports on the quality of corporate governance. 

Auditors required to comment on corporate governance. The introduction of additional external checks
on corporate governance will assist the work of the compliance officer in identifying problems and
threats. 

Industrial relations policy. Formalising staff relations into a standard and transparent industrial
relations policy with regular and established review meetings will improve organisational performance
and reduce the potential for damaging conflict.

Diversity index. With the growing size of the enterprise the need to ensure that personnel balances
are maintained will become more and more important.

Independent appeals system. As the enterprise grows, the gap between senior management and
operations staff widens. There is a universal tendency to support management against staff in all
disputes – a dangerous policy. Introducing an independent appeals system which operates outside
the enterprise will greatly enhance the standing of any appeals process.

Independent whistleblower system. Whistleblowing is damaging in any enterprise to the individual

involved, but is important for senior management to be aware of potentially threatening problems.
Creating an independent whistleblower system (which can operate alongside the appeals system) has
many advantages in ensuring that issues are properly identified and analysed.

Environmental audit. Legislation on environmental management continues to strengthen, with the

requirement for organisations to complete a comprehensive and regular environmental audit as part of
their corporate governance.

Operating, financial review. The development of a formal reporting system for the operating financial
review (OFR) is part of the legal reporting requirements for the medium sized enterprise.

Business model. A description of the business model provides investors with a clear understanding of
the way in which the company perceives its positioning in the market – what customers it services and
how it makes money. This is typically part of the operating, financial review.

Additional corporate governance requirements for the large enterprise

Simplest structure consistent with operational requirements. Complex structures produce opaque
reporting and control. 

Common reporting language. As the enterprise decentralises, the importance of a common reporting
language will grow. Incorporating this into standard operating procedures will ensure that universal
problem solving approaches will develop and that the influence of cultural barriers will decline.

Profit centre emphasis on corporate governance. Think global, but act local. Maintaining responsibility
for the majority of corporate governance activity at the local level will both improve the responsiveness
of the entire organisation but ensure that key activities are modified for local legal and stakeholder
requirements, while meeting overall corporate guidelines.

Succession planning. With the devolution of power into profit centres, an emphasis on succession
planning and corporate governance training will be required to create the pool of staff able to manage
the increasingly complex enterprise relationships.

Employee satisfaction survey. Even with high quality management emphasising management by
walking about (MBWA) rather than management by memo (MBM), a comprehensive understanding of
employee requirements and attitudes will become more and more difficult to realise unless some form
of sampling such as employee satisfaction surveys, supported by exit interviews is conducted.

Auditor rotation and removal from non-audit work. Conflicts of interest with external advisors need to
be minimised to improve the objectivity of the advice offered.

Major project management. A similar problem of conflict of interest can be reduced with other
suppliers by separating the design, execution and control phases of major projects and ensuring that
they are managed by separate enterprises.

Specialist board committees. Best practice suggests that certain functions of the company should be
transferred to committees with a substantial element of non-executive (external) directors – especially
compensation and audit. This will only work if the non-executive directors are truly independent.
Supervisory board. Integrating a range of stakeholders into a supervisory board provides another
check and balance for the large enterprise, and is becoming part of future corporate legislation in
many countries. 

Corporate governance achievement level

The continued increase in corporate governance requirements with the growth of the enterprise allows
for the creation of a key performance indicator, the corporate governance achievement level, which
enables the enterprise to measure the effectiveness of its corporate governance as part of an
enterprise balanced scorecard.

Corporate governance within the planning platform

The planning platform developed by Ibis creates knowledge centres within the enterprise which are
responsible for the planning, information, and control of their areas of expertise. The administration
knowledge centre, responsible for corporate governance is supported by the corporate governance
standard operating procedure which incorporates a whole range of checklists and action plans to build
and maintain best practice within the enterprise.