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Top 3 Corporate Governance elements every small company should have in place

As a small business owner, I understand the challenges that adherence to the barrage of Corporate Governance requirements brings. Yet, as someone who has worked with Boards and Management of larger entities during my pre-entrepreneurial career, I also have an appreciation for why these requirements exist. A solid Corporate Governance framework presents your company as one that is knowledgeable, as one that can be trusted, as one that is poised to achieve greatness. This can work wonders for your company, if you are seeking high value contracts, loans with banks, investments from the private market, all of which can set your company on a steady upward path.

As I tell my small business clients, from the moment you incorporate your business and have filed your Notice of Directors, you have a Board of Directors and each Director owes the company a duty of care to act in its best interest. The elements of Corporate Governance are vast and numerous. Organizational structures, Bye-laws, Strategic Plans, Policies and Procedures, Terms of Reference, Charters, Compliance certificates pursuant to various laws, Reports on Board Performance etc. can all be considered as elements of a Corporate Governance Framework. However, at the core of effective Corporate Governance lies Corporate Values. All these elements will be of little to no value, if the Board, under whose ambit Corporate Governance lies, fails to responsibly exercise his/her duty of care to the company. As the “apple rots from the head”, the Board should set the tone at the top by setting and adhering to values that promote integrity, accountability and transparency.

With this in mind, we recommend that each small company have the following in place to ensure its growth:

#1 - A Code of Ethics

The Board must establish standards for business conduct for itself, senior management and staff. This Code should include at the very least:

a. Requirements that any actual or perceived conflict of interest in transactions be disclosed

b. That Directors, managers and staff should exercise their functions with reasonable skill, care and diligence

c. That independent judgment must be exercised

d. A complaints procedure that facilitates open and frank expression about illegal activity or questionable practices, through the appropriate channels within the organization, without the threat of reprisal.

e. That benefits or gifts should not be accepted

f. Zero tolerance for illegal activity, such as financial misconduct, fraud, money laundering, bribery and corruption or sexual harassment in the workplace.

Application to all is critical to the success of the Code, as Directors ought to understand that they too are subject to it.

# 2 – Process for Recruiting and Selecting Directors

The Board should be balanced. This means that it should have an appropriate number of executive, non-executive and independent directors. The majority of Directors, including the Chairman, should be independent non-executive directors and there should be a clear distinction between the role of the Chairman and the role of the CEO. The CEO may or may not be an executive director.

The Board should not be too small so that changes in composition cannot be facilitated without undue disruption, and it should not be too large so that it becomes unmanageable. The Companies Act Chap. 81:01 requires that a profit company have a minimum of two directors, however this number may be increased based on the nature of the organization. The Institute of Directors and the Cass Business School ranked the 100 largest UK listed companies against a good governance index. Companies with fewer than 8 and more than 15 directors were given a negative weighting.

Special care should be given to ensuring that each Director possesses suitable skills, experience and knowledge. This would not only require presentation of resumes, but the conduct of due diligence into the information presented in those resumes. The allure of position and title can lead to the willful insertion of misinformation in resumes. Due diligence is also needed into the character of proposed directors to ensure that only persons of integrity and of sound mind and those who are regarded as fit and proper are selected as Directors.

The Board should also be diverse from both a gender and ethnic perspective, given our innate human disposition to favour those who are similar to us. It is insufficient however, simply to meet a numerical quota for women on Boards or for persons of various ethnicities on a Board. Special attention should be paid to the ability of such persons to exercise independent judgment and not fall victim to “group think” as more often than not, they are not in the majority on the Board.

A nomination Committee, chaired by an independent non-executive director, should be established to approve the selection of candidates and make recommendations for recruitment. Persons found not to be fit and proper should be removed from office.

#3 – An effective Corporate Secretary

Your Corporate Secretary, also called the Company Secretary, is neither a note-taker nor the Board’s or Chairman’s “pedal pusher”. Gone are the days when this office holder was seen simply as an administrator that supports the Board, Chairman, or other senior company officials. While this is part of the function and duties of the Corporate Secretary, it is also a statutory senior officeholder that advises the Board and can save directors from a barrage of legal and ethical scandals. He or she must be sufficiently qualified and experienced in law, business management and corporate governance. Special skills should include the ability and willingness to speak truth to power regardless of whether it is wanted or not, the ability to manage conflict among Directors as well as among managers and staff, the ability to guard the organization against unethical practices, as well as the ability to place the interest of the organization above any self-interest. While many small business owners simply name one of their own as the Corporate Secretary, the guidance of an effective Corporate Secretary is absolutely essential to the growth of the organization.

Far too many of my small business clients ask questions such as “Why is this applicable to me?” “I just have a small business.” This view limits the business and the great heights it can achieve if only it were to think and operate BIG! The requirements to govern a company effectively is not only limited to large companies. No company starts at the top. The journey requires a growth mindset; a belief that you are destined for more. Therefore, do the ground work, start BIG even though you are small and enjoy the ride!

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information contained herein are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to this article do not create any professional relationship between the reader and Ceronne Bayley’s Consulting Services.

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