For many people the phrase ‘corporate governance’ sounds so uninteresting that their eyes glaze over. For others it is a source of fear, implying impossibly high standards that they suspect they and their company could never meet. In reality, neither reaction is justified.
Putting good corporate governance in place is rather like making a vessel shipshape. If the ropes are properly coiled, the crew will be able to use them in a hurry when they need to, and if a captain has the best navigation tools on board he will reach his destination before his rivals. This is all just common sense, and good corporate governance in an SME is much the same. It not all that hard to put in place and the benefits of doing it are enormous.
If a company plans to list on a stock exchange, as a number of Dubai SMEs are considering doing, it will be required by regulations to meet certain corporate governance standards; but even it does not wish to go public, ensuring good corporate governance should be high up on any business owner’s ‘to do’ list in order to optimise performance.
Start at the top
Good governance starts at the top, with the board of directors. Even the most brilliant company founder and his family do not know everything and sometimes make imperfect decisions. Under widely accepted good governance principles, a well constituted board includes directors with diverse skills and knowledge (eg finance, sector expertise, track record of helping other companies grow). It also contains directors who are ‘independent’, ie whose financial and emotional relationship with the owners is distant enough to enable them to say ‘No, you have got it wrong, think again’. The presence of independent directors also reassures any minority shareholders, as well as the company’s business partners and staff, that sufficient checks and balances are in place to produce a decision-making process in which they can have full confidence.
Clarifying areas of responsibility and lines of decision-making is also essential to good governance. The separate roles of the owners, the board and senior management should be clearly defined in writing, so that while the owners choose the board that defines strategy, the management is left alone to make day-to-day decisions without interference. This framework can be helpful to everyone involved. A son of the founder who may be wondering if it is his job to tell the chief financial officer how to write up the accounts, for example, can consult his company’s organisation chart and discover this is not the case.
Shine a light
The more the world knows about your company, the more it will understand its strengths and feel comfortable about taking a decision to trust and do business with it. So if you are a company owner, make sure you shine a light on what your company is doing. There is a balance here; a company should not of course unnecessarily give away secrets that would help its rivals compete with it. But many SMEs would benefit from being more ‘transparent’ – to use a word that is never far from the lips of jargon-loving corporate governance professionals – by telling people more about what they are up to.
Nowhere is transparency more important than in a company’s financials. Under best practice, accounts should be prepared to international accounting standards and audited by an independent accounting firm. If a company is listed on NASDAQ Dubai, accounts are required to be published twice a year under the listing rules of the Dubai Financial Services Authority (DFSA) that govern the exchange. Other exchanges have similar rules. Non-listed companies in the UAE do not have to be so transparent, but it makes a good impression on everyone if they are. Well prepared accounts also help a company to understand its own financial situation clearly, as well as delighting lending officers at banks, minority shareholders, and potential private equity partners.
Transparency is also important in other areas including disclosing any conflicts of interest involving directors and basic information about important contracts that the company has entered into. The DFSA’s listing rules can be a useful guide on which matters to consider disclosing, even for non-listed companies.
Formally identifying risks, and ways of dealing with them, is another important area of corporate governance. Risks can range from fundamental changes in the industry in which the company earns its living, to the risk that a key individual might join a rival business. In SMEs, particularly family-run businesses, not having a clear succession plan for when existing owners give up the reins is often a key risk. Such a plan should always be put in place well ahead of time.
For more information about good corporate governance, SMEs can talk to a number of organisations that can bring a UAE focus to the topic. Hawkamah, in the DIFC, and Dubai SME are among them. In essence, good corporate governance is about putting structures in place that promote both efficiency and integrity, in a way that is visible to the outside world.
Mark Fisher is vice president, Corporate Communications, at NASDAQ Dubai. He has worked as a solicitor in Hong Kong and the UK and as a financial journalist in the Middle East and around the world.