Struggles are common with small and medium companies. Resource constraints, time pressures, internal controls and keeping up with external changes are a constant reality for many of these types of organizations.
Ultimately, the whole burden lies with the board (who in many cases are owners). It is much like having a pyramid turned upside down with full pressure on the tip down below which is the board. There are traps everywhere. If you are successful, the pressures of keeping up are immense. If you have failures and constant cash flow problems, you end up in a very stressful situation. Even if you have a knowledgeable team doing a highly commendable job, challenges are all over the company.
The purpose of this article is to help such organizations ease the burden and pressures, yet perform to their maximum potential. There is a better way to function at the top level. In fact a better way is an understatement as this is an excellent way to build wealth and manage risks. I will give a practical example in which you may recognize your own or other company operations.
When I was auditing a steel company a few years back, I realised that a governance structure did not exist. The reasons were that there was far less awareness of the need for board governance back then and that the owner was the CEO who called all the shots. The buzz words back then were corporate strategy, management reports, budgets as well as cash flows. Actually, these looked and were important in many instances. But these were simply activities without a resultant outcome. These activities are simply means to an end. The company was very busy but the direction was unclear.
Under the model of governance to which I want to introduce you, Policy Governance, decisions on the company’s Ends are segregated clearly from everything else. This distinction clarifies final outcome from activities. If the Steel Company’s board had separated their management meetings from their governance meetings, and firmly focused their governance meetings on determining the company’s Ends, all the operations involved in running the business could have taken a different, and far more aligned, turn.
Board policies which clearly translate owners’ best interests into statements of the company’s true values, principles and performance expectations can be readily permeated through all levels of management and provide a strong backbone for the company as a whole. At this steel company there was no such structure present, which meant that the CEO was always under constant pressure to answer management as well as governance issues with no proper guidance. The stress levels were always high and frustrations were evident with the way he treated his staff and other stakeholders. The difficulties kept rising as the level of growth was extremely fast.
Companies globally look for long term sustainability. But in the real world, board members change, the executive team changes, as well as a myriad of other processes keep changing. The core question is how can companies cope with these changes in a competitive landscape, have workable revenue generating and growth strategies, as well as meet up with innumerable regulatory changes? The answer is to have up to date articles or bylaws in which the owners empower the board, and, up to date board policies that guide and discipline the organization on owners’ behalf.
The Policy Governance model offers a holistic approach for those acting as custodians to a company that allows them to develop simple yet clear and comprehensive policy controls that express their core values and principles in order to instil the right discipline.
Having attended many seminars on governance and ethical issues, I realise that behaviours and cultural issues play a crucial role in an organization’s performance. It is true that matters such as remuneration, health and safety, risk management are equally important, but behavioural and cultural patterns take centre stage in many discussions. Companies applying the Policy Governance model have a well designed structure and system in place for boards to align their company’s behaviour and culture with their owners’ values in terms of their Ends as well as their standards of ethics and prudence.
We must not also forget that the cause of reserves being obliterated is mainly due to the wrong choices which company directors have made. Wrong, often because the board and management were too busy with day to day fire fighting to consider what was required for their long-term success.
In summary, small and medium organizations can add leverage and take advantage of opportunities using the Policy Governance model. Whilst your competitors will be busy looking at the ins and outs of day-to-day means related issues, you will be firmly focused on defining and tracking the outcomes your owners want, taking you further and faster ahead.