What is Corporate Governance and why is it important?
To keep the explanation as simple as possible "Corporate Governance is a set of rules and processes to steer your business" in a good and organized manner. Corporate governance principles can be mandatory and binding, e.g. in the form of laws, norms and standards. But it can also consist of individual guidelines that each company defines and implements itself. This is especially important if your business starts to grow and you want to delegate decisions to your management team.
Another expression you often may hear in the context is "business judgement rule".
Why is business judgement so important?
In short, it exists so that a managing director or board will not suffer legal action simply from a bad decision and it is freeing its members from possible liability for decisions that result in harm to the company. Since nobody can predict future developments. And a decision that was taken today under the best knowledge but still not work out in the future. But you need to make sure to stick to duty of care.
Only decide and act, if you are
- sufficiently informed, e.g. be aware of chances and risks, alternatives
- in good faith,
- with an honest belief that you have the best interest of the company and shareholders in mind,
- not involved with personal interest
How can you introduce good Corporate Governance in your business?
So practically speaking - assuming you are the director or owner of a SME that is growing and needs some more structure in the steering and decision processes - what is it, you can do?
- draw up a set of rules, e.g. rules of procedure for your business
- document decisions and the informed base for decisions, e.g. approval requests
- define a process
- implement sufficient quality control, e.g. introduce the 4-eye principal wherever possible
If you need some help or tips on setting up your corporate governance, please feel free to set up a free 15 minute call with us.
Compliance and Risk Management are also topics related to corporate governance and we will pick them up in another post.
