RSS feedsSmall and medium-sized businesses are a very important part of the economy. There is great diversity from very small owner-manager businesses, with only a handful of people, to fast-growing ones, where capital and management have been separated. Many of these businesses are family owned and are extremely well run.
The question is whether these successful businesses can enhance their performance. SMEs, and particularly family businesses, can extract more value from areas not always in the forefront of owner managers' minds. For example, having the right processes to deliver the right information at the right time, getting good independent input for the business and finding value in good governance.
Processes and information
Owner managers are usually much closer to the business and so need less information, less regularly. This is especially true where there are no significant other shareholders involved. Even in these cases, there is value in reviewing the available information.
These processes need not be heavy and hugely time-consuming. They can be light-touch and tailor-made to the requirements of the business.
Even the most capable of managers with their finger on the pulse of the business believe that decision-making is enhanced if they can talk over the tough calls with an experienced, knowledgeable person. Accountancy firms have an important role to play in providing valuable insights here.
The partner needs to know the company, its competitors, the industry and the challenges it faces. But to be effective, the partner needs to be provided with regular material so that they can be pressed into action when needed.
The second approach is the utilisation of an experienced business person as a mentor. The mentor is typically more broadly skilled and would have reasonably frequent contact. A similar approach is networking with groups of people at the same level, often from similar industries and where experiences are shared.
Third is the appointment of a non-executive director, who carries the responsibilities of a director and will become more knowledgeable about the business. These appointments can make board meetings more effective, through breadth of experience and constructive challenge to the board. In addition, the non-executive director is then informed and readily available for off-the-record discussions and to provide input that makes business decisions more robust. It is important that any such appointee has the breadth of experience and the chemistry that makes this a positive relationship.
Fourth, taking on a non-executive role in another, preferably unrelated, industry will help broaden the director's personal experience and build their self-confidence.
Value in good governance
From the IoD research among SMEs, respondents made it clear that they take governance responsibilities seriously, but they also oppose the imposition of a 'light touch' code of governance for companies not covered by the AIM regulations or the combined code. Business, especially SMEs, feel weighed down by regulation and see little merit in a box-ticking approach.
However, a review of key areas will help improve confidence in the business and, therefore, value to the stakeholders. These areas are regular board meetings with well-thought through agendas and backed up with good information. This includes seeing that topics such as strategy review, succession planning, risk assessment and control, the control environment, and health and safety are included at appropriate intervals.
They also recognise the importance of balance on the board with the right skills and experience and without one person dominating. Audited accounts were provided by 78% of the sample and were seen to provide assurance, as was an annual health check of governance, including legal compliance and good staff communication and development plans.
In total, these are areas where the owner-managers believe that they extract more value from investing some time to deliver greater assurance and have a stronger governance regime. It is good to step back and review how well-run businesses can be enhanced by extracting more value.
Neville Bain is chairman of the IoD. He is the author of Effective Director, published by Kogan Page, £35
