Stir up your business with impressive corporate governance

For many Singapore’s businesses such as small and medium enterprises (SMEs), corporate governance is like the weather. We always talk about it, but we cannot do anything about it.

Indeed the often-held view is that corporate governance is for the “big boys” only. It is something complicated and unwieldy for the smaller players. Above all, it is expensive, and the fledgling business can hardly afford it, let alone needs it.

In May this year, the Monetary Authority of Singapore approved a revised Code of Corporate Governance for companies listed on the Singapore Exchange.

The new code will be applicable for financial years from November this year. It reiterates the importance of transparency and disclosure as companies operate in an era of increasing stakeholder expectations.

Benefits of Adoption

The doubt is whether smaller businesses here can benefit or even have to bother with the revised Singapore’s code or indeed any code from elsewhere. Questions abound on its relevance and applicability. Businesses may be skeptical as efforts for compliance is sometimes viewed as bureaucratic.

There is, however, no lack of call for all businesses, regardless of size and type, to adopt corporate governance as a guide for proper conduct. A myth is that unlisted businesses are not accountable to the public since there are no public investors.

But it is actually in the very self-interest of all businesses, including SMEs, to adopt facets and features of corporate governance.

Paying heed to good governance principles inculcates a discipline of internal controls. Management and owners can then focus on their respective jobs in a specialized setting of guided “division of labor”, and this is particularly helpful for the management.

Most significantly, the practice of corporate governance assures access to resources, especially financial capital, which are vital for growth. Having external directors or advisors in governance also opens up new ideas and connections which may be valuable to the business.

In recent times, many stakeholders are demanding that business become more socially responsible. The role of good corporate governance in advancing the social cause is critical.

Further, there are also movements for sustainability to be an integral part of corporate governance. For businesses, this is a direction to be prepared for in the foreseeable future.

Although corporate governance is much more elaborate in a listed company, having some elements in their preliminary forms is a step in the right direction for all businesses. It may well be a precursor for eventual initial public offerings.

Areas of Focus

The practice of corporate governance is evolving rapidly worldwide. So are there any lessons or perspectives that the new development in the corporate governance landscape has for businesses?

Let’s begin with the original purpose of corporate governance. It is devised to protect investors, particularly shareholders, who own the so-called company. The need for protection arises from the separation of ownership and control as a company grows and as managers are hired to take care of the day-to-day operations.

With the separation, self-serving managers may deviate from the interests from the shareholders, and thus corporate governance mechanisms such as boards of directors are created to ensure the alignment of interest between the owners and the managers.

The revised code of governance in Singapore clarifies and strengthens several areas which are critical to safeguard stakeholders. Three particular areas are perhaps useful to guide smaller businesses as they look into the merits of embracing good corporate governance perspectives and practices.

First is the notion of independence. While the revised code sharpens the definition of independence of a board director on various fronts, let us go beyond specific aspects for the listed companies.

For sole proprietors or partnerships, it is important to convey to stakeholders such as investors, creditors, suppliers or even customers that the business is not conducted in the sole interest of the proprietor or partners alone, and that the concerns of stakeholders are taken care of.

For example, it is always good to opt for auditing and make regular disclosures that boost stakeholder confidence on the independent nature of the business operation. For companies, independence is carried, as in listed concerns, in the composition of the board. Some independent voices will go a long way in providing the necessary assurance.

Next is the issue of risk management. The current move to transit into a regime of enterprise risk management may be too onerous for the smaller businesses.

For listed companies, it is understandable that the scope and scale of the operations are broader and larger. It is thus necessary that frameworks are in place to ensure that risks are properly identified and assessed.

For the smaller businesses, it does not mean that no risks should be taken. It will not serve any investor any good as no risk will result in no return. What it means is that businesses have to reveal their risk profiles.

For this purpose, some effective communications will be useful especially where interactions with the stakeholders are concerned.

Third is shareholder engagement. Depending on the legal form, not all the smaller businesses have shareholders. However, the concept can be broadened to include critical stakeholders of the respective businesses.

The new code stipulates the rights and responsibilities of shareholders of listed companies and how these companies must make it a point to meaningfully engage them. Likewise, for the unlisted companies, especially those with shareholders who are not the main owners or management, the spirit of engagement is definitely relevant.

For proprietors and partners, consultative activities may be carried out particularly with investors and creditors where appropriate. This is to ensure that everyone is on board as the businesses move forward and that the stakeholders will continue to furnish their support.

Signal of Commitment

Every business is unique. Sole proprietors are different from the several forms of partnerships and even further away from companies. A “one-size-fits-all” model of corporate governance is definitely far from being helpful.

Yet, there are merits in having a simple voluntary code for all types of businesses, including SMEs. It can be less onerous than the existing Code of Corporate Governance. While being specific promotes clarity, a code for businesses cannot be overly prescriptive. Some room of freedom and adaptability should be built in. Having incentives for adoption will also expedite broader adoption.

At the more fundamental level, corporate governance for all businesses is not just about guidelines and rules. It is more than codes and laws. It is about instituting a culture of diligence in the organization and a mindset of propriety in the leadership. It is not a short-term exercise but a long-term allegiance.

Corporate governance at the surface is obeying the “letter” but a deep acceptance involves imbibing the “spirit”. It is a “signal” to stakeholders that a business is committed to sound practices. It is statement that both the owners and managers believe that good corporate governance is the basis upon which business is conducted professionally and ethically.

Lawrence Loh is associate professor of strategy and policy at the NUS Business School, National University of Singapore. He is also affiliated to the School’s Centre for Governance, Institutions and Organisations.