Good corporate governance a must for all firms

When asked about their investment in good corporate governance practices, be it time or money, the typical defensive response of a majority of start-ups and small and medium businesses, is that they are not big enough or advanced enough.

An acquaintance at a golf club confided in me about a company that he had set up with fellow avid golfers and which had gone “belly-up” almost a year into operation.

Not only was the business no more, in order to avoid each other, the once bosom golf buddies, teed off at different times. It explained why I was now his new best friend on the course.

The story goes that after mulling over a business idea, they had conceived over a number of games on the same golf course, they instructed a friendly firm of lawyers to register their company.

Thereafter, they proceeded to deposit their seed capital into a newly opened bank account.

The said acquaintance was unanimously appointed as the new CEO and it was agreed that his friends would provide whatever support he required. In essence, as investors they would be both shareholders and directors in the business.

Initially, the business picked up well and all the friends, now directors and shareholders in the company, got along famously. Board and shareholder resolutions could be approved on the golf course.

However, six months into the venture, the business hit some strong headwinds – a contracting economy. The shareholders had to extend more capital to the business to keep it afloat.

Soon accusations started floating around that the CEO was not pulling his weight. The CEO countered by accusing his fellow directors and shareholders of lack of commitment, support and an understanding of both the business and the operating environment.

It was not long before the once inseparable buddies were briefing their respective lawyers to disengage from the venture.

Friends and even family, full of optimism, coming together to invest in a business idea and falling out months after. Sounds familiar?

Embracing good corporate governance practices may have at the very least, highlighted weaknesses in the business plan and clues on how to move forward; or at worst, provided guidance on how to proceed to implement an orderly breakup.

In both situations, after considering the interests of the company’s stakeholders; including employees, customers, suppliers and the community at large.

Presumably, one of the first things the former golf buddies should have considered is advising their lawyers and/or consultants to draft a shareholders’ agreement and establish a governance charter.

All shareholders would have signed the shareholders’ agreement, regardless of the number of shares that they owned. Of particular relevance to this situation, the shareholders’ agreement would have included provisions relating to employment of the shareholders by the corporation.

If so, duties of each shareholder in their capacity as an employee and the amount of time that each shareholder would spend on the activities of the corporate business and the circumstances in which employment may be terminated.

The agreement would provide guidance on their right to keep their position (subject to typical breach of contract exceptions).

Rules to separate the roles and responsibilities of the shareholder, director and manager would limit liability and ensure effective division of labour and function.

It would also include information on shares already allocated to each shareholder, additional shares to be allocated plus details of the capital contributions to be made by each shareholder and any timing for these (e.g. all paid upfront or part upfront with commitment to inject more capital later).

The objective of corporate governance is to ensure that individuals act with integrity and in the best interest of the business and its stakeholders. The corporate governance charter defines the process and structure used to direct and manage business affairs of a company.

In this regard, the charter would stipulate the adoption of a strategic planning process, identification of the principal business risks and assessing risk management, succession planning, communications, internal controls and management systems.

In the case of our distraught CEO, the exercise of drafting a governance charter would have provoked the golfing friends to think about whether, collectively, they had the general knowledge, skill and experience which may reasonably be expected of a person carrying out the functions of a director in relation to their business.

Additionally, how would the company interact with the local environment and community - nature, society and business are interconnected.

Good corporate governance practices would have provided a firm support for the goodwill and enthusiasm of the shareholders and directors to endure even during tough times.

Meshack is chief executive officer at the Institute of Directors Kenya.