What governance is and why it’s important — business.govt.nz

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What governance is and why it’s important

Governance is about the time you dedicate to working ‘on’ your business, rather than ‘in’ it. This includes all the checks and balances you put in place to ensure your business runs smoothly, meets its objectives, and stays out of trouble. Governance also means getting expert advice on matters you don’t yet know enough about, plus support when making big decisions. Explore why governance is important, and the difference between doing it yourself and getting a board involved.

Governance is about the big picture

Governance includes all the practices, processes and policies that help you guide your business in the right direction. Any task that focuses on the ‘big picture’ is part of governance — tasks like checking your finances are stable, creating long-term strategies, planning your risk management and keeping an eye on your wider industry.

Illustration of people working 'in' a business and working 'on' the business

As a business owner, you’ve probably been doing some governance tasks from day one, whether you realise it or not. You might think of governance as ‘oversight’ or ‘supervision’ or even ‘making sure the wheels don’t come off’. Whatever you call it, it’s essential for making sure your business stays on track.

If you struggle to find time to focus on governance, you’re not alone. Many business owners have multiple demands on their time and find it tricky to balance all their roles. When you’re busy, it can be hard to think about anything non-operational, but you shouldn’t underestimate the importance of overseeing your business well. Your decisions can affect future performance.

Don’t think of governance as more paperwork and hassle — it’s simply about running your business in the best way possible and helping it succeed. It’s an extension of what you’re already doing.

“Governance means thinking about strategic issues, rather than the operational day-to-day running of the business.”

“Governance means thinking about strategic issues, rather than the operational day-to-day running of the business.”

Institute of Directors

Governance sets the tone of your business

Governance isn’t just about ensuring financial success and longevity. It’s also about guiding and supporting the character of your business. You and anyone else on your governance team should ‘set the tone’. For example, you should always make decisions that uphold your company values and help to achieve your vision for your business.

A good starting point is to make sure that everyone involved in overseeing your business is of good character. Good character can be summed up in three ways:

  • doing the right thing
  • being honest about what you’re doing
  • taking responsibility for your actions and decisions.

As a business owner, you probably already live by these ideas — good governance practices help you demonstrate your way of working to your staff, customers, and investors.

Good governance has many benefits

Governance helps you to always act in the best interests of the business. More specifically, it can improve the performance of your business, help it become more stable and productive, and unlock new opportunities. It can reduce risks, and enable faster and safer growth. It can also improve reputation and foster trust. All these benefits mean your business is more likely to last in the long term.

Good governance can also help you secure investment by creating formal reporting procedures that clearly lay out everything that investors need to know. An investor is more likely to invest in a credible business with a clear direction and good oversight. If they think your governance is sub-standard, they may see your business as a risky investment and ask for higher returns or a larger share.

Having other people involved in supervising your business can help you through tough times. For example,

  • managing cash flow challenges
  • deciding whether to downsize or expand
  • managing difficult employees
  • attracting new senior staff
  • managing shareholders.

People on your governance team can provide a sounding board and become trusted advisors. Sharing the burden of responsibility can also help you sleep easier at night.

Good governance can help your business thrive in the following ways

Grow your business

  • create a clear vision of the future and aim for it
  • improve performance and get better financial results
  • get a competitive advantage
  • discover and act on the right new opportunities
  • attract investment more easily.

Stay ahead of risks

  • better understand current risks and get insights about possible future risks
  • create strategies for reducing or avoiding risks
  • remove opportunities for fraud, corruption, or mismanagement
  • learn from other people’s experience and mistakes.

Improve compliance

  • better understand your legal responsibilities, especially when they change
  • reduce time, money and effort on compliance
  • ensure accountability for what’s happening at an operational level.

Improve trust and reputation

  • help manage conflict, especially in family businesses or if you share ownership
  • show customers that your business is responsible and ethical
  • prove to investors that you’re doing things sensibly and safely.
“Evidence of good governance has massive value when it comes to raising money or selling your business.  It demonstrates to investors or buyers that the business is well run and that it’s ‘clean’.”

“Evidence of good governance has massive value when it comes to raising money or selling your business. It demonstrates to investors or buyers that the business is well run and that it’s ‘clean’.”

Phil McCaw — New Zealand Business Performance panel

Case study

Mai realises that governance is a help, not a hassle

When Mai started her food truck business, she was a first-time business owner and the only employee. She found that balancing day-to-day operations took up most of her time. She was aware of the concept of governance, but thought it was more relevant to large companies with a board of directors. She also thought it would mean lots of red tape and hassle.

About a year after she started her business, Mai attended a food industry trade show. Through talking to other business owners there, she began to see the benefits of governance. Some of them explained how putting simple governance in place had allowed them to feel more confident about expanding their businesses or finding funding.

Mai realised she could start with the basics and work her way up. She decided to draw up a simple strategic plan that outlined where she wanted the business to be in five years. She also identified the business risks she was most likely to come across, and how she would prevent them or respond to them. This gave her targets to work towards and made her feel more prepared for dealing with unexpected events.

Next, Mai plans to look for someone who can check her thinking and steer her governance practices. She’s contacted a few people in her network to help her look for someone with the right experience and expertise.

What type of governance is right for you?

Governance should be a part of any business, no matter how small. You can start with the basics and make it more structured when you like. You can do it yourself (with other business owners, peers, or advisors to help) or you can get more people involved to create an advisory board or a board of directors.

Many small business owners consider a more structured approach when planning to take their business to the next level. When making big changes, it’s essential to have all the checks and balances in place, plus expert advice and support. If your business is small, you may choose to keep your governance approach low-key. If your business is bigger, you may need a board of directors to manage the complexity, share the load, and benefit from others’ skills and experience.

Your business is unique, and your approach to governance will be too. You might go through a number of different governance arrangements as your needs change, typically adding more structure as you grow. For example, you might start out being the only director, then later get an advisor on board. You might start an advisory board for technical advice during a tricky transition phase. At some point, you might appoint a CEO and invite another couple of directors to form a board of directors. It’s really up to you and what’s best for your business.

Comparing two approaches to governance
Do-it-yourself approachMore structured approach
Governance is down to you, with other business owners, peers, or advisors for support Governance is the responsibility of the board
You do regular ‘DIY reviews’ of your business performance and direction The board meets regularly
You make all the decisions that drive the business The board makes all the big decisions
You retain complete control of everything You share control with the board
You shoulder most (or all) of the responsibility You share the burden of responsibility with the board
You rely on other business owners, peers or advisors for expert advice You have expert advice in your governance team
There’s a strong link between governance and your bottom line. Research shows that companies with good governance achieve better financial results in the long term.

There’s a strong link between governance and your bottom line. Research shows that companies with good governance achieve better financial results in the long term.

Governance is important at every stage of your business

It’s never too early or too late to start thinking about governance or how to improve it.

  • When you’re starting up, good governance can attract investors.
  • During intense growth or a crisis, good governance can keep you on track.
  • Once you’ve matured, good governance helps to create strategies for growth or resilience.

The sooner you put good governance measures in place, the sooner you’ll see the benefits. You can add governance tasks as your business grows or changes and you need to start thinking more strategically.

Case study

Amit gets an advisor on board

Amit first came to New Zealand to study business at university. Now he’s a permanent resident, he’s started a business himself — an app-developing studio, which he’s running with a few friends. The studio’s been going for a few months now, and he’s just finished his first project: an ordering app for a flower shop chain.

One of the first things Amit did when he started the studio was to join a business meet-up group to find out how people in similar situations develop their ideas. He soon realised he’d learned about the theory of governance in his studies, but not how to apply this to a New Zealand context. He arranged monthly lunch meetings with Liza, a more experienced member of the meet-up group, to discuss how to approach governance.

One of the first issues that Liza helped Amit to solve was how to expand his network. Liza knew that being able to draw on a ready-made network can be a huge advantage for any new business, helping them to get a ‘jump start’.

Amit’s excited to start meeting other business owners and hear their experiences. By learning from other people’s mistakes and wisdom, he hopes he’ll avoid common problems.

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