Of all the concepts that a small business needs to take on board as it grows and matures, Governance is the one that sounds most “corporate”. Especially since Governance encompasses words such as authority, accountability, direction and control.
The evolution of Advisory Boards has greatly improved the accessibility of effective Governance for small and medium sized businesses.
An Advisory Board was initially considered as a “halfway house” for a business that previously recognised the value of engaging coaching/advisory services but had yet to achieve the size and complexity to justify the implementation of a formalised Governance Board.
More recently, Advisory Boards have been utilised by businesses to access specific expertise and enable new territory to be conquered (such as international market expansion or a merger or acquisition).
Regardless of the form of Governance though, the principles that need to be managed remain the same, particularly in circumstances where a significant change in business ownership (otherwise referred to as a succession event) is under consideration.
Governance is a word that does not typically elicit an emotional response.
It is a means though, by which highly emotional issues can be effectively managed.
Considering the business as an entity with its own needs is a useful place to start. This helps particularly when educating Directors regarding their fiduciary duty to act solely in the best interest of their business.
As businesses grow, the needs of the enterprise change. Each key stage of the business journey requires business owner(s) to honestly evaluate whether they are up for the phase ahead. And from the perspective of personal capability and passion, decide whether to “Step Up”, Step Back” or Step Out”.
What other emotional issues show up in these circumstances?
- Personal value and relationships – am I giving more than I get; do I have to maintain difficult relationships, what value am I bringing, what’s mine?
- Alignment of interests between shareholders/directors/board
- Alignment with the Vision as the Why for the business
The key to sustainable success here is to understand the interests of ALL parties involved, and to conceptualise an outcome that aligns the parties’ interests.
What are these interests? These typically comprise one of – or a combination of – three elements:
- Income – typically self-explanatory
- Equity – commonly in the form of shares in the enterprise; and
- Control – considered from both a business operational (day to day decision making) as well as shareholder (voting rights) perspective.
When considering a succession event such as the exit of a major shareholder, entry of an external investor or sale of the business, we need to recognise and explicitly consider the different interests the parties have in relation to the business. As a simple example, an external investor with an interest in the enterprise will want a return on their investment within an acceptable timeframe, some sort of comfort (if not a guarantee) that the business will perform as promised and an exit option if this is not achieved.
So, what’s often the overriding challenge in achieving a successful succession event?
Business founders and Owners more often than not struggle to let go of control of their business when the right opportunity materialises, even when a smaller piece of a much bigger pie might be on offer.
It is this issue that must be managed with mutual respect and sensitivity if the right outcome for all parties is to be achieved.
Author of “The Steel Ceiling: Achieving Sustainable Growth in Engineering and Construction” Wiley, 2023