Good GovernancePrinciples and Practices

for SMEs

Presentation to Enterprise Ireland

Feb 19th – 20th 2014

• What is Corporate Governance, why is it important ?

• A little history

• When it goes wrong !

• Why Good Governance is good for your business

• Applying scale and relevance to your business

• Q and A

Agenda

© Copyright empeira

Donal Keane, MBA, CMC, BSc. Finance

Donal Keane is Director and a Principal at Empeira, a firm specialising in

Corporate Governance, Risk Management and Strategy Advisory Services. Donal

also provides consulting services in Corporate Finance and Debt Restructuring for

clients in Cork.

Donal is an MBA graduate of Purdue University, Indiana, holds a Masters in

Management Degree from ESCP in Paris and holds a BSc in Business &

Information Technology from Trinity College Dublin. He is an accredited Assessor

in Corporate Governance in Ireland and is a Certified Management Consultant.

Donal has been consulting in Ireland and overseas for 10 years and prior to this he

was a senior executive, responsible for strategy and technology development in

the Public Sector. His primary sectors of expertise are financial services,

technology, retail, construction and consulting.

Contact

donal.keane@empeira.com

+353 (0)87 2511467

What is it?

Corporate Governance

refers to the (ideally visible, transparent, published) policies and practices by which an organization is

directed and managed at executive level,

with particular focus on the executive board's accountabilities to shareholders and other stakeholders,

especially concerning avoidance of risk, and the competence, ethics and propriety of the leadership,

typically a chairman and board of directors.

Corporate Governance

Function Structure

Corporate Governance

Function Roles

Corporate Governance

Corporate Responsibilities

Where did it come from?• International - The Cadbury Committee and Report - 1991/92

The popularly named 'Cadbury Report' of 1992 provided the first substantial formal Corporate Governance code.

• OECD Definition

Procedures and processes according to which an organisation is directed and

controlled. The corporate governance structure specifies the distribution of rights

and responsibilities among the different participants in the organisation – such

as the board, managers, shareholders and other stakeholders – and lays down

the rules and procedures for decision-making.

• Ireland ( Governance Codes of Practice in operation)– Code of Practice for the Governance of State Bodies 1992 & 2001 (Public Sector)

– The Governance Code – (Voluntary Sector - 2012)

– Corporate Governance Code for Credit Institutions (effective Jan 2015) – Central Bank

– Irish Corporate Governance Code 2010 – Listed companies on ISE

• Insufficient safeguards against excessive risk-taking,

• Inadequate accounting standards and regulatory

requirements

• The widespread existence of Boards which were ill-

equipped, in terms of competency and skills, to understand

their business or responsibilities

• Boards did not attend to risks sufficiently to enable them to

challenge executive management.

• Financial institutions and indeed regulatory regimes tended

to mimic their counterparts in other jurisdictions

• The result that the root causes of the financial crises in

different countries tend to be quite similar.

Corporate Governance

Lessons from the Financial Crisis (OECD 2009)

Corporate Governance

• Features of Poor Corporate Governance

– Poor Reporting Structures

– Ineffective Board

– Lack of Transparency

– No Accountability

– Conflicts of Interest exist

– Poor Information Flow

– No Independent Oversight of the Board

– Inadequate checks & balances

– The CEO ‘manages’ the Board

Corporate Governance

• What constitutes Good Corporate Governance

– A Strong Independent Board

– Clear Separation of functions of Board & Management

– Full Transparency and Communication between the

Company/Entity and all its stakeholders

– Clear terms of reference for Board / Officers /

Committees

– Strong Financial Governance and Risk Management

– Fitness & Probity & Conflicts of Interest Policies both

operated and complied with.

© Copyright empeira

The ideal Board is always searching for the point of

‘perfect constructive tension’

Company Secretary

Strategy& Oversight

Management& Performance

The Board

Day to Day Management

Sthece; Kakabadse

Board

Responsibility

Strategy Making

Policymaking

Appoint CEO

Exec Oversight

Accountability

Executive

Responsibility

Operations Mgt

Strategy Execution

Employer of Team

Perf Reporting

Accountability

The Boundary Question

Board holds Executive to account

Excessive Board involvement in executive

activities blurs accountabilities and may create

governance failures or legal exposures

Does Governance Really Matter?

Why bother? It helps to….

• Bring clarity, method and transparency

• Achieve Goals more readily

• Improve Performance, gives certainty

• Anticipate and manage risks

• Reassure Staff, Funders and other S/H’s

• Enhance reputation for being ‘well run’

Main Participants

• Board of Directors

• Individual Directors and Officers

• Executives and staff

• Company / Board Secretary

• Shareholders / Members

• Other Stakeholders

• External Auditor

• Regulator

How does all the Corporate Stuff

relate to my business?

• A governance system likely to be useful to

smaller enterprises are much simpler than

those required by larger corporates and

• In order to clarify what structures and

procedures are likely to be of value in

particular circumstances, this presentation

divides SMEs into five categories:

From SME to Company Listing

Corporate Governance

Categories

From SME to Company Listing

Corporate Governance

Categories

Small Companies owned and operated by a few individuals

Larger Companies employing Non-founders

Mid-sized Private Companies with several Shareholders

Larger Private Companies + large no. of Shareholders

Companies Listed on the IEX by the Listing Rules

1

2

3

4

5

• Owned by a Single Individual who may be

assisted by Family Members

• Credible accounts & a system of internal control

• A simple, written business or strategic plan

• A simple set of performance indicators

• Analysis of the risks & relevant basic policies

• External professional advice

• One or more part-time advisers

• Some form of succession plan

1

2

3

4

5

• Of growing size, employs people other than founders

• Formal accounting systems

• A detailed, 3-5 year business plan & Annual Review

• Key performance indicators

• Risk identification & risk management

• A succession plan involving formal family agreement

• Simple policies on remuneration & HR issues

• Simple policies to guide decisions e.g. in purchasing & sales

• An robust information system tracking financial situation

• External advice from professional accounting firms

• A simple board of advisers

• Appoint a chairman of the board

1

2

3

4

5

With several shareholders or partners

•Systems of internal control to support annual accounts

•Clear strategic objectives and plans

•A system of key performance indicators

•A system to manage risks

•An extensive network of policies & reporting systems

•A written Memorandum & Articles of Association

•An accountable board of directors

•A system to delegate authority from the board

•A mechanism to ensure due performance by the board

•A system for setting goals for strategy by board and management

•Written job descriptions for employed managers / executives

•Board to act in the interests of the company as a whole

2

3

4

1

5

• With a substantial number of shareholders

• Processes & practices for category 3 in place

• A sophisticated system to ensure ongoing company development

• Strict adherence to the principle of accountability

• Establishing a track record of good governance before applying to list

• A system of board oversight of management of the company

• A mechanism permitting shares to be bought & sold

• Guidelines for board composition & its operations

• Board sub-committees

• Board harmony, teamwork & evaluation

• Monitoring & measuring management performance

2

3

4

1

5

• Listed on the IEX

• Processes & practices for category 4 fully in place

• Listing rules & Combined Code of Corporate Governance

2

3

4

5

1

5 Principles of Good Governance

• (1) Leading

• Vision, Mission, Values

• Develop, resource, monitor

and evaluate strategy

• Appoint, Support and hold

to Account CEO/Team

• (2) Exercising Control

• Comply with all legal and

regulatory requirements.

• Appropriate Internal

financial and management

controls.

• Identify Major Risks and

Manage those risks

Principles (contd)

• (3)Transparency

/ Accountability

• Identify and actively engage with Stakeholders

• Publish all relevant documents on the web

• Meet all reporting requirements and be generous in your information sharing

• (4)Effective Working

• Shared understanding of

Roles, Duties, Powers,

• Exercise Collective

Responsibility through

effective meetings.

• Adopt suitable recruitment,

development and

retirement policies.

Principles (contd)

• (5) Behaving with

Integrity

• Honest, fair and

independent

• Understanding, declaring

and managing Conflicts of

Interest

• Protecting and promoting

Organisation’s reputation

A sample Board Agenda

• A typical board agenda should encompass the following at a minimum:– Minutes of the previous meeting

– Strategic update, including an update on the current trading conditions in the company’s marketplace, update on

major competitors

– Operational update, including high-level details of the performance of the company’s product or services

– Financial update, focusing on the company’s key performance indicators, management accounts and financial

reporting

– Cash and financing update, focused on ensuring that the company remains solvent, and covering cash flow and

financing

– Legal and regulatory update (where applicable)

– Existing projects – update on the status of projects discussed at previous board meetings

– New and proposed projects

– Any other business

• At appropriate times of the year, the agenda should also cover periodic processes

such as:

– Budgets and financial planning

– Annual external audit process

• To ensure they are effective, board meetings should stick closely to the agenda

Conclusion

Good Corporate Governance is important for companies of all sizes.

The diversity of smaller unlisted companies and their stakeholders

makes it impossible to design a strict corporate governance code for

these companies.

However some fundamental corporate governance concepts can be

beneficially applied in your company when appropriately tailored to

the needs and the resources of your company.

Thank You

Questions?

Comments?