Corporate governance for small businesses

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Corporate governance is often associated with large corporates who are led by an established board of directors. However, the principles that underpin good corporate governance can benefit any organisation, irrespective of size.

Why is it then that the term governance often raises alarm bells with small business owners? Perhaps it’s the fear of losing control over their business, or the assumption that they must report to someone else. In reality, good corporate governance should lead to business owners feeling more empowered, more supported and more equipped to make good quality decisions. 

In a nutshell, governance is all about thinking strategically and taking a ‘big picture view’ as opposed to focusing on day-to-day operations. In the context of small businesses, owner-operators are often bogged down with the day-to-day running requirements of the business, leaving little time to devote to long-term strategy and sustainability. One of the key benefits of governance structures is the ability for small business owners to take time to work “on” the business as opposed to work “in” it. This subtle switching of hats is one of the first steps toward building a governance structure.

However, there is no one-size-fits-all approach to governance; it will look different for each and every business. The approach will depend on the size and stage of the business, the operating environment, the risk profile and the key stakeholders. It is therefore crucial that all businesses take time to think about their governance practices.

Governance is often described as a journey, with the various stages typically falling into one of three categories: no formalised governance structure; an advisory board; or a full board. The idea of a full board may be overwhelming for small and medium-sized enterprises (SMEs) or not appropriate given the size and scale of the business, but they may still reap the benefits of establishing an advisory board.

At one point or another, SME owners will inevitably need expert advice – that’s where an advisory board might come in. An advisory board offers the benefit of a variety of different perspectives, knowledge, expertise and, most importantly, support. They also ensure overall decision-making authority remains with the owner, removing any apprehension owners may have about loss of control.

As businesses move through the business lifecycle, their governance needs are likely to change. Some will eventually grow to the point where a formalised board of directors is most appropriate. There is an abundance of resources available which outline the composition and responsibilities of boards, including guidance issued by the Financial Markets Authority (FMA) which includes eight key principles which underpin best practice. The topics include areas such as ethical standards, board composition and performance, risk management, and reporting and disclosure. While it is unlikely that all of the principles will be relevant for small businesses, they provide sound guidance on the fundamental areas and help simplify the underlying objectives of governance.

Moreover, the recent release of Inland Revenue’s Multinational Enterprise Compliance Focus serves as a timely reminder of the relevance of governance practices by highlighting tax specific governance as an emerging global trend. Several tax authorities in the OECD have already begun adopting tax governance measures, each agreeing that tax risk management should be a recurring item on the boardroom agenda.  The Australian Tax Office (ATO) is among those leading the way, having already implemented an assurance review initiative for the top 1000 Australian taxpayers. Under this regime, the ATO will require evidence that a tax control framework exists, is fit-for-purpose and is operational. While Inland Revenue is yet to introduce something similar, they are set to increase their focus on tax governance and are already investing in new technologies to identify who and where to focus their compliance activity.

In the interim, they have released a checklist to assist organisations with implementing their tax governance frameworks. The list sets out 10 principles underpinning tax governance, including those which ensure there is a well-documented tax strategy and that the strategy is followed, senior management are confident in the capacity and capability of systems, procedures and personnel needed to achieve tax compliance, and that management consider whether the reporting of tax payments and provisions is sufficient for stakeholders to gauge an understanding of the company’s overall tax position.

Whether it is tax specific or more general, the governance journey is best started sooner rather than later. Fundamentally, governance is all about ‘setting the tone’ which means even small changes have the potential to help your business. Despite this, even the best policies and processes are no match for a board or management team which fail to follow them. At the end of the day, the success of any governance practice boils down to the “tone from the top”. 

The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.

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About Author

Elsa Wrathall

Elsa Wrathall is a PwC senior manager based in the Waikato office. Email: elsa.n.wrathall@pwc.com