The governance conundrum

Written by Sarah Lisi

News flash: nine out of 10 Canadian entrepreneurs say protecting their company’s reputation is their primary concern. Reality check: six out of 10 aren’t taking the necessary steps to protect that reputation.

“Not an awful lot of them are doing anything to make sure that actually happens,” says Bill Demers, a Toronto-based partner with Ernst & Young. According to a recent survey of 100 successful Canadian entrepreneurs conducted for E&Y, only 38% of Canadian businesses have a formalized process to manage risks and written policies to ensure good governance. And, despite the high profile of recent business failures and corporate scandals, 71% were not familiar with the Sarbanes-Oxley Act in the U.S. or Ontario’s Bill 198 — regulatory legislation dealing with business conduct and financial reporting.

“Clearly, most entrepreneurial CEOs are not making the connection between managing business risks and protecting their company’s reputation,” says Demers. “Identifying potentially damaging issues and aggressively managing them is a key factor in protecting a firm’s good name.”

Demers suggests that growth-oriented CEOs who fail to establish governance processes and policies run the risk of missing out on significant financing opportunities. “A hidden cost of not establishing proper risk-management protocols is that it ultimately reflects badly when banks or venture capitalists are deciding what to fund,” says Demers. “Investors are looking for more than just a good idea. They need a measure of the quality of management practices — how well a company is run.”

Fortunately, establishing good corporate governance doesn’t have to be a grueling process. Demers suggests a three-pronged approach:

  • Keep it simple. Having binder upon binder of rules and regulations is enough to make anyone’s head spin. Focus on the issues most important to your company first before addressing broader questions.
  • Document it. Every policy should be clearly documented and stored securely.
  • Articulate it. Everyone in the company should know and fully understand these policies. Otherwise, what’s the point?

Other findings from the survey of Canadian entrepreneurs include:

  • Canadian entrepreneurs are a highly optimistic group: 85% of respondents are positive about the economy; virtually all (96%) plan expansion over the next year and 91% expect to increase their workforce.
  • Most (71%) plan to grow their business organically; 26% through acquisitions.
  • Fifty-six percent plan to raise additional funds over the next 36 months. Preferred sources of funding are bank loans (60%), venture capital (25%) and capital markets (23%).
  • Fifty-eight percent have established strategic alliances aimed mainly at U.S. market expansion. However, 64% suggest they find it difficult to stay abreast of foreign tax and regulatory requirements.
  • The three most important issues identified: building or defending market share (83%); improving profitability (79%); bringing new products to market (71%).
  • Where boards of directors exist, respondents say less than half of their directors are independent.
Originally appeared on PROFITguide.com