Business owners often think that there is no equity capital available to them, yet there is far more money available in private equity coffers than quality projects to satisfy them. How can we explain this anomaly? Perhaps the single greatest explanation is that firms lacking proper corporate governance, as is the case with the majority of firms in Central Europe today, lack the corporate governance structures necessary to attract outside equity investors. There are other explanatory variables as well – such as the need to show an attractive financial proposition, a growth story, etc. – but there are so many firms that eliminate themselves from consideration for equity financing due to poor corporate governance that the question of corporate governance in itself deserves careful consideration.
This article will deal with two main subjects: (a) Practically speaking, what are the types of things a business owner/manager may do to improve corporate governance? (b) What are some of the resources available to a business owner/manager looking for additional information in order to address this issue?
(a) Improving corporate governance
For any investor, a company that is dependent on one individual for any crucial function creates a risk factor. The reality is that most SMEs in Central Europe are governed by very talented individuals, who run the entire business (what I call “One Man Shows”—see my earlier article on the subject here and here). So, the objective of a business owner who wants to attract equity capital or sell his business is to create a business that will run just as effectively – and will have the same growth prospects – without him.
While for many owner/managers this is not possible in the short term – there are many shades of gray – one should at least be aware of the need to take the business in this direction. Some of the possible steps one might take include:
- Installing a board of directors, preferably that includes strong independent members, that meets regularly and acts as the supreme governing entity of a company. The board should be responsible for risk oversight and establish appropriate internal controls. If the creation of a board is not possible, the establishment of at least an advisory committee would be a step in the right direction.
- Where a business is of sufficient size and has the necessary resources, the owner might consider appointing a chief operating officer, or even a chief executive officer, and giving him real operating powers. In the case of appointment of a CEO, the owner might act as chairman of the board. This helps commence the transition in management and will reduce the risk for any investor, assuming the new individual is successful.
- Once again, where resources allow, create a second tier of management with strong and competent individuals in key areas such as sales, marketing, finance, production, etc.
- Strengthen systems. Again, where resources allow, introduce systems as appropriate, whether Customer Relationship Management (CRM), Enterprise Resource Planning (ERP) or obtaining certification from the ISO (International Standards Organisation).
(b) Places where a business owner/manager might look for additional information
I would take the liberty of recommending three sources:
First, the Corporate Governance Committee of the American Chamber of Commerce in Hungary is perhaps the strongest think tank and driving force in the area of corporate governance in Central Europe today. Led by Laszlo Czirjak, an American-Hungarian investment banker turned private equity financier, the committee has numerous publications, including a position brief on the subject of corporate governance.
Second, the European Confederation of Directors Association (EcoDa) also has a number of useful publications, including a very useful recent publication entitled "Corporate Governance Principles and Guidelines for Unlisted Companies in Europe."
And third, you may wish to consider my book, Unlocking your Company’s Value (available at www.lesnemethy.com), which has a chapter on corporate governance and other useful information for business owners/managers who wish to attract equity or sell their companies.
In conclusion, corporate governance is not just a subject for large, publicly listed companies. It is a subject that must be addressed by every company, however small. And it is never too soon to address the issue.
