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Good SME governance crucial for their growth and SA's economy

Analysis

If South Australia’s small and medium enterprises are going to be our economy’s saviour, they need to lift their view from the day-to-day and take a strategic approach, writes Chris Stewart.

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With the South Australian economy struggling under the weight of structural change, governments of all political persuasions are tipping that small and medium enterprises (SMEs) will keep it afloat.

The State Government has said that SMEs may hold the key to jobs in SA and has launched a range of measures to encourage more SMEs to export.

It announced in October last year that exports from SMEs had risen by 10 per cent, fuelled by demand for premium foods and services.

Similarly, launching the $1.1 billion innovation policy to “incentivise, energise, dynamise” Australian industry and prompt an “ideas boom”, the Prime Minister Malcolm Turnbull said the policy would give businesses “the opportunity to have a go”.

Nationally, SMEs with fewer than 20 full-time equivalent employees account for 95.9% of businesses and in South Australia their influence is even greater, accounting for 99.8% of businesses.

Yet if South Australia’s SMEs are really to be our export heavy lifters, they will need to lift their sights from day-to-day operations to take a strategic approach to their business and drive growth in the state.

I am a passionate proponent of governance systems that enable business leaders to deliver on their strategic vision; they are essential for businesses of all sizes.

While it might seem counter-intuitive in a challenging business environment, it’s important for SME leaders to step back from their immediate operational pressures to focus on the future.  Leaders need to chart the course, not steer the ship.

Successful businesses have frameworks and systems to drive performance, decision-making frameworks, and protocols and agreements that allow them to develop a strategic plan and deliver on it. These are elements of what we call “governance”.

Yet I was reminded how difficult it can be for SMEs to focus on governance at the recent Australian Institute of Company Directors’ Governance Summit.  It cemented my view that the resourcing/time/focus issue is the governance issue, if not the issue, for most SMEs.

SMEs, like large corporates, appreciate the need for good governance and strategy.  They absolutely understand the long-term financial and non-financial value that a well-governed organisation can create.

Research presented at the conference highlighted that lack of access to capital is one of the greatest inhibitors to growth with almost 40% of companies citing this issue, ahead of risk aversion (36%) and short term management focus (29%). Well-governed organisations generally will attract capital more readily to support sustainable growth.

Insights from several high profile directors reinforced the importance of having good governance processes. They emphasised the need for processes that allow leadership towards a clear, inspiring long term vision; strategic planning and tracking against the plan; aligning operational plans; engaging key stakeholders; and agreements about roles, responsibilities and succession.

The principles of good governance are incredibly important for businesses large and small.

Yet while the top end of town directors at the conference were able to draw on substantial resources to drive strong contemporary governance practices, the SME directors were not so fortunate.

SMEs were grappling with issues such as family succession or establishing their first shareholder agreement. They were refining, or in some cases, initiating their strategic plan. They were tackling the day-to-day pressure of cash flow and staff performance management.  They were also considering advisory boards or independent directors.

Clearly the intentions are good. Those SME directors are smart, entrepreneurial and passionate. They know they need to improve governance to help take their business to the next level.

They also appreciate that improving governance is a lengthy and sometimes a very challenging process, especially when dealing with issues left unattended for many years. They recognise that instilling good governance within their company requires competence, discipline and rhythm—as with implementing other management practices.

The conference highlighted that many SMEs are establishing better board protocols that effectively allow them to deal with strategic and governance matters. They want to quarantine those operational matters that can become all-consuming. They want to focus “on” the business rather than being “in” the business.

Those that get it right generally have better operational performance, decision-making clarity and they lose less time on ad hoc crisis management.

They have greater satisfaction around clarity of strategy and business priorities. Most importantly, they gain a stronger sense of control over their enterprise.

So while it’s not easy, a governance focus in SMEs is certainly worth the effort and it’s essential for South Australia’s economy and growth.

Chris Stewart is managing director at Hood Sweeney, a South Australian firm providing accounting, business advisory and financial services.

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