Corporate structure goes something like this:
- Shareholders – The owners of the business or enterprise
- Board of Directors – The elected representatives of the shareholders whose function is twofold: provide strategic guidance to the corporate officers (management team) and make sure the interests of the shareholders are protected.
- Corporate Officer or Management Team – The senior person (and sometimes some of the key subordinates) are be appointed (approved or hired) by the board of directors to carry out the will of the Board of Directors and Shareholders.
- Other employees and contractors – Are hired by the management team or their representatives to carry out the strategy and business of the company.
In large public companies this structure has become dysfunctional for many reasons, for example:
- The senior executive (CEO) is often on the Board of Directors and just as likely acts as the Chairman of the Board. The Board often cedes control to the Chairman and CEO, whose interests may not be protecting the interests of shareholders.
- The Board members are appointed by large shareholders to look out for their interests and not the interests of shareholders at large.
However, small (privately held) businesses are usually much different.
Often the shareholder, board and senior corporate officer is the same person.
Even if there are multiple shareholders and board members, the group is usually smaller and it is much easier to align the goals of the organization, its executive and the shareholders.
Let’s look at how the corporate structure can be used to maximize the real value of the business to the small business owner.
Shareholders need to be clear on what value they are wanting to derive from the business. It could be:
- The job they always wanted and can’t find elsewhere,
- Income (profits) from the business to support their desired lifestyle,
- The value of the company when it is sold, or
- Something else.
This message needs to be clear and all shareholders need to agree to it; this is why they are investing in the company.
Board of Directors
The Board of Directors needs to make sure the goals of the shareholders are receiving the correct attention from the company and its management team. This is the very high level strategy that is ultimately driving the business so it is important that there are no disconnects.
The Board also needs to perform its governance function and ensure that the executive team is fulfilling their obligations to the shareholders, complying with laws of business, and generally upholding the standards they have set for ethics.
Some small businesses bring in Board members who can act as advisors and help make the right connections to help the Executive Team execute the strategy.
The Executive Team’s role is to flesh out the details of the corporate strategy, plan and then execute the strategy. This includes accountability to the Board and ensuring accountability of the organization to the Executive Team.
Small businesses can use the corporate governance structure to reinforce the importance of:
- Planning (Tactics)
This helps avoid the trap of working in the business instead of on it… even if all positions are filled by one person initially.
Interestingly, this covers 4 of the 6 steps in Seth Godin’s Hierarchy of Success. The other two (attitude and approach) are who really based on who you are or want to be.
Oh, and don’t forget to regularly review this at each level. That is what shareholder’s meetings, board meeting and executive meetings should be accomplishing.
Then you can use corporate governance not just to comply with the rules, but to drive your small business strategy forward.