How Important Is Governance For SMEs

To give an illustration of the value of good corporate governance, I give the following example:

Carol and Mike were not long out of university and had a passion for baking. Carol was an incredibly talented cakemaker with a real flair for cake decoration. Mike was a dab hand at pies and sausage rolls and made delicious sandwiches. They became exceedingly popular for catering small events like birthdays and christenings for friends.

Initially, it was a hobby, but they thought about setting up a business and making a living catering for local parties, etc.

They went from strength to strength as the business grew. The parties got more frequent, and the numbers of guests got larger. They found a new, lucrative market in catering for business meetings, and they got busier and busier.

They soon reached a point where the little cooker, small worktop, and fridge capacity in their one-bedroom flat were just not up to the job. Carol was constantly baking and shopping for ingredients, etc., and Mike was spending hours on the road delivering food to events. His little ten-year-old mini was getting clapped out and wasn’t any longer up to the job.

The business was getting more successful as word got around, but Carol and Mike knew that they needed to make some changes.

They required access to a larger kitchen. They wanted a new and much larger cooker and fridge. They sought to recruit some staff to help in the kitchen with simple things like washing up. They needed to buy a van and equip it with a cool box and shelves to deliver their creations to the venues. They were confident that they could grow the business exponentially and be highly successful, but they needed more capital.

They spoke to the local council business advisory service, which told them about different routes to attract investment. They included banks, local government loans and grants, equity investors like private equity, venture capital, and angel investors.

It sounded great, and they started approaching potential investors, all of whom seemed impressed and interested in financing their business. However, they discovered that nobody wanted to put their money at risk until they understood that this was a well-managed, sustainable business that was professionally run.

Carol and Mike were sure they were doing the right thing but found it difficult to articulate it to these prospective investors.

They took some advice, researched the corporate governance code, and adapted the principles to suit their little enterprise. They documented it and were ready to demonstrate they had a sound, professionally managed operation.

Once they had this in place, the offers of capital investment rolled in.

Ian Garner is a retired Fellow of the Chartered Management Institute (FCMI) and a Fellow of the Institute of Directors (FIoD).

Ian is a board member of Maggie’s Yorkshire. Maggie’s provides emotional and practical cancer support and information in centres across the UK and online, with their centre in Leeds based at St James’s Hospital.

He is founder and director at Practical Solutions Management, a strategic consulting practice, and skilled in developing strategy and providing strategic direction, specialising in business growth and leadership.