Do you remember when you first thought about a business idea? The process probably followed this developmental path:
- You thought about the idea itself and how it would work in reality;
- Then you thought about how you would conduct business, and what you would have to do to get the business running; and
- thirdly, you considered whether you can do the whole shebang of getting your idea up and running as a buainess all by yourself and, if not, then who would you try to get to work with you.
Governance covers the second point above – it is a set of rules that determines how we conduct our business in our chosen marketplace. It operates at every level of business, from international trading activities between states and multi-national businesses, down to the internal workings of the smallest, one-person micro-business. It is both written and verbal in nature, but should be written and regularly modified as the business evolves. In so doing we ensure that it remains constant and relevant to the real life situation.
Governance is applied to business so that everybody realises they are operating on a level and equal market “playground”. The greatest benefit we derive from Governance is the knowledge that our business activities are subject to both scrutiny and oversight, which limits our exposure to being the subject of confidence tricksters, and we know what is expected of us in our chosen marketplace.
Firstly there is Externally Applied Governance which is made up of rules imposed on business by other entities (normally organs of state). These include:
- Governmental. Government of a country should, ideally, create a marketplace, in which business can start, grow and develop. Many governments want to “fiddle” with this model, but the inevitable result of this “fiddling” is negative and leads to a reduction in business success. When creating the marketplace, Government must draw up a set of rules that define the basic philosophy that will operate in that marketplace. These rules are essential for the health of the marketplace, and form Governmental Governance.
- Societal . Every society has a set of rules that control behaviour in that society. As there are almost as many types of society as there are peoples, there are an equal number of rule sets. These rule sets are Societal Governance and, together with Governmental Governance for the basis on which External Corporate Governance of a marketplace is determined.
The purpose of this form of Governance is to ensure that the State can claim its portion of our income which it then uses to grow the marketplace for the benefit of all society. Societal governance is there to ensure that business in the marketplace operates in line with the morals and philosophical beliefs of the society which created that marketplace.
Secondly there is Internally Applied Governance. This form of governance we traders impose on both ourselves and those who work with us on our business. The purpose of this form of Governance is to ensure that the business operates according to philosophical and moral principles which are important to the business owners and, further, that there is a set of rules by which those people working with and for us are made aware of what we want and need from our businesses rather than what they think we want and need. Governance at this level originates from:
- The Owner/Originator/Stakeholders. This group of people (which can be an individual) has their own needs and demands from their business. Also they need to determine the extent to which they are prepared to delegate their authority, and how they will control the use of this delegated authority, in the business. This is normally covered by the conditions included in the Founding Documents or Articles of Association of the business.
- The Directorate or Board of Directors. This group is selected by those who own the business. They operate “at the pleasure of” the owners. Their function is to oversee and guide the establishment and development of the business entity and, in an attempt to enhance business operation, lay down and delegate their authority to the Management of the business.
- The Board of Directors determine how the business will operate and sets goals and targets to be reached by the business. However, they will not determine the day-to-day management and implementation of their own decisions – this is done by management. Again, the appropriate “bible” in which the Directors manage and control their business is the Operations Manual.
- Business Management. This group is selected, generally by the Board of Directors. They oversee the implementation and management of the policy decisions made by the Owners and delegated to the Board of Directors, who then further delegate them to the Management of the business. This delegation is normally managed by the compilation and implementation of Standard Operating Procedures, which form part of the Operations Manual, and is regularly supplemented by both verbal and written notices down the chain.
Now we know what Governance is and where it applies, the next question should be “Why governance, what is in it for me? Watch this space!