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HB
HB 4072006

Corporate Governance for Small Business

HB 4072006

Handbook
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Corporate governance for small business

First published as HB 4072006.

COPYRIGHT Standards Australia All rights are reserved. No part of this work may be reproduced or copied in any form or by any means, electronic or mechanical, including photocopying, without the written permission of the publisher. Published by Standards Australia, GPO Box 476, Sydney, NSW 2001, Australia ISBN 0 7337 7473 3

HB 4072006

Preface
In June 2003 Standards Australia published the AS 8000 series of five Corporate Governance Standards. The Standards have been widely acknowledged in industry, and mark an important milestone in the formal expression of corporate governance principles. This Handbook is a companion volume to HB 401 (Armstrong & Francis, 2004), Applications of Corporate Governance, and is designed to offer insights and suggestions as to the importance and application of corporate governance to small business. The seemingly high-level principles may seem to some small business owners and managers to be both high-flown and irrelevant to small business. This Handbook is designed to show the importance of the principles, and that being a small business does not exempt the owners and managers from compliance with legal minima. It also attempts to show how attention to the principles of good governance can add considerable value to small businesses. This is an authored book rather than an official handbook from Standards Australia. Its intent is to give general guidance and better understanding of what lies behind corporate governance for small businesses. The insights and suggestions offered are things to be considered rather than directives. Readers will appreciate that small businesses do not run on the same model, nor at the same level of formality, as do larger enterprises. It is that difference, and its implications that this book attempts to outline and to help small businesses in doing just that. This is the third book on governance written for Standards Australia by The Centre for International Corporate Governance Research at Victoria University in Melbourne. It continues the work of the two previous handbooks on corporate governance published by Standards Australia to complement the AS 8000 series, HB 4002004, Introduction to Corporate Governance and HB 4012004, Applications of Corporate Governance. Although this Handbook highlights those areas where decisions must be made by business leaders, it does not replace the professional advice that will be needed at different times from, for example, an accountant, lawyer or auditor. Nor does it lay down the rules for each small business but seeks to provide information that will answer the questions that any small business owner/manager might raise about governance. It is intended to raise their awareness of the principles of governance and provide a basis for planning. We hope that it will prove a valuable everyday tool for all those interested in making the right decisions and adding value to their companies.

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3 Ronald Francis Anona Armstrong Centre for International Corporate Governance Research Victoria University ronald.francis@vu.edu.au www.businessandlaw.vu.edu.au About the authors Ronald Francis

HB 4072006

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Ronald Francis is Professorial Fellow at the Centre for International Corporate Governance Research, and co-editor of previous works published by Standards Australia. He is the author of a number of books, three of them on ethics, and was a member of the Standards Australia Committee which formulated the current national standard on corporate governance. ronald.francis@vu.edu.au Anona Armstrong Anona Armstrong is Professor and Director of the Centre for International Corporate Governance Research at Victoria University in Melbourne. She is co-editor of previous books published by Standards Australia, is widely experienced both in commerce and the academic field. anona.armstrong@vu.edu.au

HB 4072006

Contents
Page 1 Why corporate governance? 1.1 1.2 1.3
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Introduction ................................................................... 6 The importance of small business ................................. 7 Corporate governance and small business .................. 8 Cross reference to other Standards Australia publications ................................................................... 9

1.4

What does corporate governance mean to small business? 2.1 2.2 2.3 Introduction ................................................................. 12 Corporate governance ................................................ 12 Elements of governance.............................................. 13

Corporate governance enablers 3.1 3.2 3.3 3.4 Introduction ................................................................. 18 Leadership .................................................................. 18 Strategic planning ....................................................... 20 Fostering good governance......................................... 24

Performance measurement 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Introduction ................................................................. 26 The balanced score card............................................. 27 Measuring performance .............................................. 27 Criteria for setting performance targets ....................... 28 The performance statement ........................................ 30 The triple bottom line (TBL) ........................................ 30 Quality assurance ....................................................... 31 Introducing performance measurement....................... 32

Systems of control and accountability 5.1 5.2 5.3 5.4 5.5 Introduction ................................................................. 33 Finance ....................................................................... 34 Directors liability for debts .......................................... 37 Financial statements ................................................... 37 Financial performance indicators ................................ 39

5 6 Risk management 6.1 6.2 6.3 6.4 6.5 6.6 7

HB 4072006

Introduction ................................................................ 41 What kinds of risk are faced by small business? ........ 41 The risk management process .................................... 42 Insurance as a risk management strategy................... 44 Crisis management ..................................................... 45 The value of risk management .................................... 46

Human resources 7.1 7.2 7.3 Introduction ................................................................. 47 The relationship of employer to employee................... 47 Occupational health and safety ................................... 49 Duty of care................................................................. 50 Care for customers...................................................... 51 In defence of claims of commission or omission ......... 51 Workers compensation............................................... 51 Anti-discrimination legislation ...................................... 51 Superannuation........................................................... 51

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7.4 7.5 7.6 7.7 7.8 7.9 8

Business succession planning 8.1 8.2 8.3 8.4 Introduction ................................................................. 52 Procedures.................................................................. 52 Managing the succession............................................ 53 Sale of the business ................................................... 53

Values and ethics 9.1 9.2 Introduction ................................................................. 55 Useful principles.......................................................... 57

Bibliography ................................................................................. 60

HB 4072006

1 Why corporate
governance?
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1.1

Introduction
Governance is about the decision making and control exercised by those who are in charge of organisations, whether they are owners, directors or partners in a business. This Handbook uses the term Director in its formal sense, but it is recognised that owners and managers see themselves as owners and managers rather than as directors. Despite the use of titles it will be appreciated that owners and managers bear directors responsibilities. The text recognises that, and used Director where that is the appropriate legal definition. From the Table of Contents it will be seen that ethics occupies space at the end. This is not to say that ethics is an addition but, rather, that it is of final importance. Small businesses sometimes feel that survival rather than ethics is the critical issue: they are not opposed concepts but complementary ones. Goodwill, risk management, and harmonious relations are all part of ethics and all a part of good business practice. As such they are critical to successful operation. Readers are enjoined to read that chapter as a wrap to the material which precedes it. Ethics is not only about good values but also about good business. Governance is not about operations, i.e. everyday management of a business, but about decision making at the top: what is our market? Who are our customers? How can we best compete? What capital is needed? What is the best marketing strategy? How do we manage a crisis such as a fire or a flood? How big do we want to be? Should we take over other businesses? What should be the structures and processes to manage acquisitions? Should there be separate companies or an overarching company? Are franchises an option? Does the business need additional capital and would this mean relinquishing some of the equity? What criteria are used to decide about succession or selling a company and how should this be done? Governance also refers to the obligations of (owners/managers) directors and owners under various legislation: the Corporations Act, 2001, occupational health and safety, industrial relations, and the like.

Standards Australia

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HB 407-2006, Corporate governance for small business

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