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The key elements of good corporate governance:
Independence of directors
If the directors of a company are also the owners and/or their family members, entrepreneurs appointed by friends, or individuals who are involved in the daily management of the company, the board is in danger of being prejudiced in their favour. Having a majority of non-executive, independent directors will help avoid prejudice and conflict of interest between the board and the management, enabling independent judgement in the interest of the company.
Separation of 'strategic planner' role from 'operator' role
For small companies that do not have a board of directors it is a good practice for the strategic planner of the business to be different from the owner-operator because it frees the latter from day-to-day operational duties, and enables him or her to focus on the long-term, strategic business planning.
An 'exit strategy' for company owners
Whether it is a succession plan for passing on a family business or a buy-sell arrangement, it should be planned and agreed amongst parties concerned (eg shareholders, family members) well in advance.
Reliable systems and procedures
Potential creditors feel more confident if they know that the company has reliable systems and procedures in place. Such processes enable smaller SMEs to operate in the owners' absence (eg because of illness), and allow for smooth hand-over to other parties.
Credible accounts
Even for the smallest SMEs, credible accounts enable the entrepreneur to know what is going on in the business, while allowing lenders to accept the company as reliable.
Key performance indicators
These indicators (eg financial strategy, marketing plan, product/operational goal) are used for measuring the performance of the company, its management and even the board of directors.
Remuneration and HR policies
Transparency in matters such as remuneration, incentives, discipline and dismissal is essential for attracting good employees. It is especially important for retaining non-family members in family businesses.
Sources of information:
- Guidelines on Corporate Governance for SMEs in Hong Kong, by The Hong Kong Institute of Directors - the most comprehensive guidelines for SMEs of all sizes from sole traders, partnerships to listed companies. The guidelines also include a dedicated chapter on special issues of family companies.
- Improving Corporate Governance for SMEs (in Chinese only), by the Institute of Enterprise Development and Management Research, Hong Kong Baptist University.
- Guidelines and survey reports by The Hong Kong Institute of Directors.
- Issue brief Overview of Business and Corporate Governance, Business for Social Responsibility (BSR).
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