How smaller entities can benefit from implementing governance structures

To be successful, a corporation needs to balance the interests — sometimes aligned, sometimes competing — of multiple stakeholders, such as customers, employees, suppliers, vendors, shareholders, and the community. Ensuring that this essential activity is handled effectively, efficiently, transparently, and with proper disclosure is a key task of corporate governance.

“In a practical sense, corporate governance informs how a corporation fulfills its mission and attains its goals and objectives while ensuring compliance with all prevailing laws, regulations and best practices,” commented Jeffrey Gitchel, Pittsburgh resident and seasoned attorney with over 20 years of experience in corporate governance and corporate matters, commercial matters, litigation, and intellectual property.

"While corporate governance may seem to apply only to large-scale, publicly traded corporations, all companies must govern themselves, and even a smaller organization can benefit from doing things like establishing policies and procedures aligned with its goals. Effective governance can boost internal efficiency, enhance stability, prevent or mitigate legal violations, make a business more attractive to investors, and provide economic value to various stakeholders,” according to Jeff Gitchel.

The Value of Corporate Governance

“Behind the scenes, corporations, even small corporations, are highly complex and multi-faceted entities that face ongoing pressures and risks,” commented Jeffrey Gitchel. “Good corporate governance makes corporations more resilient and provides a foundation that allows them to adapt and respond to various challenges, from the day-to-day to the uncommon and potentially disruptive, such as supply chain and workforce disruptions, natural disasters, cyber-attacks, and as we have witnessed in 2020, public health outbreaks and pandemics.”

Corporate governance involves developing a business environment that guides the organization towards its goals in a sustainable manner. Any company, not just a large, publicly traded corporation, will benefit from a leadership team that is focused on articulating corporate goals and developing a sustainable strategy to achieve those goals. In other words, leadership that is focused on corporate governance.

Companies with this approach are better positioned to take into consideration the interests of multiple stakeholders, which can be critical to achieving long-term success, stability, and growth. Jeff Gitchel of Pittsburgh noted other key benefits, such as fostering investor confidence, improving overall trust and reputation in the marketplace (which can and often does have a positive impact on the ability to raise capital or share price), strengthening information and risk management, decrease waste, and minimizing or eliminating corruption (or the perception of corruption).

Minimize Growing Pains

"An important consequence of corporate governance is long-term value creation. Businesses that adopt a corporate governance focus early in a company's life cycle tend to encounter fewer growing pains as they grow into a larger entity," states Gitchel. "Even for companies that do not aspire to be in the Fortune 500 realm, the same fundamentals apply, regardless of size."

According to the International Finance Corporation, well-governed companies demonstrate higher long-term financial results, leading to a faster growth rate and enhanced sustainability. Ultimately, corporate governance ensures a balance of economic development while providing a safeguard against threats to the company.

The Board of Directors

Governance starts at the top, so the composition of the board is critical to the success of an organization's corporate governance plan. When possible, a board should be composed of a diverse group of individuals, each possessing different strengths and areas of specialization.

Once selected, governance is part of the board’s fundamental duties. The board is responsible for establishing and reviewing the organization’s vision, mission and purpose and creating a strategic plan, which will necessarily involve at least some level of governance.

In addition, a board has many responsibilities that relate directly to governance. For example, the board is responsible for ensuring compliance with legal requirements and establishing necessary policies.

“The board’s responsibilities can also include more focused governance functions, like exercising financial oversight and establishing necessary and appropriate governing committees, like an audit committee or compensation committee, '' commented Jeff Gitchel.

“Getting reliable and strategic legal advice throughout this entire process is vital because errors or omissions made here can have severe and lasting consequences, and ultimately affect a corporation’s competitive standing and long-term sustainability.”

Fewer Penalties and Lawsuits

Corporate governance is a common priority for larger public entities. However, many smaller businesses, whether it be a partnership, LLC, or corporation, do not always understand the importance of effective and responsible governance.

As a result, they expose themselves to a wide range of potential risks. Employees often need guidance about a wide range of issues that, if not handled properly, would leave the company exposed. Effective governance guides the organization in the right direction. For example, governance helps ensure that an organization's reporting and administrative tasks remain up to date, minimizing the risk of penalties, fines, or lawsuits.

The Bottom Line

Corporate governance ensures that an organization is well managed and all executive goals align in a sustainable strategic direction. Jeffrey Gitchel reminds smaller entities that a corporate governance plan can be tailored to a company's size and stage of development. As an experienced legal professional, he encourages all businesses to take the necessary steps to protect assets and manage their organization.