Latest update: Sept. 27, 2021
To ensure that a company delivers what its owners want, which is to generate profit, certain direction and control is required. While this may seem obvious, there is surprisingly often a lack of direction. Without a plan it is easy for a company to end up somewhere else than intended , simply because there is no direction. If the owner of a company decides on a clear plan that is communicated to the business, including measurable goals and methods for making informed decisions, how to manage the company and thereby achieve goals and generate profit becomes clearer. We will touch on this briefly below, mainly focusing on limited companies, and are available should you have any questions.
What is corporate governance?
When we talk about corporate governance, we will touch on the various decision-making corporate bodies that are important for a limited company – the Annual General Meeting, the Board of Directors (which we will refer to as the Board) and the CEO, and how they relate to each other. These bodies are important for how a company is governed.
Corporate governance issues can be difficult should the governance or direction be unclear. If the governance is unclear, conflicts of interest, for example, may arise between the various bodies. The control needs to be well thought through. Fortunately, there are many different ways and models to apply.
Lack of corporate governance
All companies have unique corporate governance issues and the situation determines which issues arise.
In order to be able to lead a company, the owners should inform the board, in writing, what they wish to achieve in the company. The board, which is responsible for the company, should then work to deliver the owners’ wishes.
The board does this by appointing an operationally responsible person for the company, a CEO, and instructs them in writing. The CEO is responsible for day-to-day management, i.e. everything operational such as business, finance and personnel. Simply put, the CEO should work and deliver according to the assignment the owners, through the board, have given them. assignment given by owners to the Board and the CEO must include and fulfil the requirements found in the applicable legislation such as EU law, company policy and other codes of conduct as well as the Code of Swedish Corporate Governance, which has been developed by industry organizations. This means that the owners' wishes are dependent on the mentioned rules and codes and requires too that the company's goals are clearly formulated and that corporate governance is ensured and works from the start of company operations.
Despite this, it is not uncommon for a company to be formed without a thought through plan on how the company should be governed. From our experience, we have seen a number of reasons that can lead to a lack of corporate governance:
- Lack of communication: If a Board or CEO fails to inform the business of the decisions that are made, ambiguities arise. Unless clear information is provided, each employee's individual decisions or actions may affect the company and steer the company in a different direction than the original instructions from owners and that the owners want.
- Lack of competence: A company must follow rules such as the Swedish Companies Act, the Accounting Act, the Annual Accounts Act and tax rules. For a company to function painlessly, it requires - in order for the Board to be able to carry out its responsibilities and role correctly - competence to perform certain tasks.
According to the Code of Swedish Corporate Governance, the Board must be independent of the owners, i.e. that they themselves do not have the same interest as the shareholders but act in the company's interest which is regulated by law, policies and industry knowledge. The Board of Directors should therefore have knowledge of finance, law and, above all, how the business or industry works.
- Lack of guidelines: Companies that do not have documented guidelines required by law, policies or other documented instructions on how the company should be run and what values should permeate every decision, risk decisions being taken that do not reflect the owners' instructions.
- Lack of information when making decisions: Accurate and relevant information is always required for a Board to be able to make decisions in accordance with the company's objectives and strategy. Many times we experience that there are information shortcomings, especially when data is produced in connection with a lack of competence, which can lead to decision-making based on inadequate data or without an appropriate impact assessment.
- New owners and owner conflict: New owners may have interests that are not aligned with the vision of the previous owners'. In order to ensure that the interests of all owners are met, a shareholder agreement should be entered between all owners and all owners should clearly establish the company's vision.
To avoid a lack of corporate governance, it may be worthwhile to get professional help at an early stage to identify risks and then take the relevant actions.
In order for the company to take full advantage of risk management, risk management should be practically integrated into the business's governance model, be a key consideration in goal development and corporate strategies and is be reflected in day-to-day operations. This puts high demands on the Board, the CEO and the management team as they set goals and strategies. The Board needs a clear basis for decision making in order to be able to run the company in an efficient manner. Once a decision has been made, ongoing follow-up of the business's risks and the company's ongoing work is required to realize the goals and strategies.
It is our opinion, that for corporate governance to work correctly, clear communication and transparency is required for all interested parties in the company, i.e. from owners to employees who manage the day-to-day operations. It is not possible to follow up a decision or strategy if it has not been documented. Support can, in many cases, be found in company's policies, if such have been formulated in a well thought out manner. Having an established culture with clear business practices facilitates future decision-making. Nevertheless, the Board should continuously review the company's management and policies to improve internal routines.
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How can corporate governance be improved?
As previously stated, the Board should introduce clear guidelines and policies, which should at minimum reflect what is required by law. Corporate governance does not have to be a complicated, but it is important that it is managed at a level that is suitable for the specific company. When there are guidelines, the entire Board must communicate the information on an ongoing basis to everyone involved in the company. This is to signal to all employees to act in a certain way and in this way, the company maintains a clear corporate culture. Furthermore, it will be easier for new employees or new members of the Board to understand how the company is run.
We at Lundberg & Associates have worked with corporate governance for many years. We have assisted companies with corporate governance issues and in some cases also taken on board assignments. As a result, we have operational experience in handling matters both small and of a complex nature in various industries. Our experience has shown that companies often miss the basic structures needed for well-functioning corporate governance. When advising on these issues, we always go back to basics, reviewing the company's current management as well as how it has historically worked. Based on the review, we can ask relevant questions to help improve the company's risk management and routines. For balanced corporate governance, the relevant questions concern both what is legally correct and personal performance, such as the amount of time that should be spent to produce sufficient evidence and to achieve a certain goal. We advise in all areas and set clear goals to achieve the desired result - balanced corporate governance resulting in a return in accordance with the owners' vision by minimizing risks and costs.