Conform, While you Perform
“Diligence is the mother of good fortune.”― Miguel de Cervantes Saavedra
When I read this quote, it hit home some truth. There are entrepreneurs who are doing great business — great ideas, deep knowledge and great enterprise. But the last piece in the jigsaw of building a complete business is diligence. Webster defines ‘diligence’ as follows:
Diligence means: a) steady, earnest, and energetic effort b) the attention and care legally expected or required of a person (such as a party to a contract)
Most entrepreneurs love to do things ( action) and plan. What they hate the most, to the point of abhorrence is building an enterprise with strong governance. The point of diligence comes when the entrepreneur involves an external party. This party is typically an investor or a lender, or a regulatory body. Till the external party is involved, most decisions are taken by the entrepreneur, often undocumented, essentially built on on-the-fly decision making.
Most small businesses lack, for example, a financial decision maker — which is a key factor in governance. Financial function is closely tied with the ‘promoter’s inner circle’ in a small business. Having advised at least 5 such organizations in an individual capacity and many more in my present capacity as a private equity advisor, this is a sticking pattern — there is a man Friday who puts things together for the promoter in this space.
The key point is that this inner circle is the one who holds the trust of the promoter. Payroll, Human Resources, Bank Relations, Accounting and such functions are kept within the inner circle. Two IT companies, a staffing company, a manufacturing firm, and a fitness firm — just to share the landscape of my sample — have an exactly similar pattern.
The promoters tend to keep this information & data under a tight fist. This also means that there is a single person — who also interacts with auditors. This will work, till the promoters can control everything in a company. But there comes a point — a pivot — when the business is of reasonable size. The differentiating factor is ‘scale’. When a small business moves beyonds its realms — to dealing with larger customers and volumes, it never sits upon the leadership to rely on their memory, men fridays and mental bandwidth.
Beyond a man, as they say, lies the means. The means rely on personnel independence — clear systems and processes. The systems and processes eliminate subjectivity — drive a check-and-balance.
“Responsibility is a unique concept… You may share it with others, but your portion is not diminished. You may delegate it, but it is still with you… If responsibility is rightfully yours, no evasion, or ignorance or passing the blame can shift the burden to someone else. Unless you can point your finger at the man who is responsible when something goes wrong, then you have never had anyone really responsible.”― Hyman G. Rickover
So scale trumps human memory, and there come the processes and systems. This is essentially the fundamental premise of Governance, Risk & Compliance. It is a structural and cultural shift for an organization. The ability of the management to let go and trust the process and the people who drive it — is the key DNA change. This comes from maturity. Whilst the promoter’s integrity is a key component, the external stakeholder — the investor, the customer, the regulator — all three, will look at the systems and process — and there by extension — data.
The only choice that leads small business owners to real success in their endeavors is the one that requires real thought. Understanding and building the systems they need within their company to afford them a framework of organization that can scale the business from a company of one to a company of one thousand. Michael E. Gerber
The key element of attitude is ‘responsibility and accountability’. Delegation of control and the processes, aided by check and balance, build a framework that enables all stakeholders — the promoters, employees, the board, the management, the investor, the customer, the supplier to place trust in that business, WHILE it is scaling.
“It is clear that good corporate governance makes good sense. The name of the game for a company in the 21st Century will be conform while it performs.“ — Mervyn King (Chairman: King Report)
The key point is ‘conform, while you perform’. Internal audit, risk assessment and mitigation, financial controls, legal prudence, liability management, tax & statutory compliance indicates that the business is absolutely in the pink of its health.
“It is not simply a case of having a set of procedures and processes, nor is it just about having controls in place. Reliance on a poor control is often worse than having no control at all. [The trustees must have] … a clear understanding of the business and what can go wrong.” — Tony Rawlins — (2001)
The promoters should realize, barring certain caveats, the governance boundaries are to ensure that the business is in the pink of health and builds fundamentals of resilience.
However, there are many cases of derailment due to academic controls. The promoters should understand the context of the control for a business and then establish and ensure the continued relevance of a control.
“Compliance” is just a subset of “governance” and not the other way around.”― Pearl Zhu, Digitizing Boardroom: The Multifaceted Aspects of Digital Ready Boards
As the last word, Governance is the key — it involves both spiritual and literal commitment by the promoters. Compliance is only the first step towards better governance.
~Ashok Subramanian is a Business Strategist and Private Equity Advisor. He advises on technology, business strategy, investments, GRC matters.