The Accountant – Is Good Governance on our Agenda?  –  Summer 2020 (MIA Publication)

What is the meaning of Good Governance for a Small-Medium Practitioner (SMP)?

The common perception is that Good Governance is a new minted term, however the concept is one which is as old as human civilization; for ‘ Governance’ means "the process of decision-making and the process by which decisions are implemented or not implemented."

Although the term is a resounding one with connotations of big business, macro institutions, national or local governance, and international governance; this is a far cry from its true substance.
Governance is the process of decision making and hence the process by which decisions are implemented. Consequently one needs to focus on the actors of the decision making and the structures (whether formal or informal) in which those decision makers operate.

The characteristics of good governance are not consequential of size and hence retain their form whether the structure is a single player structure, an SMP or a large organisation.

What are the characteristics of Good Governance?

Primarily one may list down the major characteristics at the heart of good governance as:

• Participatory
• Consensus oriented
• Accountable
• Transparent
• Responsive
• Effective & efficient
• Equitable and inclusive
• Follows the rule of law

Obviously not all characteristics will be predominant to the same degree, much depends on the specific circumstance under consideration. However, the combination of all these characteristics are at the root of good governance.

From an SMP perspective the above may seem a tall order and implementing good governance practices might be far down the priority list. But investing in good governance is critical to long-term success.

Is there room for less good governance in a small practice, rather than a bigger firm?

All practices, small or large have goals which need to be achieved. Attaining those goals is fundamentally influenced by the level of governance implemented. There is no such concept as less good governance, but varying levels of good governance apply, dictated by the size of the organisation.

In large firms there is an agent-principal issue: managers are agents for the principals or owners. Hence good governance involves implementing a framework of systems and controls to ensure that managers and staff not only act in the best interests of their principals but also of all their stakeholders.

In general, in SMP’s the agent-principal relationship is less significant, and governance is mainly concerned with business efficiency and performance and less of a monitoring nature. Hence the framework applied must be fit for purpose, meaning that it is appropriate for the size and maturity of the business.

In this respect The International Finance Corporation (IFC) issued a Family Business Governance Handbook which is designed for family owned businesses; many of which falling into the category of Small-Medium Entities (SMEs). IFC have also developed a Governance Progression Matrix, which sets minimum requirements for four levels of corporate governance, from basic to best practices which requirements cover several categories of corporate governance.

What are the challenges faced when complying with good governance?

Good governance undoubtedly brings in an array of challenges be it a micro or a macro entity, obviously with varying degrees. For a sole practitioner, or for that matter an SME, the number one priority is attracting new business (if not retaining existing ones) and struggling to survive in a competitive business environment. Hence, understandably, governance might not be at the top of the list. However, as business grows, expands and fiduciary duties increase, the governance issue starts climbing up the ladder of importance.

Notwithstanding on which step of the ladder one is, the main challenge is always the availability of resources. Balancing the act between having to immerse oneself in a wide variety of operational issues and strategic issues such as good governance is no small feat and comes at a cost. The issue is ‘will good governance pay off in the future’?

What are the intrinsic benefits when having good governance? Do SMP’s foresee that good governance will become more important in the future?

Notwithstanding the pressures good governance exerts on the limited resources available, no one would argue that corporate governance is unimportant to an organisation. Setting up a framework which assists all stakeholders to monitor the actions and performance of a business/entity protects both the future of the entity and the stakeholder’s interests. Surprisingly, some of the most significant intrinsic benefits from good governance are to be had by small and medium sized entities. These may be summarised as:

• Establishing clear reporting lines

• Clarity in decision making and control of risk

• Internal controls related to key risks

• Promotes understanding of roles and responsibilities

The above list is not exhaustive but provides a porthole view on the benefits which accrue because of good governance and in the long run, the benefits far outweigh the costs incurred. SMP’s in general acknowledge that longevity for an entity is dependent on its ability to ingrain in its DNA the culture of good governance.

Franco Privitelli is a certified public accountant and auditor. He is Director and Partner in MGI Malta, mainly responsible for the Audit and Assurance department as well as a member on the MIA SMP Advisory Group.