BOARDS OF SMALL CAP FIRMS THE FORGOTTEN SOLDIERS OF CORPORATE GOVERNANCE
March 2009
Although they are not often the subject of the Australian media spotlight, the vast majority of listed companies in Australia are not in the top 100. In fact, while corporate governance is largely thought of as a big business issue, the reality is that good corporate governance is just as applicable to that multitude of small listed companies who have vastly different issues than their larger contemporaries.
At the other end of the governance continuum from the Tesltras and the BHPs of the world, sit boards that are often composed of shareholders, founders, executives, nominees, family members and business partners. These are frequently organisations whose resources are stretched to the limit, and operations whose business and cashflow is far too reliant on a single customer, product, project or region.
In this environment, says Julie Garland McLellan, boards need practical information about how to best negotiate real world issues while still maintaining a system of corporate governance that enables the boards of smaller listed companies to manage their role professionally.
“How is a board of a smaller cap firm expected to provide good governance and to manage situations such as when the CEO has been offered a better deal by a competitor and the organisation can’t afford for him or her to leave, while the HR manager has taken an extended leave of absence, the business is under pressure for a renegotiation of terms from a major client, and shareholders only recently and reluctantly voted to accept the remuneration report?” says Ms Garland McLellan.
“These things come up fast, particularly in the current environment, and many boards of smaller listed companies are being caught flat-footed.”
Ms. Garland McLellan says that in the current economic climate there are many boards wondering if they should continue to work with a CEO who has a skill base historically built around managing growth, or turn to one with skills more equipped to deal with the downturn. Or as a support to the current CEO, should they employ a CFO who is more than 50 years old and has the track record to understand how to manage recessionary pressures on a business?
“We’re seeing a number of CEOs leave, and the concern is whether boards are going through the exercise of asking…is it right for the CEO to leave? It’s very difficult for a board to make a rational decision when their independence is compromised because the board consists of family members, the original founder, or shareholders,” she says.
Ms. Garland McLellan says that in her work with boards, her advice allows the directors to understand exactly what action is needed for the times from an objective point of view with no vested interest in company.
“Boards need to understand what options are possible and in their control, and they need to understand the process by which that can happen. There are often simple ways of dealing with problems which are not acted upon because they’re not known to the board,” she says. “For example, understanding how to navigate disclosure obligations to ASIC is a real challenge and one that small cap boards have to figure out. Large boards have a team of lawyers and investor relations experts to manage the process.”
Ms. Garland McLellan says some of the important themes for effective corporate governance in small cap boards include
- The need to cut costs but not cut corners
- Understanding the succession plan and where staff cuts will have the least effect on competitive advantage or future prospects
- Keeping an eye on their own solvency and that of key customers or clients
- Managing cashflow and optimising working capital
- Knowing what the board can do to assist and what the board must not do if they wish to retain independence from management
- Effective disclosure and shareholder engagement
- Rigorous risk management systems and reporting
“Understanding how to provide good governance with all the pressures not experienced by the big end of town is the major challenge for small cap boards. While the rules are the same, the game is played out in vastly different ways for smaller listed companies. Having the independent insight and know-how to add value to the organisation effectively and efficiently is vitally important for the future success for boards at this level.”