The foundation of the development of medium-sized businesses


Alexander Shubin, managing partner of «Partner Business Consulting», e-mail: shubin@pbconsulting.ru

 

Survey of more than 200 investment companies in 31 countries around the world, conducted by McKinsey [1] showed that investors are willing to pay more for the shares of companies that are transparent in the management plan and leading statements in accordance with international standards. Premium amount fluctuates from 10-15% in Western Europe and 40% in Russia. For companies seeking access to public investment, the formation of the system of corporate governance is a prerequisite. Most often, corporate governance is seen in this context - as a formal tool, with which you can create an acceptable level of transparency to attract foreign investment.
In this paper, we propose to look at corporate governance on the other hand, as a management tool, with which you can give a powerful impulse that takes the average company to the next level of development, including increasing its capitalization.
What is it like today are medium-sized companies? This is usually an enterprise having a strong market position in a particular niche, often regional leaders, with annual revenues of up to $ 100-200 million, with the number of employees about 1000-1500 people. Composed of several legal entities, with an opaque ownership structure. Strategic and operational management of such companies usually carry out the owners, holding key positions in the management structure and supervising the relevant activities of the company (finance, strategic development, marketing and sales, production, etc.). The important fact is that the age of such companies is over 7-10 years.
What challenges are faced in the management of medium-sized companies? Of course, every company is different and every company is faced with individual problems. Performing consulting projects and discussing the complexities of managing with the owners and managers of medium-Siberian companies, we have classified the majority of administrative problems of such companies. There are, in our view, the key "hot spots" that have a negative impact on the development of medium-sized companies in Siberia.

 

 

The first group 

management problems associated with the structure of the property:
• Unbalanced interests of owners and non-transparent ownership structure.
• Owners who have a small package (5-15%), which are not involved in the business, but want to participate in management.
• Diluted responsibility in case of success, you can quickly find a "hero" in the case of failure, the culprit is not, because no one is interested in his search.

The second group 

problems that are caused by problems in the first group, we conditionally be called "Investment". In this group we include such "hot spots" as
• Lack of a coherent development strategy.
• Financial opacity due to the lack of a unified methodology of management accounting and financial reporting.
• High risk of non-investment of dividends, even in the case of the successful implementation of the project, related to the complexity of the control of movement of financial resources is not clear because of transfer pricing system.

 

 

The third group

management problems:
• Professionalism hired managers who are one level below, often exceeding the competence of the owners, leading to management conflicts such as "You are a good professional, I am the owner, I run the risk, so we will do," as I see fit. "
• Unclear regulations execution of business processes, and management of the property owners on the principle of «ad-hoc» - came, saw and corrected.
• The lack of quantitative performance indicators of the top management, usually the key owners - "evaluate and dismiss yourself, not everyone can"

 

The fourth group – 

personal:
• Emotional exhaustion main owners - "for 7-10 years, invested a lot of effort into the business, it is time to reap the rewards."
• Fear of losing business - the "why, when investors make money, they" pry "into my business, third-party investors - are potential raiders."
• The belief that the company hired by the head of the delegation, will develop in the wrong direction, not with the same intensity - "there are no qualified salaried managers who have worked as I have."
All this leads to corporate conflicts, reduce the rate of development of the company, reducing its market capitalization.

 

How corporate governance can help mid-sized companies to overcome difficulties and solve the problems described above? 

 

To answer this question, let us consider the nature and mechanisms of corporate governance, not plunging into the theoretical foundation and institutional aspects.
The essence of corporate governance, in particular, is to create and maintain a uniform system of rules that define the relationship and interaction between all stakeholders (shareholders, investors, auditors, employees, management, public authorities). The key concept here is the "unified rules", which are usually formulated in the Corporate Code. It's kind of foundation on the basis of which one can build a building management system. In the corporate Code sets out the key principles related to [2]:
• protection of the rights of shareholders;
• ensure equal treatment of all shareholders, including minority and foreign shareholders;
• recognition and enforcement of statutory rights of stakeholders in the operation and management of the company;
• timely and accurate disclosure of material matters regarding the corporation, including the financial situation, performance, ownership and management of the company;
• provide strategic management of the company, the effective monitoring of management by the Board of Directors, and the board's accountability to the company and shareholders.

 

 

 

Why is it necessary and important to the average of the creation and implementation of corporate policies? With the growth of the company, as the number of employees and customers, and the impact of the position of the owners in the community (even at the regional level), increased attention to the activities of the company with the public authorities, the company becomes more open. The owners want it or not, this is an inevitable process. In an open system, as is known, the amount of risk of adverse effects and the likelihood is much higher than in the isolated system. The lack of formal corporate policies reinforce this uncertainty. Put yourself in the place of an investor who invested in the company several million dollars. What will he do in the face of uncertainty, to protect your investment and get the promised dividends? That's right, it will create its own rules in order to reduce this uncertainty. What will the hired director to whom you want to delegate the management of the company? It will create rules in line with its vision of how to manage the company. You may not like the rules, then you will have to part with this director. And many owners of mid-sized companies are in a vicious circle: the development necessary to attract investment - but it is dangerous to let a third-party investor, it will begin to set their own rules, the business grows, you need to transfer operational control of salaried managers - but what rules they will work is not known. The obvious solution - to create these rules. Although there is another obvious way out - to leave the business and "reap the fruits" somewhere in the Canary Islands.
Corporate Governance Principles provide a solid foundation for building management systems growing company. Many midsize companies need today to recognize that their foundation is in need of serious reconstraction.

 

 

Which mechanisms of corporate governance may be useful for medium-sized companies? Let us consider typical structure of corporate governance. Typically, it consists of the General Meeting of Shareholders, the Board of Directors, Committees of the Board of Directors, the Executive Directorate (the Directorate), and Committee for the Directorate.

The General Meeting of Shareholders is the supreme governing body of the company. It takes a decision on the fundamental issues relating to the company, for example, such as amendments to the Constitution, the issue of new shares, the election of the Board of Directors and approval of the external auditors and the distribution of profits.
The Board of Directors shall consist of at least 5 members (the minimum number of members of the Board of Directors determined by the Law on Joint Stock Companies). The Board of Directors provides strategic management of the company, controls the allocation of investment. The Audit Committee assists the Board of Directors in overseeing the work of the internal audit, financial reporting and the effectiveness of corporate control.
Directorate in holding structures, usually composed of the directors of the subsidiaries. In simple structures of the directorate may include CEO and functional directors. Directorate is responsible for the operational control of the activities of the companies. To enable members of the Board of Directors in operational control and increase the effectiveness of corporate governance at the Directorate can be created collegial committees - Tender Committee, the Asset and Liability Management, Investment Committee, Credit Committee, the Planning and Budget Committee and the Steering Committee on IT-objectives (IT - Information Technology).
As the legal form of corporate governance applied The Company closed or open. This form of the most regulated in the legislation that best protects the rights of shareholders, including the current owners, and ensures the stability of the business.
At first glance, such a structure may seem cumbersome and complicated for the average business. But if you look closely at the organizational structure of the average company, you'll find that all of the functions listed above have already made: some of the owners or managers hired determines the strategic direction of development, responsible for attracting investment and distribution, approves and monitors the budgets, controls major purchases, etc. But all this usually takes place in an opaque structure and in a "fuzzy concept of responsibility" when the ultimate owner is responsible for everything.
Establishing a clear corporate governance structure, based on common corporate rules can solve the key management issues faced by today many medium-sized companies.
The Board of Directors is a good platform to find a balance between the interests of owners, develop a coherent strategy for the development and consolidation of responsibility for decision-making. In most cases, the lack of such a permanent mechanism of minority owners and foreign investors are trying all possible ways to protect their investments, which often leads to interference in operational activities and to corporate conflicts.
Another element of the corporate governance structure - the Audit Committee and Corporate Governance Committee provides financial transparency and uniform standards of financial reporting, which together with the Tender Committee and the Budget significantly reduces the investment risk for the investor.
And finally, one of the essential properties - the structure of corporate governance is a good basis for the transfer of management of salaried managers. In addition to financial transparency and reduce investment risks in corporate governance can draw a clear line of responsibility between the executive management and the Board of Directors, which allows you to define an objective qualitative and quantitative assessment of the executive management.
On the other hand, this system, which allows owners to assess the effectiveness of the role of managers. During the transition period, the members of the Board of Directors may oversee key areas through the Committees of the Directorate, without interfering with the daily tasks of operational management. And after some time, emotional stress and fear of losing business by attracting foreign investment and transferring management hired managers will disappear.
In conclusion, it is worth noting that ultimately the goal of any business - is to increase the market value. Medium-sized companies that have not yet engaged in the formation of the system of corporate governance are at the first stage of creating the market value of the company (see Fig.). Do I need to take a step to the next level? If a large company wants to develop, the answer is obvious.

 

 

    

Global investor opinion survey, McKinsey

The OECD principles of corporate management