Small businesses that are successful have a common theme: A strong “Tone at the Top” and good Corporate Governance. But how do you know if you have good corporate governance?
We have provided a list below that details the habits of good governance. If your organization is performing 7 out of 10 or higher, you are on the right track.
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Demonstrate a strong tone at the top |
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Create and maintain an organization chart |
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Document job descriptions |
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Hold monthly management meetings |
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Publish an employee handbook |
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Formalize Board meetings |
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Uphold formal employee evaluations |
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Perform periodic risk assessments |
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Document and keep updated your internal controls |
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Maintain a reporting structure and transparency |
The importance of policies and procedures and accountability goes beyond documentation. First and foremost is Tone at the Top, which is a term used to describe the organization’s ethical culture primarily created by senior management and the board of directors. A strong Tone at the Top should help prevent fraud and other unethical behavior. It is a tone that touches all levels; it sets an expectation for accountability and doing the right thing.
Having strong corporate governance principles and practices (best practices) furthers the tone set by management. Strong corporate governance means that every level of the organization needs to be engaged and demonstrate ownership of their process, which affects the organization as a whole.
Have your management team regularly perform risk assessments to identify ways to minimize business and fraud risk. This will help identify areas that need improved controls and oversight to keep risk at a low level or to at least be aware of the risks that exist.
You must also document your internal controls and ensure that you have a sufficient amount of controls in place over key financial processes and financial reporting. Adequate segregation of duties is an area that is a focus for controls as is oversight. Management and the Board need to provide the proper oversight to reduce the risk of errors and fraud. And management must not override these internal controls.
In order to set best practices in place, you first need to identify areas that need improvement. Have your management team research the practices implemented by other companies to see what might work best. Then you need to measure the improvement or benefit to see that it is working. This is an ongoing process until you know you have reached an optimal outcome.
So, what makes reporting and transparency so important? All successful organizations have the confidence of management, its customers and its stakeholders. With the proper reporting, an organization will demonstrate a strong ethical climate and, in turn, build confidence and loyalty. Customer and employee loyalty can make or break any organization. If your business is privately held, there is still a need for reporting. Many small businesses have no requirement for financial reporting other than for tax filing compliance. However, keep in mind that employees are invested in making your business a success and need transparency to feel that they are valued. Employees are your biggest asset after all. Hold meetings, share successes and report results to create an environment that builds the loyalty and confidence that will make you a success.
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For more information on this topic, please contact a member of Withum’s Sarbanes Oxley Compliance Services team.
