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Private businesses must build governance resilience

Private businesses must build governance resilience

Traditionally, local businesses have not paid much attention to corporate governance and structures. Evidence has shown that our local business populace, mostly family-based companies operating within a relatively protected competitive framework, feel that well-planned corporate governance has not really been necessary or required for them.

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renos-ioannides

Board Member, Deal Advisory

KPMG in Cyprus

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governance resilience

Recent years have shown, however, that a well-thought-out corporate governance, structure and processes are one of the key factors which maximise a company’s resilience. In a rapidly changing, globalised world which has brought about unthought-of uncertainties and rapid changes (a perfect example of which is the recent COVID-19 pandemic), businesses cannot survive on their conventional modus operandi they have come to know and expect, over many decades of operation. The present modus operandi must be to expect the unexpected.

As a result, resilient businesses of the new era must:

- Accept that every day brings a new challenge, a challenge which may undermine the company’s viability

- Appreciate that non-conventional operations will become the new convention

- Understand that a clear corporate structure is crucial for their viability:

       i. separating corporate policy making from day-to-day decision-making

      ii. separating the ownership structure from management decision-making

     iii. acknowledging the significance of accurate, complete and timely management and financial information and communication to key stakeholders

     iv. internalising a policy of timely planning, financial projecting and adjusting on the basis of actual performance

- Acknowledge the importance of active and timely stakeholder management (clients, suppliers, staff, financiers, state authorities etc.)

- Realise that the right financing combination of the business’s capital structure is vital for long-term sustainability; excessive debt leverage increases the business’ vulnerability. The ‘right’ balance between equity and debt finance must be sought

- Incorporate social and community ethics in their strategy: the health and safety and, ultimately, the well-being of their employees and other stakeholders and the benefit of the community and society

- Recognise that duly meeting the commitments they have undertaken, be they loan instalments, payroll and social security contributions, supplier payments, tax and other state authority obligations, is part of their corporate duty and responsibility

Institute a mechanism of early warning signs in their governance model to guide and direct mitigating actions in the expectation of impending distress; recent EU directives, which shall soon be transposed into local law, create the legal obligation on directors to incorporate an early warning mechanism which shall be used to help prevent insolvency in difficult times.

Resilient corporate governance creates resilient businesses. Resilient businesses are better equipped to deal with unforeseen crises, an example of which is the coronavirus pandemic. This pandemic is a timely reminder that business owners and managers have an inherent obligation to safeguard their company. If they do, the state authorities and financiers would justifiably be expected to fully support and assist in every subsequent crisis situation.

© 2020 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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