Why is corporate governance important for your business ?

Why is corporate governance important for your business ?

Let me begin by sharing the story of a man with a vision to create a thriving business. This individual had a stellar reputation for pitching to clients and closing high-value sales, backed by a vast network of influential and successful people. He chose to start a trading business specializing in building materials, recognizing the growth potential in the construction and real estate sectors. He embarked on this new venture with a trusted group of colleagues, all experts in sales and marketing. Together, they identified top suppliers offering the best prices, quality, and delivery times in the industry. They reached out to a few initial customers from their existing connections and successfully fulfilled their first orders. The customers were highly satisfied with the competitive pricing, excellent quality, and timely delivery of the products.

A few years passed, and the trading company began attracting more customers through word of mouth, thanks to their superior product quality compared to industry competitors. They were pleased with their impressive growth and set a goal to focus on increasing sales and significantly boosting their gross profit margins over the next five years. However, in the second quarter of their third year, challenges arose. As the business expanded, the company had not recruited enough staff for their distribution network, forcing the existing employees to work harder for average industry wages. This situation negatively impacted staff morale and health, leading to growing employee dissatisfaction.

As purchases increased, the volume of goods in the storage facility grew, leading to overcrowded and tightly packed materials. This caused damage to the goods during storage and dispatch from the warehouse racks, resulting in a rise in customer returns due to defects. The man initially attributed the issues to defective products from suppliers and decided to find new sources. However, within three months, shipments from a new supplier were intercepted by customs, who imposed a substantial penalty that needed to be resolved within a week. Upon investigation, customs revealed that the company had sourced goods from an overseas supplier blacklisted for involvement in money laundering and terrorist financing—a fact the man only learned from the customs department.

The man resolved to pay the penalty within the week and issued a cheque to Customs. Unfortunately, the cheque bounced due to insufficient funds in the bank account. Upon checking with other trusted team members, he discovered that most customers had not yet settled their outstanding balances. To gain market share, the management had extended more generous credit terms to all customers compared to their competitors. These operational issues have placed the business on the brink of collapse. High employee turnover, customer dissatisfaction from damaged deliveries, regulatory fines and penalties, and cash flow problems due to generous credit terms have all contributed to the crisis. Essential functions required for smooth and effective operations have either been lacking or underperforming.

The key takeaway from this story is that a business's sustainability is not solely determined by its revenue and profit margins. Rather, it depends on the integration and effectiveness of various functions working together to deliver comprehensive value. This value encompasses motivated and dedicated employees with favorable working conditions, well-developed infrastructure to ensure the safety and security of goods, robust internal controls for efficient departmental performance, and a strong corporate governance system for long-term sustainability. A business operates like a well-functioning human body, where every part must work together seamlessly. If any part fails, it affects the efficiency of the entire system. Therefore, it is crucial to establish a sound structure when starting a business, ensuring that all components work in harmony to achieve the business's goals without compromising quality and vision. Investing in aspects that benefit the business in the long term is essential, as these investments bring true value.