By: Prof. Enrique N. Soriano
IN ONE of the rare times that I get to visit a mall along Orchard road in Singapore, I was suddenly distracted by an annoying shout repeatedly calling my name. The loud voice coming from my rear also drew the attention of shoppers. Clearly, some were distracted by the noise. But as the sound of the voice drew closer, I noticed a familiar face, an elderly well-built Singaporean in his late 60’s showing excitement all over his face and eagerly wanting to cut through the crowd. Relieved, I decided to calm him down by approaching him. We then shook hands. The first thing that he delightedly conveyed was, “Prof. you wouldn’t believe it, my loan was approved! Thanks to the Family Constitution we initiated early this year, the bank’s loan committee unanimously voted to grant me the loan! I never thought that this one single piece of governance document would have made a huge difference. As a matter of fact, the bank even encouraged me to raise my loan line! Thank you, thank you!”
There is no doubt that creditors, lenders, VC’s and financial institutions are clearly biased towards businesses that are devoted to best practices or whose business and operating model revolve around corporate governance. The Asian and Global financial crisis in 1997 and 2008 revealed severe shortcomings in corporate governance. Quoting an OECD report, “when most needed, existing standards failed to provide the checks and balances that companies need in order to cultivate sound business practices.”
Right after the 2008 debacle, the OECD and several global institutions launched an ambitious action plan to develop a set of recommendations for improvements in priority areas such as remuneration, risk management, board practices and the exercise of shareholder rights. The changes happening now is a result of the global wave of governance standards put in place especially in the most vulnerable sector, the start-up businesses and family-owned enterprises. Hopefully, the collaborative and active intervention efforts will encourage founders of businesses to step up-the plate not just in their profit strategies but in establishing a structure where sound business practices can become the norm.
It is a fact that one of the major hurdles for business owners is the issue of transitioning from an owner mindset (where there is no accountability due to its weak governance structures and systems) to the new model of stewardship management (where governance is clearly articulated, written and there is real compliance of best practices).
Why Creditors love Businesses that practice Governance?
The answers point to a very important ingredient in lending money… the ability to use the fund for the right purpose and the responsibility to pay the creditor-bank on time. Another powerful benefit would be the creation of a higher level of confidence of employees, customers, shareholders and other stakeholders.
Corporate governance structure builds a strong family foundation and banks are naturally receptive in lending capital to a stable enterprise especially when they see solid family agreements like a Shareholders Agreement and a family constitution that captures the following:
- Vision-driven and values-based document that prepares the family and the business for the future
- Aligning the family’s relationship with the business by way of meritocracy
- Defining the family member’s rights and responsibilities including sanctions that merit accountability
- Ownership alignment covering the next generation leaders are well-documented
- Effective plan for ownership including key family leadership role and succession
- A Communication platform to minimize conflict and misunderstanding for active and non-active owners
- The creation of a Family Council to manage Family and personal issues over business matters
Prof Enrique Soriano is a World Bank/IFC Governance Consultant, Senior Advisor of Post and Powell Singapore and the Executive Director of Wong + Bernstein, a research and consulting firm in Asia that serves family businesses, family offices and family foundations.
He is an associate member of the Singapore Institute of Directors (SID) and an advisor to business families worldwide, a sought after governance speakers, and the author of many articles and publications, including two best-selling Family Business books (Ensuring Your Family Business Legacy). To know more about his books, you can email [email protected].