Alerts indicating that a company requires corporate governance

Alerts indicating that a company requires corporate governance

The corporate governance It is a mechanism that allows companies to develop a solid structure, define internal controls and implement best practices to carry out a positive and transparent performance in the administration and its processes.

In Mexico, companies face various obstacles to develop and keep working. According to figures from National Institute of Statistic and Geography (INEGI), the average life expectancy of a business in Mexico is 7.8 years, in the case of small and medium-sized enterprises (SMEs), the situation is even more complex. Data from Advisors to the Board and Senior Management (ACAD) refer that only 12% of family businesses reach the third generation, and additionally, business succession is not always easy.

Some of the most common reasons for the failure of a company, according to the Radiography of Entrepreneurship, prepared by the Association of Entrepreneurs of Mexico (ASEM), are lack of knowledge of the market, poor management, problems between partners, lack of of capital and problems in obtaining financing.

In this way, corporate governance is a mechanism that can help a company set up a solid structure and define a set of controls and practices to carry out a more transparent administration, in addition to avoiding mismanagement.

“Regulating administrative processes and relationships, establishing operating rules and governing bodies is beneficial for all companies, regardless of their size. In the case of SMEs, corporate governance is key, since it can help them define the direction and provide certainty about their operations”, says Guillermo Cruz, president and founder of Asesores de Consejo y Senior Dirección (ACAD).

Likewise, it indicates that although this mechanism is normally seen as exclusive to large companies and consortiums with more than 100 employees, corporate governance is an applicable model for all types of organizations.

“Corporate governance is a model that allows businesses of all sizes and businesses to incorporate best practices, better controls and rules that encourage their development. Through this mechanism, companies can overcome some of the most common problems that lead to failure,” says Dr. Guillermo Cruz.

He adds that implementing corporate governance practices helps prevent the negative impact of a bad organization, as they serve as an action guide to achieve accountability, better decision-making, transparency, stability and define results-oriented strategies. According to ACAD, these are red flags that a company needs to implement best practices:

1) Decisions made by a single person. It is a common practice that the founder of a company is the one who has the main voice, but faced with a single voice and a single way of seeing things, the possibilities of finding solutions are limited.

2) Problems between partners. 25% of companies fail due to problems between partners, according to figures from the Radiography of Entrepreneurship in Mexico 2020. Many times these organizations do not have solid structures that allow the formation of councils for decision-making or problem solving, which which can lead to internal conflicts.

3) Lack of clarity in functions. This can lead to misunderstandings, to a lack of coverage of the functions necessary to operate, to unjustified remuneration or to the lack of an exercise of accountability.

4) Lack of internal controls. These controls make it possible to prevent fraud, mismanagement, improper behavior, among other risks.

5) Lack of planning. Organizations set short, medium and long term goals. These objectives must be defined based on the current situation of the business and its future projections.

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