The small medium enterprise (SME) is fundamentally different to the publicly listed corporation (PLC) and therefore needs a different governance solution.
SME is an accepted term to describe the size of a business in numbers of people or revenue. However, I define an SME as an organisation where there is a big overlap between ownership and leadership. It is rare in a PLC for the owners to be sitting in the boardroom.
In the case of an SME, the owners (shareholders) are in the room, giving the SME the great benefit of having the vision holders in the boardroom. If SME owners design a governance system that harnesses this advantage, they can build truly resilient and valuable businesses.
SMEs are already significant contributors to our economy — around 67 per cent of people are employed in them and they deliver about 56 per cent of Australia’s GDP (ASBFEO, June 2024). They are highly innovative (most businesses start their journey as one). By acknowledging the fundamental differences between SMEs and PLCs, we can create new SME leadership solutions to harness their advantages. Some tend to treat PLCs and SMEs as the same organisational type, applying the same business logic. Hence the need for a new approach.
SME stewardship
“Stewardship” is often more applicable than “governance” for the SME context. Organisational stewardship means seeing a key accountability of your own role as being that the business thrives beyond your tenure. Within an organisation, stewardship encourages a cooperative environment focused on group success. Stewardship is a superset of governance. Ethics, risk management, compliance and administration are key elements of governance. All of these need to be addressed, but stewardship demands a more long-term perspective. Also, the words “control” and “compliance” sometimes don’t sit well with building adaptive organisations that are critical for entrepreneurial and innovative SMEs.
I discovered succession thinking as my solution to solving SME stewardship. Succession thinking provides an approach totally driven by the underserved needs of the owner-leader of an SME. It is important to be clear that succession thinking is different to succession planning. Building your business to be resilient beyond you involves the development and stewarding of new leaders. The earlier succession thinking is applied to a business, the better the outcome for the owner- leader. Succession is enabled by the pursuit of leadership development within an SME context.
Exploring the SME context
At the founding of their business, SME owner- leaders are highly strategic. They have decided to make something from nothing and have often committed material amounts of their own capital to see an idea come to life. They can set strategies to navigate these risks. But as time goes on, their strategic skills might become overwhelmed by the operational demands of the business. This can cause burnout, anxiety, disinterest and relationship issues. Their business might be financially successful, but if they remain central to too many decisions, it can bring feelings of being stuck, overwhelmed and lonely.
This relationship between being the owner and the leader becomes a burden and the business can lose its strategic mojo. The key understanding in the SME context is that the SME owner-leader has all the following roles — owner, director, organisation leader, operations leader and technician. Without the acknowledgement of this fundamental truth, it is difficult to set strategy. If the business does not deliver what the owner wants, what is the point of being in business? Therefore, the starting point is to define the owner’s vision. Without understanding what an owner wants for all the stakeholders of the business, starting with themselves, all strategy is formed in a vacuum. I use the term “vision custodian” to define this sub-role of owner. The vision custodian has all the decision rights on the fundamental destination and guardrails of a business. If SME owners connect with this role, they can build a business that is truly aligned with their values and what they want that business to pursue. When I support the development of owner visions, I use a stakeholder approach. What do you want for yourself, leaders, team members, customers, partners, environment, society, owners and future owners? This manifesto becomes a rich driver for the setting of all subsequent strategy.
Activating the owner’s vision
I’ve found that there is a pattern — or a general case — for the owner’s vision, as follows:
Sustainable dividend returns (and funds for reinvestment)
The business is prepared for sale if the right offer is made
Financial valuation is continually maximised
Critical stakeholders (employees, customers, suppliers) are cared for
Discretionary time is maximised — I am not a victim to the operations of business.
They also have specific things unique to their life situation. However, regardless of which of these they choose or prioritise, an investment in strategies associated with building leadership and culture beyond the owner-leader is critical to success. Given this, the lion’s share of succession thinking is about how to develop leadership and culture beyond the owner-leaders. By doing so the owner-leader maximises the probability of delivering their vision.
Founder/owner/leader of several SMEs, Bill Withers is the author of Succession Thinking: Build a resilient business and deliver sustained value.
This article first appeared under the headline 'Succession thinking for SMEs’ in the September 2024 issue of Company Director magazine.
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