How pacesetting can help SME board members drive sustainable growth

Board governance in small and medium enterprises (SMEs) in India has been evolving over the years, driven by regulatory changes, changing business dynamics, and a growing emphasis on corporate governance. While there is significant heterogeneity in governance practices across India, there are many common trends.

Many SMEs, particularly family-owned or closely held enterprises, have limited formalisation of board structures and governance processes. Boards in such SMEs mostly consist of family members and are primarily focused on operational matters rather than strategic governance.

The regulatory environment for corporate governance has been evolving with the introduction of the Companies Act, 2013, and subsequent amendments. These regulations apply to both listed and unlisted companies, impacting most limited liability companies. SMEs are required to comply with various governance provisions, such as the appointment of directors and proper auditors.

A common challenge in SME board governance is the limited presence of independent directors. Independent directors are crucial for providing unbiased guidance and oversight. In many SMEs, boards may lack sufficient independent voices, leading to conflicts of interest.

Pacesetting board members for governance roles is a good idea to take on by SME owners. It involves setting high standards for governance, leadership, and performance to guide the company towards its strategic objectives. Effective board members play a crucial role in shaping the direction of a company, ensuring its sustainability, and maintaining ethical practices.

Here are some best practices for pacesetting board members, along with a few real-life examples:

Strategic alignment

Ensure that board members are aligned with the company’s long-term strategic goals and objectives. The only trouble is that SME owners do not put in place a strategic vision for the enterprise. Even then, it is best to use the board members to develop one together. Regularly review and update the company’s strategy to adapt to changing market conditions.

Learn from the Tata succession planning post-Cyrus imbroglio. Tata Sons appointed N Chandrasekaran, who was not connected with the family, as the chairman. Under his leadership, Tata Group has focused on streamlining operations, divesting non-core businesses, and consolidating its presence in key sectors, aligning with the company’s long-term strategic vision.

Uphold the highest ethical standards and help in promoting a culture of transparency and integrity within the organisation. A lesson here comes from the Volkswagen emissions scandal, which serves as a stark reminder of the importance of ethical leadership. Board members and executives faced legal consequences for their involvement in the manipulation of emissions data. Ethical lapses can have severe repercussions on an organisation’s reputation and finances. There have been many such cases in India too, from Adani to Satyam.

Diverse and inclusive board composition

Appoint a diverse board that represents a variety of backgrounds, experiences, and perspectives. Inclusivity imbibes far better decision-making and innovation capabilities. Learn from Infosys, where, under the leadership of NR Narayana Murthy, it has consistently emphasised diversity in its board composition. The company’s commitment to gender diversity and inclusion has been recognised globally. Remember, Infosys started as an SME?

Risk management and compliance

Ensure that board members are well-versed in risk management and compliance matters. Regularly assess and mitigate risks to protect the company’s interests. A good lesson comes from Boeing, which faced significant challenges following the 737 MAX crisis. Inadequate risk assessment and compliance oversight resulted in safety issues and financial setbacks. A pacesetting board should prioritise risk management.

Continuous learning and development

Board members should engage in continuous learning to stay updated on industry trends, emerging technologies, and best governance practices in India as well as across the world. Many Indian companies have demonstrated a commitment to continuous learning and adaptation. These companies have ventured into new sectors that are diversified from their core business.

Active engagement

Board members should actively engage with company leaders and senior management, ask critical questions, and provide guidance and mentorship. For instance, Apple’s board has been actively involved in shaping the company’s products and business strategies. Their engagement has contributed to Apple’s ongoing success and innovation.

Stakeholder communication

Build open communication with all stakeholders, including employees, shareholders, customers, suppliers, and the community, to build goodwill, trust, and engagement, and maintain transparency. The board of ITC, led by late YC Deveshwar, focused on sustainable business practices and stakeholder engagement. He was a visionary to steer the tobacco company towards hotels, food, and agriculture. ITC’s initiatives in social and environmental responsibility have earned it recognition and trust among stakeholders.

Succession planning

Implement a workable succession planning process for key leadership positions, including the board positions, to ensure continuity and stability. Microsoft, under the leadership of Bill Gates and later Satya Nadella, has demonstrated successful succession planning. The company’s smooth transition of leadership has contributed to its resilience and adaptability.

Pacesetting for board members requires a commitment to excellence, adaptability, and ethical conduct. SME leaders can set a high standard of governance and leadership that drives long-term success and sustainability.