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Chathura Ganegoda (BSc (USJP), MCIM (UK), MBA(UOC))

In the vibrant world of local business, some companies rise to prominence, becoming integral parts of their communities. However, beneath their success lies a hidden danger: neglecting the basics like governance and administration. While these might seem unimportant, ignoring them can lead to a company’s downfall. This article explores how overlooking governance and administration can foster unethical behavior and threaten a business’s future. It also offers practical advice to help companies avoid these pitfalls while maintaining their ethical standards.

Understanding the Importance of Governance and Administration

When local businesses start, there’s usually an understanding of how important governance and administration are. Smart leaders know that clear rules, efficient processes, and good management are vital for long-term success. So, they invest in setting up these structures, recognizing them as essential for stability.

Establishing governance and administration protocols isn’t just about following rules; it’s about creating a framework that guides decision-making, ensures accountability, and promotes transparency. For example, having clear policies for financial management helps prevent fraud and mismanagement, while well-defined operational processes streamline workflow and improve productivity.

The Dangers of Complacency

However, as time goes on, some leaders start to see governance and administration as unnecessary hassles. They forget how crucial these systems are for maintaining the company’s integrity. This can lead to neglect and a focus on short-term cost-cutting over long-term sustainability.

Complacency can set in when businesses experience prolonged periods of success. Leaders may become overconfident in their abilities and start taking shortcuts or overlooking warning signs. They might prioritize immediate gains over long-term stability, failing to recognize the importance of investing in governance and administration.

Enabling Unethical Behavior

When governance and administration are weak, it creates an environment where unethical behavior can thrive. Employees might see rules as obstacles and try to bypass them by going directly to top management for approval. Since leaders’ decisions often go unquestioned, this provides opportunities for misconduct.

Unchecked unethical behavior can have serious consequences for a business, including damage to its reputation, legal liabilities, and loss of customer trust. For instance, if employees feel they can manipulate the system or engage in unethical practices without consequences, it can erode the company’s values and undermine its long-term success.

Learning from Multinational Companies

Multinational corporations offer valuable lessons in governance and administration that local businesses can learn from:

• Clear Governance Structures: Multinationals often have well-defined structures for decision-making and accountability. Local businesses can follow suit by establishing clear reporting lines and accountability mechanisms.

• Ethical Leadership: Multinationals prioritize ethical behavior across all levels. By promoting honesty and transparency, local businesses can build trust with employees and customers.

• Investment in Talent: Multinationals invest in developing their workforce. Local businesses can do the same by providing training and support for their employees.

• Adaptability and Innovation: Multinationals are adept at navigating change. Local businesses can learn to embrace change and stay ahead of the competition.

The Importance of Corporate Audits

In addition to learning from multinational companies, local businesses must prioritize comprehensive audits. Audits help identify weaknesses, ensure compliance, and detect fraud. By conducting regular audits, companies can improve their operations and reduce risks.

Audits should cover all departments and processes within the organization. This provides a holistic view of the business and helps leaders identify areas for improvement.

Breaking the Cycle

To avoid the pitfalls of neglecting governance and administration, companies must:

• Promote Ethical Behavior: Foster a culture of integrity and accountability where unethical behavior is not tolerated.

• Strengthen Governance Structures: Regularly review and update policies and procedures to ensure they are effective and transparent.

• Empower Administrative Functions: Support administrative staff and ensure they have the resources they need to do their jobs effectively.

• Promote Transparency: Encourage open communication and accountability at all levels of the organization.

Advice to Top Management

For top management who encourage employees to approach them for approvals by bypassing processes and hierarchy, it’s important to recognize the risks involved. While it may seem efficient in the short term, such practices erode the integrity of governance structures and foster a culture of favoritism and non-compliance.

Instead, top management should reinforce the importance of following established processes and hierarchies. They should lead by example, demonstrating a commitment to transparency, accountability, and ethical conduct. By upholding these principles, they can foster a culture where rules are respected, decisions are made thoughtfully, and employees feel empowered to voice concerns without fear of reprisal.

Role of HR Department

The HR department plays a crucial role in ensuring the effectiveness of governance and administration within an organization. Here’s how:

• Policy Implementation: The HR department is responsible for implementing and enforcing company policies related to employee conduct, ethics, and compliance. They ensure that employees are aware of these policies and provide training to promote understanding and adherence.

• Recruitment and Hiring: HR plays a vital role in hiring employees who align with the company’s values and ethics. By conducting thorough background checks and screening processes, HR helps mitigate the risk of hiring individuals prone to unethical behavior.

• Training and Development: HR facilitates training programs to educate employees about the importance of governance, compliance, and ethical conduct. They provide ongoing development opportunities to enhance employees’ skills and promote a culture of integrity.

• Conflict Resolution: In cases of misconduct or ethical violations, HR serves as a mediator to address conflicts and grievances. They investigate allegations of misconduct impartially and take appropriate disciplinary action when necessary.

• Employee Engagement: HR fosters a positive work environment where employees feel valued, respected, and motivated to uphold ethical standards. They promote open communication, feedback mechanisms, and recognition programs to encourage employee engagement and commitment.

Role of Finance Department

The finance department is integral to governance and administration as it ensures transparency, accountability, and financial integrity. Here’s how the finance department contributes:

• Financial Reporting: The finance department prepares accurate and timely financial reports that provide stakeholders with insights into the company’s financial health and performance. Transparent financial reporting enhances trust and confidence among investors, creditors, and other stakeholders.

• Internal Controls: Finance establishes and maintains internal controls to safeguard assets, prevent fraud, and ensure compliance with laws and regulations. Internal controls include segregation of duties, authorization procedures, and regular audits to detect and prevent financial irregularities.

• Risk Management: Finance assesses and manages financial risks to protect the company’s assets and reputation. This involves identifying potential risks, implementing risk mitigation strategies, and monitoring risk exposure to minimize adverse impacts on the organization.

• Compliance and Governance: Finance ensures compliance with financial regulations, accounting standards, and corporate governance principles. They work closely with auditors and regulatory authorities to maintain regulatory compliance and uphold ethical standards in financial reporting and disclosure.

Role of Supply Chain Function

The supply chain function assumes a crucial role in ensuring the seamless flow of goods and services from suppliers to customers. Here’s how it contributes to governance and administration within an organization:

• Supplier Management: The supply chain function oversees the selection, qualification, and management of suppliers. By establishing clear criteria for supplier evaluation and performance monitoring, supply chain professionals ensure that suppliers adhere to ethical standards and compliance requirements.

• Contract Management: Supply chain professionals negotiate and manage contracts with suppliers to ensure favorable terms and conditions while mitigating risks. They ensure that contracts are legally sound, enforceable, and aligned with the organization’s goals and values.

• Inventory Control: Supply chain professionals manage inventory levels to optimize working capital and minimize carrying costs. By implementing inventory control measures and demand forecasting techniques, they ensure the availability of products while minimizing excess inventory and obsolescence.

• Logistics and Distribution: The supply chain function is responsible for the efficient movement of goods from production facilities to distribution centers and ultimately to customers. They optimize transportation routes, manage warehousing operations, and coordinate logistics activities to ensure timely delivery and customer satisfaction.

• Risk Management: Supply chain professionals identify and mitigate risks within the supply chain, such as supplier disruptions, transportation delays, or quality issues. They develop contingency plans and risk mitigation strategies to minimize the impact of potential disruptions on the organization’s operations and reputation.

Role of Sales and Marketing Function

The sales and marketing function is critical for driving revenue growth and market expansion. Here’s how it contributes to governance and administration within an organization:

• Customer Relationship Management: Sales and marketing professionals interact directly with customers, representing the organization’s brand and values. They build and maintain strong relationships with customers, ensuring satisfaction and loyalty while upholding ethical standards in sales and marketing practices.

• Compliance with Regulations: Sales and marketing professionals ensure compliance with laws and regulations governing advertising, promotions, and sales practices. They review marketing materials, sales contracts, and promotional campaigns to ensure they adhere to legal requirements and industry standards.

• Sales Forecasting and Planning: Sales professionals forecast sales volumes and revenue projections to support business planning and resource allocation. They collaborate with other functions, such as operations and finance, to ensure alignment between sales targets and operational capabilities.

• Brand Management: Sales and marketing professionals are custodians of the organization’s brand and reputation. They develop and execute brand-building initiatives, ensure consistency in messaging and branding across channels, and protect the brand’s integrity through ethical marketing practices.

Role of Legal Function

The legal function plays a critical role in ensuring legal compliance, managing risks, and protecting the organization’s interests. Here’s how it contributes to governance and administration within an organization:

• Legal Compliance: The legal function ensures that the organization complies with applicable laws, regulations, and industry standards. They monitor legal developments, interpret regulatory requirements, and advise management on compliance obligations and best practices.

• Contract Drafting and Review: Legal professionals draft, review, and negotiate contracts with customers, suppliers, and business partners. They ensure that contracts accurately reflect the parties’ intentions, protect the organization’s interests, and mitigate legal risks.

• Dispute Resolution: The legal function manages legal disputes and litigation on behalf of the organization. They assess the merits of claims, develop legal strategies, and represent the organization in negotiations, mediation, arbitration, or court proceedings.

• Corporate Governance: The legal function supports the organization’s governance structure and processes, including board governance, shareholder relations, and regulatory compliance. They ensure compliance with corporate governance principles, facilitate board meetings, and maintain corporate records and filings.

CEO’s Role in Fostering a Governance-Biased Culture: Leading the Way in Leadership Meetings

The role of the CEO in leadership meetings to foster a process and governance-biased culture is pivotal.

• Setting the Tone: CEO sets the tone for the entire organization, including its approach to governance and adherence to processes. In leadership meetings, the CEO should emphasize the importance of following established protocols, upholding ethical standards, and prioritizing governance.

• Emphasizing Accountability: CEO should underscore the importance of accountability at all levels of the organization. In leadership meetings, discussions should revolve around holding individuals and teams accountable for their actions, decisions, and adherence to processes.

• Promoting Transparency: Transparency is key to fostering a governance-biased culture. The CEO should encourage open and honest communication in leadership meetings, ensuring that information flows freely and decisions are made transparently.

• Aligning Goals and Objectives: CEO plays a crucial role in aligning the goals and objectives of the organization with its governance and process frameworks. In leadership meetings, the CEO should ensure that discussions and decisions are in line with the organization’s overall strategic direction and adherence to governance principles.

• Leading by Example: As the leader of the organization, the CEO must lead by example when it comes to following processes and adhering to governance standards. In leadership meetings, the CEO should demonstrate a commitment to governance and process excellence in their own actions and decisions.

• Providing Resources and Support: CEO should ensure that the necessary resources and support are provided to enable teams to follow processes effectively. This may include investing in training and development, implementing robust systems and tools, and fostering a culture of continuous improvement.

• Encouraging Feedback and Improvement: CEO should create an environment where feedback is welcomed and used constructively to drive improvement. In leadership meetings, there should be opportunities for discussion and reflection on governance and process-related issues, with a focus on identifying areas for enhancement.

• Monitoring and Evaluation: The CEO has a responsibility to monitor the organization’s adherence to governance and process standards and evaluate its effectiveness.

In leadership meetings, the CEO should review performance metrics, compliance reports, and audit findings to assess the organization’s governance maturity and identify areas for improvement.

Conclusion

In conclusion, the intricate interplay of governance and administration within local businesses is pivotal for their sustained success and resilience. Neglecting these fundamental aspects can pave the path to downfall, as evidenced by the erosion of ethical standards, compromised integrity, and increased vulnerability to risks.

By understanding the importance of governance and administration, local businesses can fortify their foundations and cultivate a culture of transparency, accountability, and ethical conduct. Learning from multinational corporations provides invaluable insights into establishing clear governance structures, nurturing ethical leadership, investing in talent, and embracing adaptability and innovation.

Moreover, prioritizing comprehensive audits, empowering administrative functions, promoting transparency, and fostering ethical behavior are essential steps in breaking the cycle of neglect and steering businesses towards long-term viability and prosperity.

As each department and function within an organization plays a crucial role in governance and administration, recognizing their contributions and working collaboratively to uphold ethical standards is paramount. By harnessing the collective efforts of HR, finance, supply chain, sales and marketing, legal, and other functions, businesses can navigate challenges, mitigate risks, and ensure their enduring success in an ever-evolving landscape.

In essence, by embracing the principles of good governance and effective administration, local businesses can not only withstand the tests of time but also emerge stronger, more resilient, and better equipped to seize opportunities and thrive in the dynamic marketplace.

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