What is governance?
Governance is the role of leading an organisation and management in its day-to-day running or operating. Governance is the job of the governing body, such as a committee or board, to provide direction, leadership and control.
Often seen as the domain of corporate businesses, governance applies to all family businesses. In a family farming situation, the family and business are intertwined, and you may play all the roles (governor, manager, staff); you may need to wear a different hat for different roles.
What is effective governance?
Effective governance ensures the organisation remains viable and thrives, improving its results (both social and financial) and making sure its assets are protected and funds are used appropriately.
Governance gives clarity of direction and purpose, and clearer roles and responsibilities, effectively utilising the skills of the family or team around you.
Improved decision making and being on top of your business builds confidence, engagement and satisfaction, while family or team harmony levels rise. Stress, risk and uncertainty levels decrease.
Poor governance risks
Poor governance can result in risk of commercial failure, financial and legal problems for directors or trustees, or may allow an organisation to lose sight of its purpose and responsibilities to members and the people who benefit from its success.
How does governance lead a business?
Governance must be satisfied the management team is doing its job in accordance with policy and resources.
- Knows the big picture - why you are in business (purpose), and where the business is headed
- Sets the goals, then monitors and reviews performance – making changes at a strategic level when performance is not aligned with goals – ensuring accountability
- Sets clear boundaries of responsibility and accountability
- Ensures a broad range of skills and experience is brought to the table – a mix of creative and big-picture thinking, good decision making and implementation. Independent and impartial thought is encouraged which provides a good environment for people to flourish
- Understands the broader issues the business has to deal with
- Identifies and manages risk and compliance requirements
- Plans the business succession
Governance or management?
The governing body's role is to oversee management, not to manage. Governance decisions should provide guidelines for management to implement.
In smaller organisations it can be a challenge to separate issues of strategic governance from day-to-day management because there might not be many staff or members so people perform multiple roles. However, as an organisation develops and grows, the distinction becomes increasingly important.
Governance refers to oversight and decision-making related to strategic direction, financial planning, and bylaws - the set of core policies that outline the organisation's purpose, values, and structure.
Management is typically the job of a management or executive team, led by a co-ordinator or chief executive and his or her staff and volunteers.
Doing the right things
Taking an overview of the business
Doing things right
Ensuring things are implemented well
Discerning the purpose, vision and strategy of the business
Given the strategy, what needs to be done to deliver that strategy
Where are we heading?
Where are we now?
What will we do to get there?
Are we on track?
How well are we delivering?
DairyNZ's governance findings in dairy farming businesses
We found many dairy farming businesses were already practicing good governance, but generally informally and in small doses. Businesses were at different stages of development.
Often in an early stage of development or businesses with low debt, smaller businesses may have quite formal processes:
- Governors are often a sole operator or a farming couple
- Little formality around written plans, reporting, monitoring and benchmarking.
As businesses grow and more people become involved, governance needs to address more complex issues:
- Progressing from husband and wife to an annual meeting with key advisors and a regular family meeting, or even further to advisory or formal boards
- Reporting and benchmarking requirements increasd
- Agreements become more formalised.
Where are you on the governance journey?
As your business grows and more people become reliant upon that business, the governance requirements will change.
This means skills changes for you and others in the governance group, as well as changes to the formality of how you do things and involve other people in your business. The earlier these habits are learned and the more they are practised, the better the businesses will perform and grow.
Answer ten questions to understand where your business governance currently stands and determine the next possible steps and focus areas. All options presented come from what is actually happening in New Zealand dairy farming businesses.
Complete the governance journey self assessment.
Six ways to enhance your business governance
These six practical things, easily introduced into a business, will improve your business governance.
1. Act with a purpose in mind - determining purpose
Governors need to spend time determining the business vision, purpose and strategy. What is the purpose of this business? What are you trying to achieve? It is important to have extreme clarity about this and allowing governance decisions and actions to align with the purpose, vision and strategy.
Make time to think and plan for the future, to ensures today's actions lead to the outcomes and results you want in the longer term.
2. Hold effective governance meetings - effective governance culture
Many businesses already have an annual calendar of events outlining farming activities that occur throughout the year and hold meetings focusing on mainly management and operational. To hold a sustained pattern for effective governance meetings utilise agendas, meeting calendars, minute taking and discuss expectations and how to run time efficient meetings.
Holding an annual meeting with your key advisors to discuss strategy and performance is an excellent method of harnessing the knowledge and skill set of those who support your business. These meetings should provide insight into possible business improvement while also providing key advisors the opportunity to learn more about the business. They can use this time to think on a strategic rather than management or operational level.
3. Work with other people - effective governance culture
This practice is based around achieving thoughtful challenging and non-personal debate to get consensus without groupthink. Seek a range of skill sets around the table establish the roles and responsibilities members have and the values that describe how the governance group or board behaves.
4. Make right decisions - effective governance culture
Making good governance decisions requires a balance between prudent stewardship, creativity and stable but not static systems of policies and parameters. Examples of areas where policies and parameters are used in decision making include capital expenditure, investment and borrowing policies, checklists and due diligence for investments, processes for getting board approval or areas of delegated authority.
A governing group needs to continually evaluate the skill set of the team to ensure a range of attributes are covered.
Each business needs a:
- Big picture and new opportunities person
- Great decision maker
- People person
One person may provide one or two of these attributes but is unlikely to provide three or four. Who provides these skills for your business?
5. Know what’s going on and what to do about it - holding to account
Governance has the role of taking responsibility for achieving the predetermined purpose of the business. This is done by knowing what is going on and appropriately holding those responsible to account. Developing a reporting calendar and identify a small number of key performance indicators which allow governors to monitor and evaluate business performance. One example is simply completing an annual budget and cashflow and monitoring this monthly. This is a basic core discipline of business yet so few do this with purpose.
6. Manage risk effectively - effective compliance
This area deals with proactively minimising the likelihood and severity of future events that could negatively affect the business and bringing grounded confidence.
Risk management would include areas such as:
- addressing the new environmental challenges and conditions our industry is facing
- effluent compliance
- health and safety policies
- financial policies, e.g. for debt levels and managing fixed and floating mortgages
- planning for the replacement of the key people in your business – often that is you. Set up A Guide to the Living, a file where you put everything needed for your family should you depart life. This is a really practical idea, and something we each should have.
The Governance framework used in DairyNZ's Farm Business Governance programme.
This is a guide for people considering a position on the board or advisory board of a farming company.
Keen to develop your governance skills and apply that knowledge to your own business, industry or community?