Poor handling of issues of ownership, governance and management can kill a social economy business, no matter how good the business idea or business plan may be. Yet, if handled effectively, they can add real value to the business and contribute significantly to its success.

The majority of social economy businesses start small, often with fewer than five employees. In the private sector such businesses may be owned and managed by one person, or perhaps operate as a partnership.

But in the social economy sector it is not unusual for such a business, structured as a company limited by guarantee, to have a board of anything from 10 to 20 people, as well as one or more managers who are usually not board members.

The company then also has members (equivalent to shareholders) who may be the ‘parent company’, which itself can have up to or even over 20 directors, some of whom may also be directors of the business.

Such a potentially confusing and cumbersome structure can often lead to real difficulties, particularly with decision making, and can subsequently leave all concerned feeling frustrated and the business struggling.

Problems

Not getting the ‘right mix’ between the company members, directors and managers can in our experience lead to a number of difficulties, including the following:

Poor decision making

Businesses are making operational decisions all the time; they need to be the right decisions and often need to be made quickly yet with considerable thought. If managers need to consult with board directors, or even members, before making such operational decisions, it may be too late. Also, even when there is opportunity for discussion at board level, there may be limited time for adequate discussion or even explanation, and the decision may not be the right one.

Ineffective accountability

Managers are accountable to the board directors, and ultimately the directors are accountable to the members, who ‘own’ the company. Often, because everyone is trying to manage the company, such accountability is missed and as a result the focus on achieving the business targets is blurred.

Inappropriate interference

It is the directors who are legally responsible for company decisions, so it is inappropriate for members who are not directors to interfere in board decisions, even more so when individual members attempt to directly influence staff management decisions. Similarly, it can be inappropriate for the board to become involved in operational management issues, particularly when individual directors get directly involved. Apart from being inappropriate, such interference may cause confusion both within the company and with external stakeholders such as suppliers or clients.

Inadequate strategic direction

Another negative by-product of directors and members becoming engaged in operational management matters can be the neglect of strategic direction. Business strategy is critical to a company’s success; this is the core business of the directors and to some extent the members. The easiest way to lose strategic focus is to become involved in operational management, and if the strategy is wrong there soon won’t be any business left to manage!

Discouragement and poor performance

Perhaps the most subtle, yet dangerous, result of confusion about membership, governance and management is that everyone can become discouraged, feeling that they are not ‘given their place’ or don’t appear to have ‘a role to play’. When this then results in poor business performance, people can start blaming each other, leading to further deterioration in relationships. At its worst, you will end up losing the skills and experience of directors and/or managers and the potential benefit these can be to the business.

Suggestions

Effective governance and management are not an exact science and often depend on qualitative factors such as the characteristics and commitment of the people involved and the nature of the business being managed. However, based on our own experience to date, we would make the following suggestions:

Be clear about structures and associated roles

This is perhaps the most important lesson of all; confusion about roles almost always leads to poor business performance. Broadly speaking, there are three clear roles within a company structure (limited by guarantee), taken on by the members, the directors, and management.  

There will always be some blurred lines between these roles, but within each company there need to be clarity about roles and a commitment for each to focus on their respective role.  Within the businesses in which we are involved, we have found the following allocation of roles helpful:

Members: Members ‘own’ the company, and are responsible for appointing directors to run the business on their behalf. Their primary focus should be on company performance, for which they hold the directors (and managers) to account.

Members should also have an interest in company strategy, although they do not set this. If they are unhappy with business performance or strategy they can make this clear to the directors, and while they cannot directly interfere in changing these themselves they have the ultimate sanction of replacing the directors with others who they think will get the strategy and performance right.

Directors: Directors are legally responsible for company decisions and while they may delegate much of this decision making to management they cannot delegate their legal responsible and therefore need to ensure that they have processes in place to ensure that managers are taking operational procedures in keeping with the wishes of the directors.

With limited time, and once they are confident that effective management processes are in place, directors should focus on strategy, alongside holding management to account for performance.

Management: Managers are there to manage the business to achieve performance targets within the strategic direction and operational processes set by the board, and hopefully agreed by the members.  They will contribute to board discussion on strategy and processes, but once they are agreed the management focus is on implementation to meet performance targets (and of course feeding back to the board information that will challenge and help refine the strategy).

Ensure that everyone has a clear role to play

As well a clarifying roles within the company it is also important to ensure that everyone has a role to play and that opportunity is given for that to happen.

While the structure of a limited company for a small business may appear cumbersome compared to the sole trader model, a big advantage is that you have professional and business skills that many small businesses could never dream of accessing. Someone without a role will soon either lose interest and drift off, or else become involved inappropriately in matters which do not concern them.

Ensure everyone has opportunity to add value

If something, or someone, is not adding value to the business, what are they doing there? Managers, directors, and even members to some extent, should be asking the question ‘What value am I adding to the business?’.  If the answer is nothing, or not much, then do something about it.

Keep everyone focused on business goals (including social ones)

Members, directors and managers should all be focused on the business goals. Are they the right goals? Are we achieving them? Can we improve on them? Such a focus at management meetings, board meetings and annual general meetings will be the best antidote to wasting time on inappropriate or irrelevant matters.

Do not assume that directors only have a role at board meetings

While individual directors need to be careful not to interfere directly in operational management, managers should learn to make good use of the wide range of skills and experience that voluntary directors bring to the business.

Often the best way to do so is to meet from time to time with individual directors to discuss matters on which they have a particular contribution to make, which will often lead to more effective implementation of board decisions or better recommendations coming back to the board for agreement.

Work on building positive relationships

Clarity and focus are critical, but it is also important to work on relationships. A business in which there are strong relationships founded on trust and confidence will often get everything else right anyway, while on the other hand, if relationships break down, then all the strategy and planning in the world won’t lead to success.

Keep learning

Effective management and governance, like everything else in life, are areas where we can always do better, so we should keep asking ourselves where we can improve, and remain open to learning from our own experience and that of others.