Governance and startups: why legal risk management is a growth opportunity

Mention legal risk to an SME business owner and you can literally see them cringe. While the perceived challenge of legal and compliance issues can seem overwhelming for a business owner, it is the unseen legal risks that can rapidly destroy a business.

Often those risks come from where you least expect them – your own shareholders and team. With risk management being a critical part of effective governance, legal risk should be a key focus area for any SME.

According to my colleague and High Court attorney Eugene Botha, “shareholders tend to wind up companies faster than creditors do”.

This is due to the core foundation of the business – the shareholders’ agreement – not being in place or not being adequate to deal with disagreements between or changes to shareholders. Once a dispute occurs, without a reference point to manage it, the only option quickly becomes to wind up the company altogether – a decision driven all too often by emotion and not by logic.

This is even more critical in the case of SMEs founded by spouses, friends, family or associates where the tough conversations that should occur early in the life of the business do not happen. If relationships sour there is no reference point to guide parties forward. Even a successful business can quickly deteriorate from protracted legal or personal battles between owners.

Another key risk faced by SMEs, especially when their team is small, is from employees. Entrepreneurs tend to invest a lot of their knowledge and experience in their team, often without the requisite contracts and agreements in place to define the performance agreement and secure trade secrets and confidential information. Two scenarios result from this – the inability to manage the performance of an employee or the huge loss suffered when a key employee is head hunted by a competitor.

Yet behind the risk posed by shareholders and employees lies an even greater challenge for SMEs – the compliance to a vast number of Acts and legislation the business owner might not even be aware of.

Whereas large corporates employ compliance officers at great expense to ensure that all legalisation and regulations are addressed, the SME often does not have the resources or expertise to do so. Directors on the board of an SME are therefore required to take the lead in guiding management and ensuring compliance and governance principles are implemented.

While SMEs may experience barriers to compliance, ignoring the issue does not in any way reduce the risk. “SMEs walk a tightrope of risk,” adds Botha, “Even though most entrepreneurs are risk takers, the key is to manage the risks appropriately.

Sticking your head in the ground and ignoring the risks is not the same as taking calculated risks. A legal partner that can assist with risk assessments and risk management is crucial if the entrepreneur wishes to reach the summit of business success.”

This means that SMEs have to accept that the same ground rules of business apply to them as well. Investing in quality, SME-focused, legal advice within the framework of a governance system could be the difference between success and failure.

Finding the right legal partner and proactively addressing the specific legal risks of a business should become a strategic opportunity for growth and not the frequently perceived grudge purchase made too late.

Image: SMLP.co.uk via Flickr.