Corporate governance is not just for listed companies
When a Spanish company hears "corporate governance", the immediate association is typically with the IBEX 35, the CNMV, large listed companies' annual reports and the Code of Good Governance. The reality is that good governance principles are universally applicable, and SMEs that ignore them pay a price they rarely recognise as such.
The cost of poor corporate governance in an SME manifests differently from that of a large company: shareholder conflicts that end in court, managers operating without oversight, strategic decisions made without sufficient information, families fractured by business disagreements and founders who do not know how to exit or transfer the business.
This guide adapts corporate governance principles to the reality of Spanish SMEs: from the family sociedad limitada to the company in the process of institutionalisation ahead of an investment round or a sale.
Why corporate governance matters for SMEs today
Access to financing
Banks and venture capital firms increasingly evaluate the corporate governance of the companies they finance. A company with a functioning board, audited accounts and a solid shareholders agreement accesses significantly better financing terms than an opaque company governed by a sole director with no control mechanisms.
For SMEs seeking European funds, public sector grants or contracts with large corporations, good governance requirements are increasingly explicit.
Preparation for growth
A well-governed company is a company prepared to grow. When a potential investor arrives — whether a private equity fund, a strategic buyer or an industrial partner — the corporate governance due diligence can be the difference between closing the transaction and not. Investors pay premiums for companies with clear governance, documented decisions and identified risks.
Conflict management
Shareholder conflicts are the primary cause of value destruction in medium-sized and family businesses. Corporate governance does not eliminate conflicts — which are inevitable when there are several people with different interests — but provides the mechanisms to resolve them before they reach the courts. A well-drafted shareholders agreement with exit and dispute resolution clauses can save the company years of litigation and millions in legal fees.
Practical governance framework for an SL
Level 1: The minimum foundation
A well-run SL should have, at minimum:
Updated articles of association. The articles at the time of incorporation typically reflect a standard model that does not reflect the shareholders’ actual agreement. Updating the articles to reflect the desired quorum for resolutions, restrictions on share transfers and rules for the functioning of the management body is the first step of corporate governance.
Shareholders agreement. The shareholders agreement is the most important corporate governance document in a private company. Unlike the articles — which are public and registered at the Registro Mercantil — the shareholders agreement is a private and confidential contract between shareholders that can regulate all aspects of their relationship: dividend policy, enhanced voting rights, exit mechanisms, non-competition, dispute resolution.
Updated minutes book. The minutes book of the general meeting and, if there is a board, of the board of directors, is the institutional memory of the company. Keeping it up to date, with real rather than formulaic minutes, is the most basic and most frequently neglected governance practice.
Level 2: Institutionalisation
When the company grows, a new shareholder joins or it prepares for a corporate transaction, corporate governance must evolve:
Board of directors with external directors. Incorporating external directors — independent or investor-proposed — brings external perspective, enriches deliberation and provides a mechanism for supervising executive management.
Written policies and procedures. Policies for approving expenditure and investments, for related-party transactions, for conflict of interest management and for shareholder reporting do not require the complexity of large corporations, but they do require a written document that establishes the rules of the game.
Quality financial information. Regular preparation and review of financial information — ideally with external audit — is the governance practice with the greatest impact on the confidence of financiers and investors.
Level 3: Preparation for investment or sale
If the company is preparing for an investment round, a sale or a listing, the level of corporate governance required is close to that of a listed company:
- Board with majority of external directors and delegated committees.
- External audit by recognised firms.
- Documented legal and tax compliance.
- Management information with clear and comparable metrics.
- Shareholders agreement with drag-along, ROFR (right of first refusal) and anti-dilution clauses.
The shareholders agreement: the backbone of SME governance
The shareholders agreement is the most important corporate governance document in a private company. Its content must be adapted to each company’s situation, but the basic clauses that should always be included are:
Company governance
- Board composition and appointment: number of members, who proposes each one, term and grounds for removal.
- Matters reserved for the general meeting: what decisions require meeting approval with a supermajority (sale of significant assets, debt beyond a certain threshold, budget approval).
- Information rights: how frequently and in what format management reports to shareholders.
Dividend policy
A clear dividend policy avoids recurring conflicts between shareholders with different liquidity needs. It can set a minimum percentage of net profit to distribute, an adjustment mechanism based on investment needs or a full reinvestment policy with pre-emption rights.
Share transfers
- Right of first refusal (ROFR): no shareholder may sell to a third party without first offering the shares to the remaining shareholders on the same terms.
- Tag-along right: if a majority shareholder sells, minority shareholders have the right to sell on the same terms.
- Drag-along right: if the majority shareholder sells, they can require minority shareholders to sell on the same terms, to avoid blocking a full sale of the company.
Exit mechanisms in case of disagreement
Exit clauses are the equivalent of divorce in marriage: nobody wants to use them, but their existence makes the shareholder relationship more stable, because each party knows what happens if the relationship breaks down.
- Shotgun clause (forced buy-sell): a shareholder can offer to buy the other’s shares at price X; the other shareholder can accept to sell or buy the first party’s shares at the same price X. This mechanism incentivises the offered price to be fair.
- Put and call options: rights to buy and sell at pre-determined or determinable prices (EBITDA multiple) that are triggered by certain events (breach of the agreement, death, incapacity).
The basic family protocol
For family businesses, the shareholders agreement should be complemented by a family protocol that regulates the relationship between the family and the business.
The family protocol is a broader document than the shareholders agreement. While the agreement regulates the legal relationships between shareholders, the protocol addresses the family’s shared values, rules for employing family members, dividend and reinvestment policy in the family context, management of non-business family assets, and succession principles.
For small businesses, a brief family protocol that answers four questions is sufficient:
- Which family members can work in the business and under what conditions?
- How are strategic decisions made when family members have different interests?
- How is the dividend split and what is reinvested?
- Who succeeds the founder in management and ownership, and how?
Risk management at SME scale
Risk management does not require the complexity of large corporate systems. A simple risk map — the five to ten most relevant risks to the company with estimated probability and impact — is sufficient to:
- Guide insurance and coverage decisions.
- Identify priority internal controls.
- Inform the board about principal risks and their evolution.
- Meet the diligence expectations of investors and financial institutions.
The most frequent risks in Spanish SMEs include: customer or supplier concentration, founder dependency, technological obsolescence, sector regulatory risk and liquidity risk.
Conclusion: corporate governance is an investment, not a cost
Well-implemented corporate governance in an SME does not cost money — it generates value. It reduces the cost of capital, facilitates access to investors, prevents costly conflicts and increases the likelihood of success in succession or sale.
At BMC we accompany SMEs in designing and implementing their corporate governance framework, adapted to their size, sector and stage of development: from the basic shareholders agreement to preparation for an institutional investment round.
