Corporate Governance in SMEs

Corporate governance is defined as the system by which companies are directed and controlled. In other words, corporate governance refers to internal disciplines or systems, which govern the relationships among 'key players' or entities that are instrumental in the performance of the organization.

Sound corporate governance is an important element of sustainable private sector development – not only because it improves business performance and strengthens businesses’ ability to attract investment and to grow, but because it also makes them more sustainable and accountable.

The guidelines of corporate governance aim to achieve greater transparency, fairness and hold executive management of the organization accountable to shareholders. In doing so, corporate governance plays a pivotal role in protecting shareholders and, in the meantime, duly considers the interest of the organization at large without prejudice to employees' rights. Whilst executive management should have reasonable level of power to run the business, corporate governance ensures that such powers are set to practical dimensions in order to minimize misuse of authority to serve objectives not necessarily in the best interest of the shareholders. Therefore, it provides a framework for maximizing profits, promoting investment opportunities and eventually creating more jobs.

The misconception about SME's stems its roots from the size and contribution of this segment to the economy. The reality is, today, SMEs may appear small in size but likely many of them have potentials to grow and become big entities in future. Sadly, this prophecy is still not well realized and as a result, implementation of good corporate governance practices continues to be ignored.

Implementing corporate governance framework for SMEs entails the following:

  • Separate ownership from management duties and specify clear roles and responsibilities for business owners, partners and other stakeholders.
  • Create a balanced board and invite non-executive directors who would add value to the board (replace the board of director with an advisory board for companies that are not legally required to establish a board of director). Non-executive directors play an important role in ensuring integrity of the financial data provided to the board and to protecting shareholders' interest. They also exercise control over executive management and reduce the risks arising from poor management practices or gross negligence.
  • Introduce Code of Business Conduct.
  • Raise corporate culture with a focus on benefits of corporate governance
  • Develop senior management's administrative and technical skills particularly in areas such as strategic planning and leadership.
  • Create clear organization charts.
  • Establish independent internal audit function (or employ an internal auditor based on the size of the organization).
  • Create job descriptions which establish clear responsibilities and reporting lines.
  • Introduce succession plans and rules for conflicts of interest.

The understanding and implementation of a good corporate governance framework presents SMEs a structured path to infusing better management practices, effective oversight and control mechanisms which lead to opportunities for growth, financing, exit strategies and improved performance..

Good corporate governance can help a company to:

  • enhance its performance, operations, efficiency, profitability and long-term value
  • grow in a sustainable manner
  • establish clear roles, responsibilities and accountabilities
  • define and implement corporate strategy and direction
  • identify and manage risks
  • become more competitive
  • attract capital, investment and business partners
  • build reputation and trust, through the strengthening of relationships with relevant stakeholders.

Our Thoughts

Good Corporate governance in SMEs is a must.

Corporate governance tends to look at how a company is managed, how decisions are made in a company, and who has the authority and accountability on major decisions. For instance, an appointment of a senior executive should require a discussion and an approval at the board of director.

Many SMEs always ask whether they should introduce good corporate governance practice in their companies. The answer is definitely yes, but how? Should they follow the same set of rules that apply to listed companies? Probably not, there are six key elements of good corporate governance practices for SMEs:

  1. Discipline
  2. Transparency
  3. Independence
  4. Accountability
  5. Fairness
  6. Social Responsibility

These are all applicable to both privately owned and public companies although the level of implementation would be different for different type of companies. A large but closely run family owned company is recommended to have more diversity and independence in the board of directors.

For SMEs and family owned businesses, the initial cost of implementation is relatively high as it involves the setting up of a set of corporate governance practice guidelines and to a larger extent, possibly some restructuring at the board of directors, for instance, segregation of duties between the Chairman and CEO, and introducing independent non-executive director or advisors to the board.

The long term benefits outweigh the initial and on-going cost of implementing good corporate governance practice for SMEs. Companies with good corporate practice can benefit from improvement in operating efficiency, better relationships with suppliers and customers, and greater access to capital, especially in the case of raising private equity capital and for an initial public offering. Although not every SME or family owned business will seek a listing, having good corporate governance practice in the company will certainly be beneficial for its future expansion and development.

Another recognizable benefit for having good corporate governance in place is improvement in staff retention. Today employees like to participate in Corporate Social Responsibilities events such as charity work. It also helps to attract talent as good employees prefer to work in a better managed and transparent organisation.

Good corporate governance practice is more than just a set of guidelines and reporting standards, it is a corporate culture and attitude that needs to be educated across the entire organisation from top to bottom.