Small and medium sized businesses are very important to the economy. They generate employment and are the main drivers of economic growth. However, various sources report that a significant proportion of SMEs do not survive beyond the first 5 years and even when they do, they are not usually passed from one generation to another.
Corporate Governance is the means to ensure that SMEs stay in existence as a going concern and that they attain their strategic objectives. To be sure, good corporate governance alone does not guarantee business success but undoubtedly poor governance practices contribute to business failures.
Corporate governance for SMEs entails setting up operational systems and practices to ensure that a business’ affairs are carried out transparently, professionally, ethically and independent of undue personal influence of the owner or her family members.
The benefits of sound corporate governance practices for SMEs include improvement in competitiveness, as firms are able to gain access into the supply chain of bigger firms who use a governance criterion to screen business partners. Other benefits of corporate governance include increased attractiveness to investors, and reduction of key-man risk, which is the risk that business continuity is threatened if the owner or key personnel exits suddenly. Employee morale and brand equity also improve with good corporate governance.
When the question of corporate governance arises, SMEs usually excuse themselves on occasion of their small size. However SMEs need not adopt lofty governance practices that are not suited to them. For example, the legal form of most SMEs does not necessitate the establishment of a board of directors with several board committees. For an SME that is merely operating as a registered business, a board of advisors may suffice.
SMEs need to develop bespoke governance systems that are relevant for today’s realities and adaptable to tomorrow’s needs. An SME’s corporate governance system needs to be evaluated periodically, perhaps annually to ensure that it is fit for the business and is growing with the business.
A corporate governance system for SME should at the barest minimum include the following; clear job descriptions and reporting lines, a code of conduct, separation of ownership from management duties, staffing plans and procedures, distinct financial accounts and records, and a commitment to business integrity in all aspect of a business operation.