Corporate governance and the promise of SME

Small and Medium Enterprises (SMEs) are very simple organizations. Their operating systems and management processes are not as complicated as those of big corporates. Sometimes, this simple nature of the management and systems of SMEs makes some think that corporate governance is something for every other entity but the SMEs. It is sometimes also felt that the costs and time required to do the right things in corporate governance are too high for SMEs. And the biggest culprits in this line of thinking are actually the SMEs themselves. They often wonder what corporate governance has to do with a small, especially family business in which, quite often, the difference between the owner and the business is highly blurred. That feeling is not hard to appreciate if we recognize that over 99 per cent of the 37 million SMEs in the country in 2013, was of the microenterprise category – mostly unregistered sole traders. The truth however is that good corporate governance is as important to an SME as it is to the mega corporation, scale differences notwithstanding. The only difference is that big corporates may require to go the full scale small enterprises find the critical minimum that is good for their survival.
Corporate governance has to do with the system of management and control established in a company. These relate to the proper management of the enterprise including the relationship among members, the board and stakeholders as well as the company and its publics, including creditors and customers. It is also concerned with internal control processes. Effective corporate governance framework will promote internal discipline, accountability and transparency. No matter how small a company may be, corporate governance should be taken seriously. The lack of it is one of the reasons funding often eludes SMEs. Lenders are not just looking for companies with strong cash flows, they are also interested in the structure of a company. This includes how company leadership relates to the board, observes laid down procedures and promotes accountability. These elements are more likely to found where good corporate governance is a priority. Therefore, proper corporate governance is essential in resolving the funding challenges faced by SMEs. This has implications for the growth of these small businesses and their ability to contribute their quota to the development of the country. Good corporate governance is the first sign of a well-managed enterprise because it presupposes the existence of proper systems and controls that ensure accountability and transparency.
Companies may grow without structures but growth may be unsustainable without structures. It is the structures in an organization that support attempts to scale up operations in response to growth. Part of effective corporate governance is the proper delineation of duties, which is very important not just to directors, managers and shareholders but also to funding sources, such as banks and other categories of fund providers. A clear understanding of roles is important for all classes of SMEs, including owner-managed institutions. By reducing the potential for conflict, it improves trust and loyalty, helping management to focus on its corporate objectives. These elements are important ingredients for the attainment of the goals of SMEs as the engine of economic growth, agents of high employment and political-social stability in a country.
Strategic planning and such forward-looking plans benefit immensely form good corporate governance. When boards meet regularly and interact intensely with management, they are able to marshal out proper direction for an entity. This is even more so effective when boards contain independent directors who can tell it as it is. Unfortunately, independent directorship has not gained the relevance it deserves as a check on board-capture of companies in Nigeria. However, properly selected independent directors bring extremely high value to organization though their dispassionate and honest contributions to board decisions not tainted with vested interest. They provide the SME with additional skills, more balanced and objective views on all issues, thereby bringing improved transparency and objectivity in management decisions.
We do not in any way suggest that SMEs should implement the full range of corporate governance regulations applicable to big corporates. However, we insist that they adopt and implement basic governance rules that are not just appropriate but also take account of their size, level and stage of growth and sophistication. An effective governance strategy does certain basic things for an entity: it helps to identify and manage risk; promotes innovative thinking and new product development and enhances organizational reputation. No company is too small to implement some modicum of corporate governance best practice, because all organizations need leadership harmony, which begins with clear and publicised roles for the board, and channels of delegated authority, including delegated authority to commit the company in expenditure. Well-governed enterprises have properly held and managed board meetings where such critical issues as the budget and financing are discussed, documented and strategies for effective monitoring are elaborated.
Companies, big and small are in business to create value for the shareholders. This happens through effective market development, risk recognition and management, including effective disaster recovery and continuity plans that ultimately positively impact growth. Appropriate levels of good corporate governance suited to a company’s stage of growth enhances corporate reputation and patronage. Here lies the colour of the bottom-line at the end of the day.

Emeka Osuji