Corporate Governance in SMEs And Its Relationship with Corporate Performance

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One of the biggest challenges of Small and Medium Enterprises in Nigeria is the inability to withstand both the external business environment and its internal problems resulting in its inability to survive. Several surveys carried out have shown that most small and medium Enterprises find it difficult to survive after one or two years.

And the reasons for this failure range from:

  • Lack of planning and forward-thinking leadership
  • Poor management skills at a senior level
  • Cash flow problem due to lack of separation between personal accounts and corporate accounts
  • Inability to innovate in a dynamic environment
  • Lack of access to technical assistance

So how then does corporate governance address these problems? Corporate Governance can no doubt assist SMEs in achieving optimum performance as it is a set of rules and regulations guiding the affairs of an entity in order to achieve its stated objectives.

No doubt, Corporate Governance is peculiar to large corporations due to their large size and stakeholder engagement especially the regulators. However, it should be noted that SMEs are the fulcrum upon which economic development can be sped up. The failure of which will be disastrous in sustainable economic growth and development. At the last national survey conducted four years ago by SMEDAN/NBS, over 37m enterprises were operating in the economy employing over 59m persons.

In view of this, the guidelines of corporate governance with the aim to achieve transparency, fairness and accountability are required for small medium enterprises. These three objectives play a pivotal role in protecting business owners and on a larger scale, the organisation with a view to employees’ rights.

Whilst the power to run the business lies on the top level management, corporate governance ensures that such powers are set within the dimension in order to eliminate misuse of authority not in the best interest of the organization’s survival. Hence, corporate governance provides a framework in promoting the triple objective of transparency, fairness and accountability leading to profit maximization, promoting investors’ confidence and ultimately creating jobs.

In summary, corporate governance highlights the following issues in promoting executive oversight and accountability:

  • Roles, Responsibilities and Composition of the Board
  • Financial Reporting and Auditing
  • Directors Remuneration
  • Risk Management and Internal Control

Most SMEs have no Board of Directors in place, albeit lack of clearly defined roles and responsibilities. It is expected that the composition of the Board should include independent non-executive members, not as patrons or figureheads but to enshrine their independence in directing the affairs of the entity on a volunteer basis. Furthermore, the separation of ownership and management of the entity are also vital in corporate governance. While this is subject to debate, small medium enterprises should consider the spirit and not the rule.

Secondly, the preparation of financial reporting and its auditing thereof by an independent auditor is one of the principles of good corporate governance. Sustaining small medium enterprises includes the preparation of timely financial accounts. Bookkeeping is vital and major criteria for business expansion. This also includes the separation of personal accounts from the business accounts.

Fixing and payment of Director’s remuneration is the third principle under review. This is also a fall out of the previous issue stated above on financial reporting and auditing. Most SMEs owners lack proper salary scale for their roles and justify same under benefits in kind, including payments of their ward’s school fees without a documented policy and records. A proper structure is critical in Director’s pay and remunerations.

Lastly and not the least is the implementation of an effective risk management and internal control process. The entity should have a robust risk management framework to aid in identifying, assessing, planning and monitoring its activities. Internal control policies should also cascade from the top to bottom of the organizational hierarchy and same should be embedded across the organisation.

Finally, a key point to reinforce is that the management of listed entities is regulated within strict mechanisms, therefore, are restricted by their power and authority. However, leaders in SMEs have more autonomy and freedom in creating their governance structure and therefore it is important to note that these powers do not spiral out of the boundaries of international best practices of corporate governance in achieving optimum performance. Hence, the type of the entrepreneur in question not only impacts the organizational culture but also has a direct influence on its structure and corporate performance.

References:

  1. http://www.articlesbase.com/small-business-articles/importance-of-corporate-governance-for-smes-917533.html
  2. Sanya Adejokun (2018) Tribune Business News https://www.tribuneonlineng.com/15040
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