Governance for All—Including SMEs
Rosana Mirkovic | July 27, 2015
No one would argue that corporate governance is unimportant to businesses. By setting the framework for monitoring the actions and performance of management, it protects both the future of the business and the interests of its owners and investors.
However, when we talk of corporate governance, it is often assumed that we are talking about large, listed companies; the term itself suggests that unincorporated or family-owned businesses need not apply.
Good corporate governance should not be the domain of large companies; it is important for organizations of all sizes, irrespective of their legal structure. Some of the most significant gains from good corporate governance are to be had by small- and medium-sized entities (SMEs), which are often seen as the section of the business community that are the least rigorous in its implementation. The benefits, though, of stronger corporate governance are many, including:
- Less risk of conflict between family members, or between owners who are active in the business and those who are not;
- Improved access to credit because investors have more confidence in the business;
- Faster business growth; and
- Greater protection from fraud, theft, or financial mistakes because internal controls are stronger.
The problem for the SME sector in general, though, is that even those companies that want to improve their corporate governance are hampered by the fact that existing frameworks and guidelines have been developed with large, listed companies in mind. However, a new report by the Association of Chartered Certified Accountants (ACCA)—Governance for All: The Implementation Challenge for SMEs—aims to open the debate about what corporate governance means for SMEs. The report draws extensively on material discussed during a 2014 seminar organized by the Economic and Social Research Council and hosted by ACCA, as well as the views of the ACCA Global Forum for SMEs.
The report points out that it is inevitable that corporate governance frameworks will vary from one company to the next, depending on their set-up and needs. It proposes a number of essential elements of well-governed SMEs, including clear reporting lines and clarity about how decisions are made and risks controlled, appropriate internal controls that are related to key risks, and a framework that promotes understanding of roles and responsibilities and the limits of authority.
One of the most interesting points made in the report is that businesses do not exist in a static state, but are constantly evolving. This is especially true for the SME sector and I think that this is the key to understanding what SMEs need from a corporate governance framework. By nature, SMEs are heterogeneous, so any corporate governance framework for SMEs has to be adaptable and flexible in its application.
This is where we come in as SME advisors. We, along with other interested international institutions, need to make the case for why corporate governance matters to SMEs. We need to explain clearly how they can benefit from strong corporate governance, and why the benefits will exceed the costs. And we need to show that we consider corporate governance to be as important for small businesses as for the largest.