The precise principles of Corporate Governance are published globally through assigned local government regulators within their respective countries. These fundamentals are put into place in order to adequately regulate and manage the behavior of large-sized corporations whom are publicly listed on the stock market. This ideology is primarily set to protect the rights and interests of the shareholders from more than one standpoint.
Various international research institutes and professional bodies have issued specific governance guidelines for unlisted companies. However, sufficient guidance has not been offered to date in the form of a unified governance model for Small and Medium Enterprises (SMEs). Since such a mechanism has not been tailored to them, SMEs primarily face difficulty in implementing such available regulations and/or may find themselves not eligible due to their size, distinct operations or complexity. In brief, the existing regulations do not reflect the characteristics of SMEs putting them at risk of potential misconduct. On the other hand, SMEs cannot afford to seek advice from specialized consultants due to relatively high cost. Therefore, SME’s are left much more vulnerably exposed than listed companies; they will incur unnecessary costs and have poor internal control, which translates to weak performance, fraud and perhaps business failure.
Looking at basic information concerning the value of SMEs in our economies and societies, the following statistics have been gathered for your easy reference.
A. The UK Financial Stability Board (FSB) – reported that there are 5.4 million private sector businesses in 2015, increased by 1.9 million since 2000. Of the above, small businesses accounted for 99.3% of which 99.9% were SMEs. Employment in SMEs was 15.6 million representing 60% of all private sector employment in the UK. Moreover, the combined annual turnover of SMEs was £1.8 trillion representing 47% of all private sector turnover in the UK.
B. The European Commission (Eurostat) – SMEs in EU countries make up over 99% of all enterprises. They account for two-thirds of total employment, ranging from 53% in the UK to 86% in Greece. SMEs contribute 57% of value added in the EU.
C. The World Bank Group – In a study announced in September 2015 it was reported that formal SMEs contribute up to 45% of total employment and up to 33% of GDP in emerging market economies. The number of informal SMEs is significantly higher. There are 365-445 million Micro, Small and Medium Enterprises (MSMEs) in emerging markets. Of which 25-30 million are formal SMEs, 55-70 million are formal micro enterprises, and 285-345 million are informal MSMEs.
The above figures illustrate a clear insight of how SMEs are effective on a global scale with great impact on businesses and growth.
Unfortunately, many SMEs may/will fail in the midst of their path forward due to multiple reasons of poor governance. Scenarios that commonly occur to such SMEs are as follows:
1) Non-existing leadership in the form of a ‘board of directors’ or a supervisory board coupled with the possibility of lack of experience from the management.
2) A lack of written or clear distinct responsibilities and/or delegation powers for various stakeholders, consequently the absence of accountability.
3) No future strategic plans for growth and expansion alongside poor attraction to new/external investors.
4) The nonexistence of incentive or plans to retain worthy managers, in addition to the absence of training and/or succession planning.
5) Absence of the ability to create necessary alternatives or encourage innovations for competition, not being able to cope/survive with changing market trends.
What is Good Governance for SMEs?
I. To create a procedural framework that would add value, build-up a sound reputation, ensure long-term sustainability and achieve targets with success.
II. It is a set of rules and regulations that aim for the optimum performance in order to accomplish strategic goals including laying down internal policies to control the relationships between the board, owners and the management under an umbrella of clear responsibilities, powers and accountability for all. The purpose should be to prevent abuse of power for personal gain on the expense of the company’s interest.
I. High priority is to be given to seek investment opportunities and new/external investors. This is a matter which would lead to creating new job opportunities, cater to the needs of other stakeholders and the society as a whole.
Some international surveyors reported more than 50% of investors are prepared to pay an additional premium for buying shares or steaks of firms whom follow strict governance regulations. Moreover, such (governance-equipped) firms have the advantage of being able to secure loans and/or other borrowings at preferential rates as opposed to firms that do not implement strict governance regulations.
What can SMEs do?
In order to translate the above into a simple workable plan and keep SMEs away from potential failure, the following essential guidelines are proposed:
1. To create a ‘board charter’ to include predetermined powers and responsibilities of the board, the chairman and the management. It should also specify the board structure, types of members, the committee’s responsibilities, delegated authority to the management, meeting procedures, board secretariat and other issues as needed.
2. To include independent board members with a broad array of experiences and diverse backgrounds.
3. To form at least two board committees in order to cover audit, risk, strategy and governance.
1. To offer board members an induction course in addition to continuous training programs to update their capabilities.
2. To encourage senior managers to develop and improve their knowledge and capabilities.
3. To establish an internal control department with sufficient resources to be reporting directly to the audit committee.
4. To introduce an “Ethics Code” for the board, the management and all employees.
5. To classify and describe senior jobs and form succession planning program with the emphasis on retaining qualified talents.
6. To evaluate the performance of the board on a two-year cycle through external facilitators.
We at Emirates CoreNiche Consultancy “ECNC” are proud to have been able to produce a standard “Board Charter” for SMEs, implementation of which would suit as many jurisdictions as possible across the globe. The document is presently under fine-tuning and we expect it to be available for clients before the end of September 2016 in both English and Arabic languages.