Corporate governance is the system by which organizations are directed and controlled. It can also be referred to as the internal disciplines or systems, which govern the relationships among ‘key players’ or entities instrumental in the performance of the organisation.
Sound corporate governance is an important element of sustainable private sector development – not only because it improves business performance and strengthens businesses’ ability to attract investment and growth, but because it also makes them more sustainable and accountable.
The guidelines of corporate governance aim to achieve greater transparency, fairness and hold executive management of the organisation accountable to shareholders. In doing so, corporate governance plays a pivotal role in protecting shareholders and, in the meantime, considers the interest of the organisation at large without prejudice of employees’ rights.
Whilst executive management should have a reasonable level of power to run the business, corporate governance ensures they set that to practical dimensions to minimise misuse of authority to serve objectives, not just the best interest of the shareholders.
So, it provides a framework for maximizing profits, promoting investment opportunities and creating more jobs.
The misconception about SME’s stems its roots from the size and contribution of this segment to the economy. Today, SME may appear small but many of them have potentials to grow and become big entities, this prophecy has failed and as a result, implementing good corporate governance practices, not appreciated.
Implementing corporate governance framework for SME entails:
- Separating ownership from management duties and specify clear roles and responsibilities for business owners, partners, and other stakeholders.
- Creating a balanced board and invite non-executive directors who would add value to the board (replace the board of director with an advisory board for companies not required to set up a board of director). Non-executive directors play an important role in ensuring the integrity of the financial data provided to the board and to protect shareholders’ interest.
- They also exercise control over executive management and reduce the risks arising from poor management practices or gross negligence.
- Introduction of Code of Business Conduct.
- Raising corporate culture with a focus on the benefits of corporate governance,
- Developing senior management’s administrative and technical skills in areas such as strategic planning and leadership.
- Creating clear organisation charts.
- Establishing an independent internal audit role (or assign an internal auditor based on the size of the organisation).
- Create job descriptions which set up clear responsibilities and reporting lines.
- Introduction of succession plans and rules for conflicts of interest.
The understanding and implementation of a good corporate governance framework present SME a structured path to infusing better management practices, effective oversight and control mechanisms which lead to opportunities for growth, financing, exit strategies, and improved performance.
How good corporate governance can help a company;
- Enhance its performance, operations, efficiency, profitability and long-term value
- Grow Sustainably
- Set up clear roles, responsibilities, and accountability
- Define and carry out corporate strategy and direction
- Find and manage risks
- Become more competitive
- Attract capital investment and business partners and
- Build reputation and trust, through the strengthening of relationships with relevant stakeholders.
Our Thoughts!
Good Corporate governance in SME is a must!
Corporate governance looks at managing a company, how decisions are made in a company, and who has the authority and accountability on major decisions. For instance, an appointment of a senior executive should require a discussion and an approval at the board of director.
Many SME always asks whether they should introduce good corporate governance practice in their companies. The answer is yes, but how? Should they follow the same set of rules that apply to listed companies? Probably not, there are six key elements of good corporate governance practices for SMEs:
- Discipline
- Transparency
- Independence
- Accountability
- Fairness and
- Social Responsibility
These are applicable to both owned and public companies although the level of implementation would be different for different companies. We recommend that a large but family-owned company should have more diversity and independence in the board of directors.
For SME and family-owned businesses, the first cost of implementation is high as it involves the setting up of a set of corporate governance practice guidelines and to a larger extent, the restructuring at the board of directors, for instance, segregation of duties between the Chairman and CEO, and introducing independent non-executive director or advisors to the board.
The long-term benefits outweigh the first and on-going cost of implementing good corporate governance practice for SME.
Companies with good corporate practice can enjoy an improvement in operating efficiency, better relationships with suppliers and customers, and greater access to capital, with raising private equity capital and for an initial public offering.
Although not every SME or family-owned business will seek a listing, having good corporate governance practice in the company will be beneficial for its future expansion and development.
Another recognisable benefit of having good corporate governance in place is the improvement in staff retention. Today employees like to take part in Corporate Social Responsibilities events such as charity work.
It helps to attract talent as good employees prefer to work in a better managed and transparent organisation.
Good corporate governance practice is more than just a set of guidelines and reporting standards, corporate culture and attitude that must integrate across the entire organisation from top to bottom.
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