January 23, 2019

Proper corporate governance structure vital for SMEs

Across the world over, Small and Medium-sized Enterprises (SMEs) are recognised as the vehicles through which global economies are built. They provide the entrepreneurial vibrancy and vitality which drives economic activity across different industries.

About 80 per cent of jobs created in the economy are in the informal sector, which is dominated by SMEs. This goes on to show that SMEs are the undisputed foundation of economic diversification and expansion, contributing immensely towards a positive socio-economic impact in Kenya.

Vision 2030 has for years provided the country’s blueprint for growth. The plan envisages a newly industrializing middle-income country capable of providing a high quality of life for all its citizens by the year 2030.

In order to realise the improved performance of the country’s manufacturing sector, there is a deliberate effort being made towards strengthening SMEs with a view of transforming them into major industries in future.

Challenges

Apparently, SMEs within Africa face similar challenges. In 2016, Invest in Africa (IIA), an independent non-profit partnership organization commissioned Strathmore Business School to conduct qualitative and quantitative research to establish the main obstacles faced by Kenyan SMEs in growing their businesses.

The findings cited low corporate governance being one of the major challenges SMEs encountered despite a good number of them having boards in place. The study also revealed lack of relevant and practical training programs, huge information and communication gap between multinational corporations and local suppliers, access to finance, lack of awareness of credible local firms by multinational companies and difficulties on scaling up. In addition to the above, local firms faced challenges in accessing and filling out tenders.

Governance

In developing countries, SMEs are important because of their role in economic growth and poverty reduction. However, the main underlying constraint in the growth of SMEs is lack of corporate governance structure.

There are several definitions for corporate governance. However, the most appropriate one which is more relevant to small and medium-sized enterprises (SMEs) describes corporate governance as “a set of rules, regulations and structures which aim to achieve optimum performance by implementing appropriate effective methods in order to achieve the corporate objectives”.

In other words, corporate governance refers to internal disciplines or systems, which govern the relationships among ‘key players’ or entities that are instrumental in the performance of the organization. Moreover, it supports the organization’s sustainability in the long term and establishes responsibility and accountability.

Generally, there is a lack of awareness among the enterprises on the importance of corporate governance. Globally, companies face issues relating to transparency, accountability and timely disclosure of material information. It is against this background that the concept of corporate governance and business ethics has gained traction. The need for SMEs to embrace corporate governance and ethical business practices is therefore immense.

In Kenya, corporate governance can improve the SME sector by imparting better management practices, stronger internal auditing as well as creating greater opportunities for growth. Besides enhancing the organization’s corporate entrepreneurship and competitiveness, it is also likely to bring out new strategic outlook through external independent directors

In 2015, Afande O F conducted a study hinged on financial performance and the extent to which corporate governance practices have been adopted by SMEs in Kenya. The study, Adoption of Corporate Governance Practices and Financial performance of Small and Medium Enterprises in Kenya were published in a Research Journal of Finance and Accounting (International knowledge sharing platform). The population sample was registered by SMEs in the manufacturing sector in Kariobangi Light Industries that have adopted corporate governance practices.

The study showed there was a positive relationship between the following corporate governance practices and profitability of SMEs that took part in the study; availability of board of directors, the existence of a system of evaluating the board and individual directors, existence of Bylaws to govern board meetings and use of cumulative voting for elections of directors. At the same time, the study also found that the adoption of the following corporate governance practices did not have a direct influence on the profitability of the SMEs that were part of the survey; holding four or more regular board meetings per year, the choice of shareholder date or location to encourage attendance and board approval requirement for related party transactions.

On the other hand, it is imperative to understand that the proper implementation of good corporate governance does not necessarily guarantee the success of the organization. Meanwhile, a bad corporate governance practice is certainly a common syndrome causing failure in many organizations. It is interesting to note that a recent survey revealed that more than 48% of investors are willing to pay an additional premium over stock prices for companies known to implement sound corporate governance practices as opposed to other companies which may have the same level of profitability but characterized with inefficient management or a record of poor governance practices.

According to an article published on www.articlesbase.com, corporate governance plays a significant role for SMEs since it defines the role of shareholders as owners on the one hand and as business managers on the other hand. On the other hand, it is essential to understand that the proper implementation of good corporate governance does not necessarily guarantee the success of the organization.

The writer is Country Manager, Invest In Africa-Kenya