July 6, 2015 Governance for all
“Corporate governance is now seen as an essential building block of stable economies.” So starts a new ACCA report which looks at the corporate governance challenge for SMEs. Acknowledging that corporate governance frameworks have generally been drawn up with the larger corporate in mind; the report seeks to gain an understanding of how corporate governance works within SME companies, many of which may be owner managed or have ownership shared amongst family members.
Commenting that in larger organisations corporate governance is associated with the agent-principal model; with the leadership acting as quasi agents for the shareholders, the report concludes that for SMEs governance is more about improving business efficiency and performance. However, regardless of the size of the organisation, corporate governance principles including clarity of roles, clear reporting lines, risk and internal control management, and clear communication still apply.
For those who wonder whether small businesses should give time to corporate governance issues the report lists key governance benefits. These include faster growth, enhanced access to credit and greater resilience against fraud. For the family business, a strong governance framework can help to protect the interests of those who are not working in the business and also can help to ensure that the business is fit to be passed on to the next generation. One of the most interesting aspects of the report is the section in which it analyses trigger points which may signal a need to strengthen or review corporate governance and then goes on to highlight potential obstacles to change such as a lack of awareness of need and cost concerns.
Because governance best practices have been drawn up with the larger corporate in mind, it can be difficult for smaller companies to appreciate the benefits which, for example, appointing a non-executive director could bring. However, regardless of the size of the company, non-executive directors can bring a new perspective which will enhance the knowledge and skills of those working full-time within the organisation. For a small company, this may include introductions to new markets, suggestions about new processes, or simply sharing business knowledge and experience for the benefit of the company.
The report concludes that whilst corporate governance can be beneficial to SMEs, further research is required to understand the impact of governance on the smaller business. This will include identifying and overcoming barriers as well as working to understand how the governance framework can be flexed to meet the needs of smaller companies.