GOOD CORPORATE GOVERANCE FOR SMEs
*Reviewed 26th August 2021*
Corporate organizations like humans are involved in different activities. There is no doubt that corporate commercial organizations are primarily set up to make profits, it is, however, important for these organizations to continually maintain a balance between their goal to maximize profit and the general interest of other stakeholders. It is important that in the course of attaining their profit-making goal, they do not jeopardize the interest of their investors, workers, the public and the society. The activities of these organizations could have a direct or indirect effect on society.
Corporate governance encompasses the various mechanisms and processes used in creating a balance between profit-making and the interests of stakeholders. For more insight on the how to ensure good governance in a business organization you can read our article on How to Make your Board Effective.
For the purpose of this discussion, it is important to identify who these stakeholders are. They could either be internal or external and they include the customers, creditors, the government, government agencies, suppliers, directors, employees, investors, communities, and others who have a stake in the organization. The balance which is sought to be attained is between the maintenance of the growth, sustenance and continued existence of the corporation and the well-being of the beneficiaries of the corporation's activities. This is done in the context of protection from acts or omission within the organization which are contained in the rules guiding corporate governance. It is therefore important to maintain Good Corporate Governance. There are different regulatory frameworks which seek to ensure good corporate governance in various sectors by providing guiding principles.
In Nigeria, a primary source of corporate governance is The Nigerian Code of Corporate Governance introduced in 2018. The provisions of this code are in the form of policy recommendations which are suitable for the operations of various companies while taking into consideration their various structures. A successful implementation of the code involves “flexibility” and “scalability”, which mean the ability to apply the code to different circumstances and to companies of different sizes. The aim of this code is to institutionalize corporate governance practices in Nigeria, and thus create an enabling environment for sustainable business operations. It addresses the urgent need to raise the standard of corporate governance of companies in Nigeria. This code is applicable to private and public companies.
The focus of this article, however, is Small and Medium Enterprises. SMEs here include sole proprietorships, partnerships and companies. Usually, startups and small enterprises do not prioritize corporate governance especially since these companies are mostly privately owned and the shareholders in such companies are usually the same as the members of the management team. For startups, top priority is usually survival, confirming viability and scaling the business. In fact, most companies feel that governance should be executed in large, publicly owned or traded companies, however that is not the case. Different rules and practices will apply depending on the type of organization, ownership structure, stage of the company, size, geography or industry.
Corporate Governance is as much theoretical as it is practical. There have been several theories which have different categories of persons at the forefront of the basis for decision making. These theories and the principles of corporate governance have however agreed on basic elements which every corporate organization should always take into consideration when making decisions. These are sometimes referred to as the pillars of Corporate Governance. They apply to small organizations as much as they do large organizations. They include (but are not limited to);
Fairness
Independence
Transparency
Accountability
Governance is about the decision making and control exercised by those who are involved in the management of an organization. Small businesses may not have shareholders in the sense that larger companies do, but some of them do have partners, investors, and other stakeholders, corporate governance, therefore, does apply to them. This means even small businesses need to set out on the path to more accountable operations.
Why Adopt Good Corporate Governance Practices;
Scaling/Growth: For startups, transparency, ethics, and compliance are some of the yardsticks clients and prospective investors may use to measure your company against competitors. No investor wants to invest in a company with loads of unpaid taxes, unchecked founders and poor management team. There is a need to understand that growth can happen quickly in an organization, growth often requires additional capital and the need to attract new investors who may want to see strong governance processes and procedures in place.
Legal requirements/Regulatory Compliance: Asides the basic requirements like payment of taxes, there also exist several regulatory requirements businesses may be required to comply with. It is advised that they as much as possible comply with these requirements to avoid sanctions which may come with noncompliance.
Encourage investments and trade in your organization
Help build sustainable business operations: It is important to ensure that the proper processes are put in place before serious growth happens. Having a proper structure eases adaptability and makes pivoting the business where necessary easier.
Public morality
Good Corporate Governance instils a culture of best practices in the organization.
Good Corporate Governance Tips:
Be regulatory compliant.
Consistent Financial Reporting
Keep records.
Set up a board where applicable
Regular auditing
Tax compliance
Create a social mission and continually give value to your community
CONCLUSION
In conclusion, there is a need to understand that while operating a business for profit, your actions and inactions have consequences on not just your business but every person who may be directly or indirectly affected by your business. Context matters in Corporate governance, applying a one-size-fits-all approach would usually not work. As your venture grows, your corporate governance requirements would increase and structure would also change. It is therefore important to take this into consideration from the beginning. From as early as the point of drafting that Shareholders agreement, to every business transaction conducted. Although organizational structures like incorporated companies enjoy a separate legal personality, there is no doubt that humans are the vessels through which they live and function. There is a need to maintain a high standard of business ethics and administration.