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Corporate governance practices in SMEs

Mar 15, 2019

Corporate governance practices in SMEs

Photo Credit: Mary Winspear Centre  http://marywinspear.ca/venue/lebbetter-board-room

Every successful enterprise has systems and processes that define how the business of the organization is run. This is what is referred to as corporate governance. Corporate governance defines how an institution relates with stakeholders. This include the customers both internal and external, suppliers, the community around the organization and any other people who interact with the enterprise. In broad terms the imperatives of corporate governance are: optimal leadership, optimal returns, minimal risk and stakeholder involvement.  One aspect of corporate governance that has been very key and has been closely identified with Corporate Governance is the board of governance. At the center of corporate governance are boards which are fundamental in running of an enterprise. 

Boards of governance

As earlier stated, one of the main components of corporate governance is setting up of boards for institutions. A board acts as the policemen. Through the board there is provisions for checks and balances.

Why you need a board 

Many SMEs ignore the aspect of setting up a board when they start a business. Boards have been looked at as an unnecessary evil especially for very young and small businesses. It is far from the truth to think a board is not necessary even at the inception stage. A board offers broad guidance to an organization and offers strategic direction. At inception very crucial decisions are made and at this stage it is important to have a group of people who offer guidance on critical decisions. Some of this guidance could relate to recruitment, setting up of governance structures, setting up of operational systems, acquiring assets, investment among others. All which would be very crucial to the success of an organization. Research has shown, organizations with an effective board are more likely to succeed than those that do not have an effective board. 

Many small enterprises avoid boards and view boards as expensive to maintain for the organization. For a startup, it is important to engage board members that will be open to offering probono services until such a point that the organization is able to offer remuneration to the board. 

Role of the board 

The boards main role is to oversight the secretariat and in essence the CEO reports to the board on the performance of the organization. The board should not be involved in the day today running of the organization but should receive reports on the strategic direction of the organization from time to time. An effective board should meet at least quarterly and also do most of its work through board committees. Committees of a board are established based on the core business of the organization. The Board rewards and also reprimands the management based on performance.  The main areas of concern for an effective board include Legal framework, Policy framework, Scanning the environment, Analyzing the stakeholders, Strategic plans, Service charters, Performance contracts, Providing leadership and Results. The boards success in its role is measured by the effectiveness of the organization in achieving its set goals. 

Composition of a board

The success of the board is highly determined by its composition. It is fundamental to appoint a professional board. This means every board member should bring in some technical expertise into the board. If the business is in agriculture, then ensure you have experts in that area to bring in practical experience and expertise to the board and also the organization.  A mis-match in skills within the board and the organization would mean the board does not bring much value and ends up being a bigger burden than an asset. 

Apart from the board corporate governance is also concerned with the relationship of the enterprise with other stakeholders. It is important for an enterprise to look at their surrounding environment and ensure they take up their responsibilities as required. Corporate Social Responsibility (CSR) cannot be ignored even for small enterprises. In the current business setting CSR should be aligned to the business to ensure even as we give back to society the enterprise benefits. Sustainability of projects taken up under CSR is key. If you are a briquettes producer, you could identify a school where you provide briquettes for free and this acts as a marketing strategy and also a point to receive feedback on the product. You achieve your objective of taking up CSR project and at the same time the product benefits.

Corporate governance is concerned with the efficiency and effectiveness of a business. Implemented in the right way corporate governance practices improve organizations performance.  

 

By Sarah Makena

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