There are various definitions of corporate governance. However, the most appropriate definition that is most relevant to small and medium-sized enterprises (SMEs) describes corporate governance as “a set of rules, regulations, and structures that aim to achieve optimal performance by implementing appropriate effective methods to achieve corporate objectives. In other words, corporate governance refers to the internal disciplines or systems that govern the relationships between the ‘key players’ or entities that are instrumental in the organization’s performance. In addition, it supports the long-term sustainability of the organization. and establishes responsibility and accountability.
The corporate governance guidelines aim to achieve greater transparency, fairness and make the organization’s executive management accountable to shareholders. In doing so, corporate governance plays a critical role in protecting shareholders and, meanwhile, duly considers the interest of the organization as a whole without prejudice to the rights of employees. While executive management should have a reasonable level of power to run the business, corporate governance ensures that such powers are set in practical dimensions to minimize abuse of authority to serve goals that are not necessarily in the best interest of shareholders. . Therefore, it provides a framework to maximize profits, promote investment opportunities and eventually create more jobs.
In general, corporate governance highlights two fundamental principles:
A. Supervision and control over the performance of the executive management and the strategic directions
B. Responsibility of executive management to shareholders
For that reason, corporate governance principles apply to those who bear ultimate responsibility for the organization’s success or failure. 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, bad corporate governance practice is certainly a common syndrome causing failure in many organizations.
It is interesting to know that a recent survey revealed that more than 48% of investors are willing to pay an additional premium over the share price for companies known to implement strong corporate governance practices compared to other companies that may have the same level profitability but are characterized by inefficient management or a history of poor governance.
The misconception about SMEs is rooted in the size and contribution of this segment to the economy. The reality is that SMEs today may seem small, but it is likely that many of them have the potential to grow into large entities in the future. Unfortunately, this prophecy has not yet been fulfilled and, as a result, the implementation of good corporate governance practices continues to be ignored.
SEM in Egypt form a large segment of business activities. They generally take the form of private companies owned by a small number of shareholders. They usually have less than 100 employees. These companies are usually family-owned and run by family members, where the authorities and powers are usually in the hands of one individual, usually the majority shareholder. For that reason, owners are commonly considered managers of their personal property.
Perhaps the question on the minds of entrepreneurs and managers of small and medium-sized businesses, as well as the executive management team, “why should we choose to introduce new internal systems and rules that impose limits on the way we do business and our business driver? The answer is simply that corporate governance plays an important role for SMEs as it defines the role of shareholders as owners on the one hand and as business managers on the other. This is best done through a process that spells out governance rules and guidelines. These aim to help all parties understand how to run the organization. As a result, internal conflicts would be better managed and more attention would be paid to achieving growth objectives and supporting profitability.
There are at least three reasons why small and medium-sized companies show a greater interest in implementing corporate governance principles:
A. Good governance practices pave the way for companies to grow or attract additional investors as an alternative to raising capital through high-cost bank loans. Additionally, companies may consider going public through an initial public offering.
B. Strong governance practices lead to better internal control systems that translate into greater accountability and profitability. The latter is attributed to enhanced controls that minimize the likelihood of fraud losses.
C. The corporate governance framework ensures that shareholders are free from executive and administrative functions. As a result, conflicts between business owners taking on managerial roles in the organization would be further reduced, particularly in organizations owned by a small number of shareholders where the distinction between ownership and managerial capacity is blurred.
Raising capital has long been considered the main challenge faced by SMEs. The real challenge is the absence of good corporate governance practices in these organizations. Consequently, it would be difficult to access financing sources from banks or investors.
The adoption of corporate governance framework is not common not only in Egypt but also in most developing countries. This is mainly due to the lack of knowledge about what corporate governance is and its relation to corporate performance and objectives. In addition, the general fallacy that the implementation of corporate governance implies high costs, together with doubts that such costs would not generate the expected benefits for the organization.
The biggest challenge for small and medium-sized businesses in Egypt is how well they can cope with external business conditions and internal problems that threaten their ability to survive. Surveys indicate that a third of this category of companies collapse after three years for the following reasons:
-Lack of planning and vision of the future.
– Inadequate leadership and management skills at senior management level
-Lack of future business plans for growth and new investment plans.
-Problems with cash flows
-Inability to innovate, come up with ideas for business development and cope with a constantly changing business environment and economic conditions.
-Inadequate access to technical assistance
If we consider the main reasons why small and medium-sized companies fail, we can conclude that the implementation of corporate governance goes a long way in supporting the chances of these companies to perform well, grow and adopt better decision-making processes. For family businesses, corporate governance improves management efficiency, limits internal conflict, and helps make the transition from ownership to heirs a smooth process.
Speaking in practical terms, we need to realize that SMEs may face various problems in implementing the corporate governance framework which can often be seen as a costly exercise. Consequently, it is essential that consideration be given to reducing relevant compliance and disclosure requirements and introducing less costly financial and administrative alternatives that such companies can afford.
To help small and medium-sized enterprises implement corporate governance, we recommend that the relevant state authorities issue a code for corporate governance of SMEs similar to the one issued by the General Investment Authority in collaboration with Cairo & Alexandria Exchange. Special attention should be paid to the following:
-Transparency (strategies, organization chart, processes, etc.)
-Function of the Advisory Council and relationship with other entities
-Risk management and planning system
-Function of human resources with focus on succession plans for senior management
Finally, we propose a brief recipe to face the challenges and help in the implementation of the corporate governance framework for SMEs:
-Separate ownership from management duties and specify clear roles and responsibilities for business owners, partners and other stakeholders
-Create a balanced board and invite non-executive directors who would add value to the board (replace the board with an advisory council for companies that are not legally required to establish a board). Non-executive directors play an important role in ensuring the integrity of financial data provided to the board and in protecting the interests of shareholders. They also exercise control over executive management and reduce the risks arising from poor management practices or gross negligence.
-Introduce the Code of Business Conduct
-Elevate corporate culture with a focus on the benefits of corporate governance
-Develop the administrative and technical skills of senior management, particularly in areas such as strategic planning and leadership.
-Create clear organizational charts.
-Establish an independent internal audit function (or employ an internal auditor depending on the size of the organization)
-Create job descriptions that establish clear responsibilities and reporting lines
-Introduce succession plans and rules for conflicts of interest.