Drivers of Corporate Governance in Small and Medium Enterprises
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Introduction
Good corporate governance within small and medium enterprises can be examined through some of its key drivers. The drivers of efficient governance are aligned in such a way that they provide satisfaction to all stakeholders as well as facilitate achievement of growth and vision of the organization. The importance of small and medium enterprises in the larger economy cannot be overstated. Aside from reducing the unemployment rates, they contribute to the gross domestic product and improve living standards of stakeholders. Extensive studies have provided strong links between effective corporate governance and stakeholder trust and sustainable business operations and principles.
Consequently, support from stakeholders, the larger community, and the government are essential towards ensuring their growth and sustenance (Vincenza and Troisi, 2013). These drivers are also focused on enhancing the levels of security, transparency, and accountability for the small businesses. From the resources, many of the drivers of corporate governance in the smaller enterprises have been funding, enhancement of management systems and internal processes, risk management, planning, and future growth, among other reasons. Corporate governance for small businesses offers opportunities for expansion, effectiveness, and the development of a strong brand name. Through effective leadership practices, businesses are able to become more competitive, providing opportunities for them to compete effectively with larger firms. Policy development in the business sector also plays a huge role in the enhancement of leadership and governance in the small and medium enterprises. Ease of doing business, incentives, and other crucial policy influenced factors to play a significant role in supporting this rapidly growing economy.
Literature Review
Corporate governance within smaller businesses has become an important economic sector, both in the developed as well as emerging economies. Small and medium enterprises have reduced the levels of unemployment while increased commercial revenue (Du Plessis et al., 2018). These enterprises have also sparked innovations that lead to effectiveness, productivity, and overall improved quality of life from the communities in which they operate. Much like their larger and more extensive counterparts, smaller firms have been geared towards incorporating leadership and governance practices aimed at enhancing transparency, the consensus among stakeholders, inclusiveness, equity, participation, and accountability among all parties involved.
Corporate governance in small firms has been motivated by the need to serve stakeholders in the most effective way possible. Through effective executive leadership, the needs of all stakeholders, including the community, will be examined more critically. In response to this, the decisions made concerning the direction of the business will be centered on these needs and interests (Mirkovic, 2015). The author also states that small and medium enterprises should not underestimate the benefits that good corporate governance has on a business, no matter how small it may be. Through developing effective monitoring and performance management measures, leaders can “protect both the future of the business and the interests of its owners and investors (Mirkovic, 2015).
Similarly, Schlierer and colleagues (2012) emphasize the need to incorporate stakeholder management as a strategy for achieving success in small firms. Key stakeholders are considered to include customers, employees, and suppliers. Because smaller firms possess the advantage of proximity to these stakeholders, it becomes essential for them to ensure that they establish relationships characterized by trust. Furthermore, stakeholders are considered groups or individuals who possess rights, ownership, and investments in the firm at various levels. For corporate governance in the small firms to be effective, leaders need to ensure that firms provide a sense of empowerment to these parties (Harris et al., 2013). Subsequently, it allows for the development of a more positive attitude as well as confidence in the direction of the firm. Therefore, small business enterprises are motivated by the need to ensure that direct and indirect investors of the company stand to benefit.
Another key motivator for corporate governance is access to funding for small businesses. Extensive studies on small businesses have shown that investors are more likely to direct their resources towards firms that demonstrate a high level of corporate governance efficiency. According to Dzigba (2015), smaller firms have a better chance of accessing credit if it has shown an extensive history of efficient management practices. Additionally, investors are more attracted to smaller firms that possess a strong leadership model, and that which shows clear directions for the future. The concept is because good corporate governance translates to organizational success, for both small and large firms (Durst and Edvardsson, 2012). The author also maintains that financial institutions have been instrumental in helping to develop small firms. They allow small firms to be connected to investors with extensive resources. Furthermore, banks are sources of external financings, such as loans.
Bernini and colleagues (2015) also emphasize the importance of corporate governance on attracting external investors. Effective system management is seen as a tool that provides investors with the trust that their money will not be lost or misappropriated. From the report, corporate governance is described as “the set of processes that assures outside investors of a fair return of their investment” (Bernini et al., 2015, p. 5). An essential part of corporate governance is its effectiveness to market the small enterprise to the external environments, thus building a strong and positive reputation. Through this, corporate leaders will be essentially opening up the business to financial investors as well as support from other stakeholders such as the local community and government. The report covers a study that showed that an estimated 80% of investors would be willing to pay premiums for companies that were considered efficiently governed (Bernini et al., 2015, p. 6).
Future growth is an essential driver of effective corporate management in small and medium enterprises. Corporate governance has been regarded as a significant tool that facilitates effective monitoring, auditing, control, development of infrastructure, among several other functions. Because of this, smaller businesses can operate even in the most competitive markets. Small business owners often face the challenge of effective management of not only resources but also supply chain, stakeholders, and other necessary day-to-day operations. Corporate management ensures that roles of stakeholders, particularly those in the internal environments, are clearly defined (Shezi, 2014). This facilitates models of accountability. Furthermore, these defined roles provide an opportunity for leaders to define specific processes required for successful production and performance. Growth and sustainability of the small businesses are made possible through effective leadership that is manifested in corporate leadership. To overcome some of the ethical challenges that divert investors away from the smaller enterprises, business owners often turn towards corporate mechanisms that ensure that ethical policies and standards are maintained across all operational levels of the business. Shezi (2014) also maintains, “corporate governance principles have been recognized as playing a significant role in curbing business failures resulting from poor governance” (p. 18).
The ethical principles and standards of small businesses are considered essential in ensuring that integrity, the rule of law, and consideration for stakeholders is maintained. Small business owners often have the challenge of maintaining ethical standards among its various stakeholders because of lack of experienced leadership and governance. Many small businesses are still developing their path, niches, and identity concerning their products, services, and their relationships with stakeholders (Bundaleska, 2011). Due to this, difficulty in maintaining an efficient, ethical framework is experienced. Business owners thus decide to involve board members, who serve as the leadership representatives of the company. Their function is to provide a “strategic direction” that is characterized by the development of organizational values that align with its vision and mission.
To ensure growth, small and medium enterprises also turn towards the legal requirements and implications of carrying out business. Compliance is a major driver for corporate governance within small and medium enterprises that have plans for future growth and expansion. Compliance also centers the development of a corporate culture that upholds regulations and policies established (Vincenza and Troisi, 2013). A driver of corporate governance is to enhance the level of legitimacy about how business is conducted therein. For this to be achieved, small firms consider efficiency in compliance with the regulations set within its jurisdictions. Governance ensures that members of the board (who possess an extensive understanding of the laws relating to business operations) provide their expertise and assistance. Furthermore, corporate governance is shown to facilitate some exit strategies that allow a company to go public through the initial public offering.
According to Del Baldo (2012), corporate social responsibility is an essential driver for small and medium enterprises today. Through social responsibility, board members can communicate to external stakeholders the values and intentions of the company, thus garnering support from local communities. Business owners are driven by the need to establish sustainable business practices characterized by loyalty and a solid reputation. Garay and Font (2012) relate corporate social responsibility in small to medium-sized firms as a way to enhance competitiveness, even though primary reasons may be centered on altruistic principles. Competitive advantage among small and large businesses alike has been used as a tool for sustainability and long-term success (Baumann-Pauly et al., 2013).
Innovation serves as a key motivator towards the development of useful corporate governance models. Among the main reasons for the success of small firms, particularly those in competition with large corporations, is the successful development of innovative business practices, products, or services. According to Shapiro and colleagues (2013), board governance supports the implementation of innovations because it provides a framework for examining risks involved (Brustbauer, 2016). An effective board also performs the functions of monitoring, evaluation, and gathering of resources to ensure it is successfully incorporated into the business models. Because executive board members have an objective perspective of stakeholder needs, they can establish the value that various kinds of innovations provide to them (Bos‐Brouwers, 2010). Company owners often experience the challenges of implementing technological frameworks, which have shown to increase efficiency. Consequently, the implementation of corporate governance allows them to develop this infrastructure at a more cost-effective rate and with minimal risks.
Discussion
According to Bundaleska (2011), corporate governance is described as a set of combined processes and systems that are incorporated into an organization by a board with the aim of directing, monitoring, and managing operations and stakeholders. Within the context of small businesses, corporate governance has not been considered significant as compared to larger corporations. However, recent studies have shown significant benefits linking effective corporate governance with success and growth of small businesses. These organizations stand to benefit in a myriad of ways thanks to the implementation of more solid leadership frameworks and systems from external executives. Consequently, these benefits have acted as the key drivers towards its implementations.
From a stakeholder point of view, the decision to involve external executives provides owners with a form of balance, which allows them to operate on a more objective level. A key driver of corporate governance is the need to reduce bias, which may frustrate the interests of some stakeholders over others. Business owners who wish to gain a stronger market position will be required to implement leadership strategies that separate ownership from management. This form of separation ensures that roles and responsibilities are more clearly defined and that participants are held accountable. Furthermore, business owners may be proficient in various skills such as management of inventory, supply chain management, or customer relationships. However, for most small enterprises, it is difficult to find owners who are proficient in all sectors of management. Therefore, the election of experienced executives provides them with assistance in areas where they lack in experience or find challenging to manage. Additionally, stakeholders are more represented in small businesses that employ corporate governance. Differing needs may create challenges for business owners, who may lack the skill to balance and provide satisfactory results for all involved. Corporate governance advocates for more inclusiveness and participation for stakeholders. Executives create platforms for communication and exchange of ideas and further encourage stakeholders to make the contributions they perceive as beneficial to the business.
Additionally, corporate governance of small businesses reduces the overall potential for business owners to close business in the event of a conflict. Choices made are dependent on the type of ownership that is established by an executive board. Families may decide to own a percentage of stock in the business, which allows them to make decisions. However, on the larger part, a board is placed responsible for major decisions about the direction to be taken.
The need to connect with the local communities has driven small and medium enterprises to engage in corporate social responsibilities beyond the legal requirements. The establishment of this connection serves to not only develop a positive perception of the company but also ensure that clients remain loyal on a long-term basis. Engagement with the local communities also allows them to develop strong business foundations that facilitate future growth and expansion. Effective and relevant forms of corporate governance provide an avenue for an efficient corporate social responsibility model to be developed (Vázquez-Carrasco and Lopez-Perez, 2013). Like large businesses, small and medium enterprises need to focus on how they can contribute to their local community. Engagement in activities geared towards better living standards, environmental conservation, social development, and education are some of the areas that small firms may focus on to improve sustainability measures (Ruangviset et al., 2014).
The role of ethics in corporate governance has gained importance in the past few decades after small enterprises have established executive boards. Many companies, both small and large have suffered significant losses because of the scandals relating to violation of ethical and legal practice. Regaining the trust of investors, customers, and other stakeholders in the community are often difficult once the brand name has been tainted. Small business owners have been able to realize this and sought after experienced executive boards that work towards preventing scandals and unethical business practices (Rodriguez-Dominguez et al., 2009).
From the resources, funding has been shown to be a significant driver for the development and implementation of corporate governance practices in small enterprises. Many companies face substantial financial limitations that prevent them from growth and implementation of business ideas. For many small businesses, investors lack trust in the growth processes mainly because there lacks a sound leadership and corporate structure. Because of this, there is the need to attract investors who provide the financial capital required. Furthermore, corporate governance practices are maintained for the sake of keeping investors confidence in the business. Investors have been seen to be more open to paying higher premiums shares on companies, which possess a history of effective governance practices. They are likely to direct their resources in businesses that have proper management practices. These practices are centered on the accuracy of financial records and audits. It also entails a high level of transparency and integrity regarding expenditure, returns, and other vital indicators of organizational performance.
Corporate governance plays a huge role in ensuring that risk is minimized within small and medium enterprises. For growth to be achieved, business owners need to take significant risks, whether through investing in innovations, marketing strategies, product and service development, among other means of expenditure. The challenge of many small business enterprises is that there are higher stakes in approaching risks, such that failure to achieve success may result in devastating financial consequences. In the light of this, the implementation of corporate governance involves collaborating with experts in risk management practices. These executives can develop customized risk management models, which align with the vision and goals of the firm (Brunninge et al., 2007). Through this, the critical decision makers can determine which risks are worth taking and which are not. Subsequently, business owners can implement innovative products, services, processes and infrastructure that have a higher potential to yield positive results.
Many small business owners have centered competitive advantage in the drive towards achieving effective corporate governance. Harris and colleagues (2013) have maintained that the small to medium enterprises have many opportunities to explore in the presence of knowledge management. This is seen as a tool that provides business owners with a vital foundation through which they can navigate the ever-changing and competitive external markets. Knowledge management is achieved through developing frameworks that aim to gather, process, and utilize information in ways that increase productivity as well as market presence. To achieve this, small business owners need to have developed an efficient group of board members who provide opportunities for such explorations. Governance bodies also provide avenues in which business owners can examine and methods of innovation implementation (Durst and Edvardsson, 2012). Resource limitation is another problem that can be solved through knowledge management.
Furthermore, knowledge management that is handled at the corporate level facilitates both short and long-term planning for the businesses. Members of the board can determine the path and progress of the firm through general meetings and regular updates. In essence, communication is enhanced at the corporate level. This may lead to the development of an organizational culture where communication and coordination are highly valued. Because of these knowledge systems, businesses can be protected from various kinds of external harm, such as theft, fraud, and information system hacking, among others. Additionally, the business is also protected from internal harm that can be manifested through financial mishaps (Mirkovic, 2015).
Management systems also allow for the development of agility within the business. In every external business environments, technological, social, financial, and political changes are shaping the manner in which business is operated. Small to medium enterprises are affected by these changes at every level. For this reason, they need to develop a business framework, which provides room for change (Guarda et al., 2013). Corporate governance roles center business models that provide opportunities for easier transition. Moreover, change management systems can be implemented to enable employees to adjust to the shifting organizational environments.
Business owners also face the challenges of maintaining compliance, especially when they lack the knowledge and background relevant to their area of operations (Harris et al., 2013). Historically, lack of compliance within the small businesses has translated to limited growth and damaged reputation. Corporate governance is beneficial to the business because of the legal expertise implemented therein. Executives on the board can apply relevant policies relating to the business in such a way that they adhere to the legal and jurisdictional requirements. Because of this, the smaller firms can save on expenses that would be incurred in the event of litigations and penalties that are accrued from violation of regulations.
Conclusion
Small and medium
enterprises have incorporated professional governance in their businesses as a
means to achieve their organizational growth. Effective corporate governance
has been linked to growth and expansion
of businesses through effective planning
and management of resources and stakeholders. Small businesses are driven by the need to satisfy the needs and
interests of their stakeholders, ranging from investors, employees, customers,
and the larger communities in which they
operate. Furthermore, business owners are
required to adhere to the rule of law. Corporate governance provides
expertise in this area, ensuring that they minimize potential damage from
litigations and penalties. Additionally, corporate social responsibility as a
means of connecting with the local communities has become essential for small and medium-sized businesses. Executive governance provides
opportunities as well as relevant platforms for positive perceptions of small
and medium-sized companies to be achieved. Resource and funding are essential to the growth of any business,
particularly for the small and medium enterprises that may lack sufficient
capital as compared to their more extensive
and more established counterparts. Investors seek trustworthy and effective companies to direct their financial resources. A
record of good governance for a business
is bound to attract investors, who will be willing to pay more for shares and
premiums. Competition is essential in ensuring that the business remains relevant in the industry in which it operates.
Corporate governance provides opportunities for small businesses to create
advantages that allow them to be competitive even with large firms.
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