The view hitherto taken that SMEs and FOEs owing to their size, do not significantly contribute to the economy is fast changing. In reality, many SMEs and FOEs whilst small in size in terms of current operations have enormous growth potentials. According to the 2012 Enterprise Baseline Survey, SMEs and FMEs contribute nearly half of Nigeria’s GDP and account for over 25 percent of employment in the country.
However, many Owner Managers are not receptive to embracing new processes, policies and structures which impose perceived restrictions on the way they do business. Thus, many SMEs and FOEs do not outlive the first generation of owners due to a multitude of reasons including but not limited to the following Corporate Governance deficiencies;
· Lack of accountability and transparency
· Lack of Succession Planning
· Weak risk management and internal control systems
· Inability to define and implement clear Strategy
· Lack of clear separation between the role of the Board and Management
· Ineffective Board oversight
· Overbearing influence of the Chairman on Management (when the roles are separated – often times the MD/CEO is also the Chairman)
· Benefits and compensation for Owner Managers (and other family members) not clearly defined – no distinction between company and personal funds
· Employing family members who are not qualified or lack the requisite skills
· Failure to set measurable performance indicators
The challenges to defining, implementing and sustaining a sound Corporate Governance culture by SMEs and FOEs include the unwillingness to invest the required resources of time and money and the need for a paradigm shift. Considering the already high cost of doing business in Nigeria, the introduction of Corporate Governance to SMEs and FMEs might be a disincentive to investment. However, the benefits derivable from putting in place appropriate and effective governance structures, policies and processes cannot be over-emphasised.
Benefits of Corporate Governance to SMEs & FOEs
· Ensures corporate success and economic growth.
· Minimizes wastages, conflicts of interest, risks and mismanagement.
· Makes the SMEs and FOEs attractive to investors
· Formal structures and processes reduce ‘key‐man” risks and provides for succession
· Assures competitive advantage and increases brand equity
· Enables the Board of Directors to provide critical stewardship/strategic direction
Conclusively, It is an established fact that SMEs and FOEs are the backbone of many developing economies like Nigeria, owing to their capacity to create jobs, drive economic growth and act as a major force in poverty alleviation. It is however advisable that SMEs and FOEs embrace Corporate Governance for business sustainability.
It is in recognition of this that compliance with the proposed National Code of Corporate Governance envisaged by the the Financial Reporting Council Act will be mandatory and applicable across all sectors. However, it is recommended that the provisions of the proposed Code be flexible enough for smaller companies to comply as overly stringent compliance requirements would be a disincentive to small businesses..
Adeyemi is Managing Director of Deloitte Corporate Services Limited ([email protected])