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Why corporate governance is a survival strategy for SMEs

Running a business is not as glamorous as it seems. On the contrary, most entrepreneurs will agree that keeping a company afloat is extremely demanding. It is therefore not surprising that corporate governance does not make the priority list of most Small and Medium Enterprises (SMEs). With the low adoption rate of governance practices in Nigeria, most SMEs consider corporate governance as an expensive structure reserved for larger, more established companies, and ultimately a burden they are unable to take on.

This could not be farther from the truth. Simply put, governance is the system that guides all interactions for applying resources to meet a set objective. In the case of a company, it involves the system for managing the relationships between the owners, directors, managers, and stakeholders of the Company. While most entrepreneurs focus on the day-to-day running of the business, governance is the system for ensuring that it is run properly.

Contrary to popular belief, everyone has a governance system. The real question is whether it is done well, to preserve and increase value, or done badly. Studies have shown that corporate governance is not only beneficial to businesses at various stages of growth, but it is also crucial for their long-term survival. A deliberate governance strategy creates a formal structure for decision making, minimising risk, taking advantage of opportunities, and building resilience in times of crisis.

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Importantly, good governance is a strong indicator that an enterprise is utilizing its resources prudently. It serves as a check against waste, corruption and mismanagement. These attributesprovide a confidence boost for investors who are usually willing to pay a premium for well governed companies. Sound governance practices will give founders the freedom to focus on high level, strategic matters, without having to bear the burden of overseeing every part of the business and managing operational risk at the same time.

These benefits are every business owner’s dream. However, knowing the advantages and implementing them are two different considerations. A common complaint by overwhelmed entrepreneurs is that they simply do not have the time or resources to set up these governance structures. However, approaching corporate governance as a ‘structure’ to be set up may be inaccurate. A preferable starting point is to view governance as an enabler of business growth, and a tool for long-term success. It is a key contributor to the bottom-line, a strategy to minimise the risk of fraud, poor business output, and the occurrence of mishaps that threaten the very life of the business.

Once the role of governance in business success is firmly established, a commitment to its implementation must be set at the top and across the organisation. This is on the basis that the execution process is not a magic pill, but an evolving journey throughout the company’s existence. When implemented correctly, property governance will make room for innovation and the maximising of available opportunities. This however should not be confused with the temptation to apply quick fixes outside the set governance framework, permitting short-term decisions that lead to avoidable long-term consequences.

While governance principles of fairness, transparency, accountability, and responsibility should be fixed, the method of implementation should be flexible enough to meet the present needs of the business. For instance, a small business of 5 peoplemay not need to set up a full board of directors and board committees, but it can establish a system of decision making and reporting that ensures the business considerations are prioritized over personal biases. Ultimately, a sound governance system will protect the company through time, success, challenges and risks, into the desired future state, while ensuring that value is preserved along the way.

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