Corporate governance (CG) is deemed as the necessary building block in terms of stable economies, as it helps the organization in protecting the rights and interest of the shareholders and other stakeholders of the organization. Corporate Governance mainly gives the framework for the effective monitoring of management actions and performance, and it also encourages better business results.
This framework reflects the rules and policies through which board of directors of the organization ensures the accountability, fairness, and transparency in the relationship occurred between the organization and its stakeholders such as financiers, customers, management, employees, government, and the community. Following things are reflected by the corporate governance framework-
- Contracts which are explicit and implicit in nature signed between the organization and stakeholders in terms of distributing the responsibilities, rights, and rewards.
- Procedures which deals with the conflict of interests of stakeholders in terms of their duties and roles (Corporate Governance, 2018).
The main challenge for small and medium size firms (SMEs) is to establish the framework related to the corporate governance which is mainly developed for the large and listed organizations. These frameworks of the corporate governance fail to reflect the elements and characteristics of the SMEs, as in these organizations owners are the managers of the organization as well. In this ownership of the company is also shared across the family members. This report mainly aims to encourage the understanding of the challenges faced by the small and medium firms in terms of the corporate governance. In other words, this paper reflects all the major challenges faced by the organizations in context of the corporate governance, and further states the strategies which are used by the organization for dealing with these challenges (World Bank Group, 2017).
Corporate governance structures can be used by the small and medium sized firms in terms of ensuring the long term success for their stakeholders and for organization itself. As stated by the Organisation for Economic Cooperation and Development (OECD), CG mainly involves the set of connection between the management and board, its shareholders, and other stakeholders of the organization. In terms of the SMEs, CG ensures the proper incentives for the board and management of the organization in terms of achieving those objectives that are in the interest of the organization and its shareholders, and also facilitates the effective monitoring of the organization (ACCA, 2014).
Corporate governance guide prepared by the MCCG mainly targets the large and listed company, and those organizations which are not listed are also encouraged in terms of including this code in their day to day activities. These organizations must ensure the implementation of the practices defined by MCCG in context of enhancing their accountability, transparency, and sustainability (SC, 2017).
Major Corporate Governance Issues
The biggest issue in context of the Corporate Governance faced by SME is the lack of independent directors. Structure of the Corporate Governance mainly based on the independent directors of the company, as these directors are responsible to bring the objectivity I each and every function of the board of directors and also ensure effectiveness (KPMG, no date).
As lack of independent directors on the board is considered as big issue for the SMEs, because it ultimately cause influential effects on decisions taken by members of the organization. This can be understood with the help of example, as IJ pharmacy is the organization which falls in the top 15 SMEs of Malaysia. This organization also face the issue related to the lack of IDs for ensuring best CG practices in their business (Rachagan & Satkunasingam, 2009). It is necessary to understand that, at the time when changes in the corporate governance law occurs, number of challenges will resulted in terms of the corporate governance measures which affect the efficiency of the organization. Some of these challenges are lack of understanding in terms of the working of the board of the organization and the independent NEDs. It is difficult to find the NEDs of high quality. However, there is expectation of the guarantee that SMEs get the benefit related to the cost savings because of the enhancing corporate governance standards in the business organization. There is no urgency on the part of the SMEs to improper the governance in comparison of the other pressing issues related to the business such as there is issue in managing the cash flow of the organization. Those advisers which are working with the SMEs are under obligation to challenge these perceptions, which are generally the reason of the inaction.
SMEs further face the issue of lack of transparency in terms of the corporate governance, as there is risk of hidden transaction in the SMEs. Lack of transparency is deemed as big issue for the organizations, because it enhance the risk of wrong decisions and also affect the interest of stakeholders in negative manner.
There are some general challenges also which are faced by the SMEs for ensuring the effective corporate governance in their business, such as difficulty in the interpretation of the expression of need, there is lack of awareness of need, there is lack of standardization, issue related to the understanding of the required changes, and there are concerns related to the cost (ACCA, 2017).
Another difficulty emerge in the interpretation of the expression of need, which means, family-owned SMEs must identify some issues in the business which required to be addressed in context of improving the performance and perspective of business. This can be understood through example, following is the period of business growth, internal decision-making structures which need to be strengthened or formalized. Solution of this issue actually lies in the improvement of the corporate governance, but in actual SMEs fail to frame these needs in such terms. In this context, they required the external advisers and institutions in terms of making the link with the corporate governance structures and also give them advice on further solutions.
Strategies to deal with these challenges
There are number of strategies which can be used by the SMEs in Malaysia to deal with the above stated challenges, and some of these challenges are defined below-
- A board with proper functioning can help the organization in ensuring that performance and management of the organization both conducted in well manner, and also monitored properly in the SMEs. There is also an enhanced risk that poor quality of the management information makes it harder to analyse whether SMEs are going to be insolvent.
- Failure of the board of the organization and business is the result of the family-owned board, because in this board members are not well-experienced. In other words, there is lower failure rate in those SMEs in which board of the organization holds the experienced members.
- Another strategy in this context is the board evolution, which means, there are number of business organization in which business does not exist in the static state, but it is evolved on continuous basis. This is the reason, because of which role of the board needs to be evolved over the time.
There are number of practices which are stated by the MCCG in terms of resolving the issues faced by the SMEs while emerging the corporate governance in their organizations. Following are the practices which can be adopted by the SMEs in terms of meeting the strategic aims of the corporate governance-
- Strategic aims of the organization must be set by the board of directors of the company in terms of meeting the corporate governance standards, and also ensures that all the necessary resources are available in terms of meeting these objectives, and also for reviewing the performance.
- The Chairman of the board who is responsible for ensuring the good governance practice.
- The position of chairman and CEO in the board must be hold by the different individuals.
- The board of the SMEs must be supported by the qualified and suitable company secretary in terms of giving the sound governance advice, and also ensure comply of the rules and procedures related to the CG (SC, 2017).
Improvements in Corporate Governance
There are number of factors which need to be incorporated in the CG practices, as all these practices also helps the organizations in resolving their issues-
- Board of directors of the organization must include the experts related to the corporate governance, which means, those directors who hold the expertise in terms of the corporate governance, so that they are able to give their expert advice on the issues related to the corporate governance.
- SMEs can also take the advice from outside experts, which means, those consultancy firms who help the SMEs in resolving these issues (Abor & Adjasi, 2007)
Abor, J. & Adjasi, C. (2007). "Corporate governance and the small and medium enterprises sector: theory and implications", Corporate Governance: The international journal of business in society, Vol. 7 Issue: 2, pp.111-122.
ACCA, (2014). Governance for all: the implementation challenge for SMEs. Available at https://www.accaglobal.com/content/dam/acca/global/PDF-technical/small-business/ea-governance-for-all.pdf. Accessed on 11th October 2018.
ACCA, (2017). What the new Malaysian corporate governance code will mean for companies. Available at https://www.accaglobal.com/in/en/member/discover/cpd-articles/governance-risk-control/mycorpgov-cpd.html. Accessed on 11th October 2018.
Corporate Governance, (2018. Corporate Governance. Available at
KPMG, (no date. Role of Independent directors. Available at https://www.in.kpmg.com/SecureData/aci/Files/RoleofIndependentDirectorsIssuesandChallenges.pdf. Accessed on 11th October 2018.
Rachagan, S. & Satkunasingam, E. (2009). "Improving corporate governance of SMEs in emerging economies: a Malaysian experience", Journal of Enterprise Information Management, Vol. 22 Issue: 4, pp.468-484.
SC, (2017). Malaysian Coe on Corportae Governance. Available at https://www.sc.com.my/wp-content/uploads/eng/html/cg/mccg2017.pdf. Accessed on 11th October 2018.
SC, (2017). SC Releases New Malaysian Code on Corporate Governance to Strengthen Corporate Culture. Available at https://www.sc.com.my/post_archive/sc-releases-new-malaysian-code-on-corporate-governance-to-strengthen-corporate-culture/. Accessed on 11th October 2018.
World Bank Group, (2017). Corporate Governance and Small and Medium Enterprises. Available at https://www.ifc.org/wps/wcm/connect/e4267212-baf6-401e-9c4e-165eb3e41908/CG+SMEs+fact+sheet.pdf?MOD=AJPERES. Accessed on 11th October 2018.