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Role of Corporate Governance in SME

This article is provided by Levanter Africa ;A partner of PROI Worldwide

 


In 2008 the Capital Markets Authority intervened in the management of Discount Securities Ltd, a stockbroker with the Nairobi Stock Exchange, and appointed an auditing firm, KPMG, to investigate allegations of weak financial base and poor corporate governance. Following these developments, the National Social Security Fund (NSSF) is said to have lost over Sh1.4 billion (approximately US$19 million) belonging to desperately poor retirees invested through the stockbroker.

According to a May 2016 report by Cytonn Investment titled “Kenya Listed Companies Corporate Governance Analysis Report, “What is the role of corporate governance in the recent investor losses?” Kenyan investors have incurred Kshs. 264.3 billion losses as a result of isolated corporate governance issues affecting a section of companies in Kenya. Some of the companies that have led to losses being incurred include Chase Bank, CMC, Imperial Bank, Uchumi, Mumias, Kenya Airways, National Bank and TransCentury.

Although these are listed companies with slightly bigger market capitalization than traditional SMEs, the importance of corporate governance in the smooth running of each of these businesses cannot be understated.

Small and medium sized enterprises in Kenya have undergone massive transformation over the years. Their contribution towards economic development and job creation has played a complementary role in enabling the government reach its long term goals. Despite the positive contribution, most SME owners consider corporate governance as a practice relevant only to the large and listed companies.  

SME founders have traditionally expanded their businesses up to a size that they can still manage personally on a daily basis.  Company owners are reluctant to adopt corporate governance practices because of the requirement to release company information.

In order to strengthen SMEs, it is important for such businesses to adopt and implement management and governance systems through corporate governance.  This means that interested parties will have confidence knowing that your business is professionally run.  We will share five reasons why corporate governance is crucial for the growth and success of an organisation regardless of the size.

Firstly, the foundation of corporate governance is based on decision making.   Through corporate governance, the decision making process is opened up to more than one person. Third party scrutiny enhances the chances for objective decision making and also identifies a reliable channel to share the said decisions to the involved parties.

Financial management is a core element of corporate governance. Financial planning determines the success of any company and also enables the management to implement decisions effectively.  It is advisable for SMEs to prepare budgets in time to manage cash outflows within a specific period of time.  This practice also limits employees from wasting company resources.

An open system that defines employee responsibilities and expectations will also establish ways to identify and reward performance.  As SMEs continue to grow; the owner may not be able to perform all the operational tasks simultaneously.  The need to delegate authority becomes a priority in the business.  Corporate governance defines credible mechanisms to define roles and address problems when they arise.  Since employees and the managers are aware of their responsibilities, there is continuity of business even when the owner is away. Such management systems play a major role in identifying ways to monitor and reward performance.

Companies that implement corporate governance gain the trust of investors, customers and stakeholders.  This will have a positive impact on the different elements of the business. For instance, lenders will have confidence in your internal processes, investors will be willing to invest in the business and the employees will be confident in the success of your business.

Finally, corporate governance will streamline the processes and give people accountability. The practice of such policies limits the potential of bad behavior from employees and institutes rules to identify and deal with misconduct and fraudulent activities.  Internal parties are also bound by their contracts from sharing company information to third parties.

 

 

Copyright © 2016 Diamond Trust Bank. All Rights Reserved.

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