Effective Strategies For Improving Corporate Governance In Small And Medium Enterprises

By Author: Abhijeet Sharma
Total Articles: 1
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In light of the rapid global economic transformations and ongoing technological changes, small and medium enterprises (SMEs) have become the backbone of the economy in most countries worldwide. Amid this increasingly competitive environment, there is an urgent need to develop effective governance systems and practices that ensure the sustainability and growth of these companies. Corporate governance is not just a modern management term; it is an integrated system of rules and practices that ensures responsible management of companies and balances the interests of all stakeholders.
Given their unique nature and specific challenges, SMEs require a tailored approach to implementing governance principles. They differ from large corporations in their organizational structure, limited resources, and decision-making processes. However, adopting appropriate governance practices suitable for their size and nature of operations can yield numerous benefits, from improving operational efficiency to enhancing their ability to attract investments and achieve sustainable growth.

Importance of Corporate Governance for Small and ...
... Medium Enterprises
The importance of implementing an effective governance system lies in the numerous benefits it brings to the company, including:
1. Enhancing Decision-Making Processes and Reducing Operational Risks
Corporate governance establishes clear frameworks for decision-making processes within companies, making them more structured and transparent. By creating clear structures for roles and responsibilities, overlap in authority is minimized, and a reference point for decisions is ensured. Additionally, governance helps reduce operational risks through the implementation of precise control and monitoring systems, thereby minimizing the chances of uncalculated decisions or unlawful practices.
2. Increasing Trust among Investors and Partners and Facilitating Access to Funding
Companies that implement effective corporate governance practices are more attractive to investors because they provide a transparent and responsible environment. When investors and partners feel that the company is well-managed and sustainable, they are more willing to invest or engage in business with it. This increases the company’s chances of securing the necessary funding for growth and expansion.
3. Enhancing Transparency and Accountability within the Organization
Corporate governance ensures that all operations within the company are conducted transparently and can be monitored and evaluated. It also helps establish accountability systems, where each individual is responsible for their actions and decisions within the company. This reduces the likelihood of corruption or abuse of power and strengthens trust among various internal and external stakeholders.
4. Improving Relationships with Stakeholders and Strengthening Institutional Reputation
Through corporate governance, relationships with all stakeholders—including employees, customers, suppliers, and the surrounding community—are strengthened. These relationships are built on principles of fairness and transparency, which leads to the establishment of a strong corporate reputation. A positive reputation is one of the most valuable intangible assets a company can have, helping it gain the trust of society and investors.
5. Ensuring Long-Term Sustainability and Facilitating Management Succession
Corporate governance assists companies in planning for the future, whether through developing growth strategies or preparing for management transitions. Having clear plans and steps for management succession ensures smooth continuity of operations even in cases of leadership changes or company ownership transitions. This enhances the company’s long-term sustainability and reduces the shocks that may result from sudden changes.
Steps to Establish an Effective Governance System
1. Assessment and Planning
• Conduct a comprehensive assessment of the company’s current situation.
• Identify gaps in current governance practices.
• Develop a clear action plan with specific objectives.

2. Developing the Regulatory Framework
• Establish a balanced board of directors or advisory committee.
• Clearly define roles and responsibilities.
• Create written policies and procedures for governance.

3. Implementing Monitoring and Follow-Up Mechanisms
• Develop an internal control system.
• Create specialized committees (e.g., an audit committee).
Implement a risk management system.

4. Building a Governance Culture
• Train employees on governance principles and practices.
• Promote values of transparency and accountability.
• Develop effective communication channels with stakeholders.

How to Implement the Governance System?
1. Start Gradually: Implement basic practices first and then gradually expand.

2. Comprehensive Documentation:
• Prepare a governance manual.
• Document policies and procedures.
• Establish a code of conduct.

3. Ongoing Review and Improvement:
• Conduct periodic assessments.
• Update practices based on findings.
• Utilize feedback from stakeholders.

Challenges and How to Overcome Them
Small and medium enterprises face challenges in implementing governance, such as:
• Limited Resources
• Resistance to Change
• Lack of Expertise
These challenges can be overcome by:
• Starting with small, well-planned steps.
• Seeking external expertise when necessary.
• Focusing on long-term benefits.

In a world characterized by continuous change and increasing competition, corporate governance is no longer a luxury reserved for large companies; it has become a strategic necessity for small and medium enterprises seeking growth and sustainability. Adopting a gradual and thoughtful approach to implementing governance practices, considering the specific circumstances and capabilities of each company, can lead to a positive transformation in their performance and capabilities. Ultimately, investing in the development of an effective governance system is an investment in the company’s future and its ability to face tomorrow's challenges.
Implementing an effective governance system is a strategic investment for small and medium enterprises. While the path may seem challenging initially, following a structured and gradual approach tailored to the company's specific needs can lead to tangible positive results in the short and long term. Visit: https://www.mbgcorp.com/ae/

Abhijeet Sharma is a Partner in Risk & Transaction Advisory Practice in MBG Corporate Services. He is an Experienced Professional with more than 15 years of experience involving Internal Audits, Compliance Reviews, Assurance Reviews, Forensic Due Diligence, AML Compliance Framework, Corporate Governance, Intelligence Framework, Investigations & Forensic Audits.