“The Practical Challenges of Implementing Governance in SMEs”

BUSINESS is business, yet it is commonly erroneously thought that corporate governance has no place in small to medium enterprises (SMEs). While the governance principles are the same in both SME and large corporate environments, the difference lies in the practical application of governance activities.

What then are some of those practical differences that you would need to take into account as a director of an SME?

Your greatest obstacle would most likely be overcoming the lack of resources that would limit a board’s ability to implement the actions that arise out of the governance process. The availability of human skills, capital and financing, cash flow and other resources may create this challenge. As a director you may feel frustrated at not being able to deliver change as quickly as you would like to. It then becomes necessary to “work smarter not harder”. A clear awareness of what the real priorities are will support this. The extensive use of technology can also be extremely useful.

As an SME director, especially where the executives are also the founders, you will quickly notice how difficult it is for business owners to separate their roles as shareholder, director and manager. You would therefore need to be vigilant in making sure these roles are kept separate and that the board as a whole stays in the mode of “directorship” while the board meeting is in session.

According to George Zacharias, executive director of Sirdar Legal, IoDSA member and experienced corporate and SME board chairman, working with SMEs as a director requires a greater focus on issues of solvency and liquidity: “With the new Companies Act, it is critical that solvency measurements are on the monitoring dashboard of any SME”. In really small businesses, where there may be a lack of a management team, this is made all the more tricky to implement effectively.

If an SME is a family business, the complexities of these relationships make it very challenging to implement performance management of those family members. Independent directors need to be empowered with real decision making capability and must have the ability to negotiate through this minefield of relationship complexity.

In a corporate environment, the managing director is often appointed due to his or her skills for the job. In an SME this role often falls onto the founder of the business, who may not have the skills needed to lead the business forward. Directors may therefore have a greater challenge in the performance management of the managing director when he or she is in the position simply due to being the business owner. How would you then go about firing the business owner from their own company?

While there are many other practical differences, in a subsequent article I will share with you some of the unique skills and abilities that are therefore needed in being a director of an SME. Working in this field certainly brings directors a new and exciting dimension of challenge, opportunity and growth.

Scroll Up