Sunday, 25 February 2018

Why Entrepreneurs Should Worry About Governance

Corporate governance, in the present form, was introduced in Malaysia after the Asian financial crisis in the late 90's with the publication of the first Code on Corporate Governance (CG Code) by the Securities Commission in year 2000. 

This CG Code, which was revised a number of time over the years, was enforced through the Listing Requirements of Bursa Malaysia. Given the needs of the time and the consequences if the governance practices of our listed companies were not up to mark, the focus of the code was for larger structures with significant external shareholdings. 

Although the outcomes of good corporate governance would improve any organisations, for profits or otherwise, big or small, the principles, best practices and other recommendations in the CG Code are more practical to be implemented by larger business organisations. What about small and medium enterprises (SME)? Should entrepreneurs start to worry about governance and leadership when their businesses grow into bigger companies?

Corporate governance is defined as "The process and structure used to direct and manage the business and affairs of the company towards business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, while taking into account the interest of other stakeholders". There are a number of concepts which are important to all businesses, irrespective of their size - "process and structure", "direct and manage" and "long-term shareholder value" amongst the few.

SMEs have many structures and processes; they require to be directed and managed; and more importantly, entrepreneurs normally are their major shareholders. Hence, if the outcomes of good corporate governance create long-term shareholders value, their entrepreneurs who are their major shareholders would benefit if their businesses have good corporate governance practices.

One of the major challenges for good corporate governance to be implemented by SMEs is the way governance are discussed in the public space. The focus had always been on the structures such as committees and various controls and assurance activities. All of these appear to be too overwhelming for entrepreneurs to relate to their smaller SMEs. The distinction between governance, leadership and management are also not clear. Hence, entrepreneurs tend to focus more of the management aspects since that would bring them profits and neglect governance and leadership part of business simply because they are too complex to be understood.

It is suggested here that when the three key concepts; governance, leadership and management are discussed with entrepreneurs, their interests (being the major shareholders) should be the focal point. Governance should be sold as the mechanism for them to protect their profit generating machines and whether they like it or not, they have leadership roles to play in their respective businesses.

My recent session on governance and leadership for SMEs. Entrepreneurs are not only keen but they also indicated their challenges in enhancing governance and leadership in their enterprises
Rather than worrying too much on the structures, entrepreneurs need to be encourages to focus on the principles of governance and be creative in getting the outcomes. For example, instead of having independent directors, they could create an advisory structure where independent people could advise them on governance, leadership and management issues faced by SMEs. This will avoid those advisers from being exposed to business and conduct risks of SMEs.

A lot more need to be done to enable good corporate governance be adopted in the SME sector. This require responsible leadership by the entrepreneurs themselves. Good governance should result in effective management and more sustainable enterprises. At the end, entrepreneurs should be also to see and benefits the most, since they are the owners and assume the highest risks of ownership.
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