Key Topic

family business1562739794_8544.jpg

SMEs CORPORATE GOVERNANCE

Improving SME Performance – A Corporate Governance Perspective

 Article: Nazih Hisham Al-Naser - ICD 

Does Corporate Governance improve business performance?

This question has been the subject of many research studies aiming at determining the impact of various governance variables on the performance of a business.

Most research support the verdict that there is a direct correlation between good corporate governance and improved business performance.

A global survey conducted by Deutsche Bank, “Beyond the Numbers” concluded that companies with stronger governance practices outperformed those with weak governance. The Top 20% companies surveyed had a Return on Equity(ROE) of 15.9% compared to companies in the Bottom 20% who only managed to have an ROE of 1.5%.[1]

Another study by Credit Lyonnais showed that companies in emerging markets that practice good governance practices had 8% points higher Economic Value Added than the average companies in the countries surveyed. [2]

ABN/AMRO conducted a study of Brazilian firms and their results showed that companies with strong corporate governance had a 45% higher ROE and 75% higher net margins than companies with average governance practices. [3]

Several governance principles have a direct impact on business performance. These principles include:

Better Board Oversight

A well-functioning board is the cornerstone of good corporate governance practices. When a board is fulfilling its governance duties, it is able to provide better oversight over the activities and performance of management.

Good corporate governance means an active board that meets frequently and is able to monitor performance and question management decisions. In the event of business failure or inability to increase shareholder value, the board can replace non-performing and ineffective managers.

Independent and Diverse Board Composition

Principles of good corporate governance require that the board has the right mix of executive and non-executive directors.

Non-executive directors increase business performance in two ways:

  1. If selected properly, they are able to bring into the business expertise skills and experience which the management team can tap into when making business decisions.
  2. Secondly, they do not have any self-interest and therefore strengthen the monitoring function of the board. They are more comfortable and in a better position to challenge the CEO and management.

Improved Internal Controls & Risk Management

Poor governance is a fertile ground for fraud, corruption, asset misappropriation, and many other unethical practices. Such practices erode business performance.

Corporate governance recommends the establishment of a strong control environment including forming a board audit committee, conducting external and internal audits, developing risk and compliance frameworks, and documenting policies and procedures.

The board audit committee acts to provide oversight over the financial health of the business. Together with the internal and external auditors, the audit committee is able to identify key risks and weaknesses in financial management and provide timely corrective recommendation.

In conclusion: An SME that is well governed will not only draw huge investor interests but it will also outperform its peers.

 

References:

  1. Deutsche Bank, “Beyond the Numbers,” Corporate Governance Implication for Investors. http://www.unepfi.org/fileadmin/documents/materiality1/cg_deutsche_bank_2004.pdf
  2. Amar Gill: Saints and Sinners, Who’s Got Religion. Credit Lyonnaise Securities Asia. https://webb-site.com/codocs/Saints&Sinners.pdf
  3. Erbiste, Bruno(2005) “Corporate Governance in Brazil: Is There a Link Between Corporate Governance and Financial Performance in Brazil cited by: Research Gate publication: https://www.researchgate.net/publication/303435981_BOOSTING_INVESTORS'_OPTIMISM_IN_CAPITAL_MARKET_THROUGH_CORPORATE_GOVERNANCE
  4. Deloitte: Does Corporate Governance Lead to Better Performance? https://blogs.deloitte.ch/banking/2018/05/does-good-corporate-governance-lead-to-better-performance.html