Introduction
The small and medium-sized enterprises [SMEs] form a critical element of the Dubai’s economic growth. The sector accounts for 95% of all businesses in Dubai, and it employs over 42% of its workforce (Dubai SME 2015). Thus, the SMEs must be managed effectively to ensure sustainability. One of the enabling aspects that SMEs should take into account entails corporate governance. Corporate governance allows SMEs to adopt the best practices such as control systems hence alleviating the occurrence of risks that might affect their performance. Therefore, the attractiveness of the SME to different stakeholder categories such as investors and credit financiers is improved.
Despite corporate governance being a focal point in businesses success in the 21st Century, the SMEs’ approach to corporate governance has been tepid (Tricker 2012). Dubai SME has formulated nine (9) pillars that existing and aspiring entrepreneurs should consider in establishing a strong foundation to change this approach. This paper is a critical assessment of the nine pillars and an evaluation of their relevance in corporate governance amongst SMEs.
Analysis of the nine (9) pillars of corporate governance
Pillar 1: Adopt a formal corporate governance framework outlining the roles of the key bodies such as partners, shareholders, board of directors, and management.
This pillar emphasizes the importance of implementing a prescribed governance framework. The framework should outline the roles of the different stakeholder categories such as Board of Directors, the management, shareholders, and partners. The rationale of this pillar is based on the view that corporate governance is an interdependent issue amongst the different stakeholders. This pillar aligns with the resource dependency and the resource-based theories. The resource dependency theory underscores the importance of establishing dependencies. Conversely, the resource-based theory highlights the importance of nurturing interdependencies between different economic organizations (Huse 2008). The stakeholders identified in this pillar constitute a critical organizational resource, viz. human capital and economic organizations. Therefore, collaborative effort is necessary for achieving the intended outcome. This goal can be achieved if a clear definition of roles and responsibilities is developed. Huse (2008) emphasizes that the formal relationships are necessary to achieve corporate control. Through corporate control, an organization ensures that the delegated activities are undertaken within the stipulated structure, size, and scope.
Pillar 2: Conduct a succession planning process.
This pillar involves carrying out a comprehensive and successful planning process. Most SMEs are largely dependent on the skills and experience of one [sole proprietorship] or a few persons. As business entities, the SMEs’ performance or operations should not decline or close down (Huse 2008). However, failure to formulate a succession plan may compromise the SMEs’ long-term existence and survival. The succession plan increases the chances of sustainable business operations by facilitating change in organizational leadership. Tricker (2012, p. 3) affirms that change ‘in organizational leadership should be undertaken in a progressive, planned, and non-disruptive manner’. Through succession planning, the level of confidence in the longevity of the firm amongst different parties such as shareholders, customers, and employees is increased. The ultimate effect is the preservation of the SMEs’ brand value and reputation despite the changes. Moreover, the chance of the SME achieving the intended vision despite some of the key parties retiring is sustained.
Pillar 3: Establish a timely, open and transparent flow of information with shareholders
This pillar stipulates the importance of establishing a timely, transparent, and open flow of information amongst stakeholders. Effective communication constitutes a fundamental aspect of corporate governance. Thus, businesses have an obligation to ensure that the different stakeholders are informed adequately about the firm’s operations. Mallin (2007) emphasizes the importance of honest and open communication in establishing relationships based on trust and cooperation. In executing their managerial duties, managers have a responsibility to act in the best interest of shareholders. Thus, they are supposed to act as organizational stewards. According to the stewardship theory, managers should not be guided by personal economic reasons. On the contrary, managers should endeavor to safeguard the welfare of the shareholders and other stakeholders (Mallin 2007).
One of the ways through which this goal can be achieved is by entrenching open communication. Timely, transparent, and open communication increases the shareholders’ understanding of the business strategies. Moreover, promoting openness and transparency is critical in limiting the occurrence of conflict of interest between organizational managers and shareholders. By gaining information on a firm’s operations, the stakeholders can hold the managers accountable for their actions (Mallin 2007).
Pillar 4: Endeavour to set a formal board of directors to accompany the growth of the company
This pillar underscores the establishment of a formal Board of Directors. Tricker (2012) asserts that a Board of Directors forms the cornerstone of effective corporate governance. According to this pillar, the Board of Directors should comprise external parties. The rationale for integrating a Board of Directors is to entrench checks and balances amongst managers and provide strategic directions in the decision-making process. Depending on the nature of stage of the business, an organization may consider integrating an advisory board as opposed to a fully-fledged board of directors. The advisory and board of directors are essential in providing strategic directions (Tricker 2012).
Pillar 5: Develop a clear mandate for the board of directors to oversee the operational performance of the business, as well as evaluating and improving business strategies
This pillar underscores the significance of formulating a clear mandate that the board of directors and the management should follow to oversee the SMEs’ operational performance. The separation of roles between the organization’s chief executive officer and the chairperson is vital because the two positions require different skills and experience (Tricker 2012). Furthermore, through such separation, it is possible for the respective parties to undertake their oversight role over the organization’s management team.
Pillar 6: Maintain a credible book of accounts, which are annually audited by an external auditor
This pillar stipulates that SMEs should maintain credible financial records that must be audited annually by an external auditor. The rationale of this pillar arises from the view that SMEs have a responsibility to provide stakeholders with quality, comprehensive, and reliable financial information (Ittonen 2009). One of the ways through which this goal can be achieved is by ensuring that the financial information issued to the shareholders complies with the Generally Accepted Accounting Principles [GAAP]. Due to the agency relationship between the manager and the owners, the former might exploit the latter due to their exclusive access to information. Therefore, the owners might make ineffective business decisions due to information asymmetry (Ittonen 2009). The inclusion of external auditors limits such occurrences.
Providing internal stakeholders with timely and quality financial statements improves their assurance on the businesses’ operations and financial stability. This assertion arises from the view that the shareholders are provided with an independent opinion of an external party rather than solely relying on the opinion provided by the internal auditor (Ittonen 2009). Subsequently, their effectiveness and efficiency in undertaking different roles and responsibilities is increased. The inclusion of external auditors can be explained by the existence of agency problem, which emanates from conflict of interest between the business owners and managers. According to the agency theory, managers are required to act in the best interest of shareholders by maximizing the shareholders’ wealth (Ittonen 2009). However, the existence of opportunistic behaviors may derail managers from this overall goal. Thus, they may make risky decisions at the expense of the shareholders (Ittonen 2009). The external auditors enable the organizational managers to minimize the risk associated with opportunistic behavior amongst the managers. Furthermore, their involvement increases the relevance and reliability of the financial records.
Pillar 7: Set up an internal control framework and conduct a regular review of risk.
This pillar emphasizes the importance of integrating a comprehensive internal control framework and undertaking regular risk assessments. The rationale of this pillar is to promote reliable financial reporting by ensuring that businesses comply with the relevant laws and regulation. The importance of the control framework is highlighted by the view that the owners cannot rule out the occurrence of unethical practices such as fraud (Fernado 2009). Besides, such owners cannot limit the occurrence of financial losses and ensure that activities are conducted within the stipulated guidelines and procedures hence eliminating errors. Thus, the presence of internal control framework improves the checks and balances necessary for successful corporate governance.
In addition to the above aspects, SMEs might experience a high rate of growth, hence limiting the owner’s capacity to undertake effective control. Under such circumstances, it is imperative for the owners to delegate some of the internal control activities to internal stakeholders (Freeman et al. 2010). However, this aspect is only possible if the firm has a well-stipulated internal control framework. The presence of such framework increases the level of accountability, hence ensuring that the firm’s assets are utilized effectively.
Pillar 8: Recognize the needs of stakeholders
This pillar accentuates the importance of recognizing the varying needs of stakeholders. This pillar aligns with the stakeholder theory with stipulates that businesses’ success does not only depend on the shareholders. On the contrary, a firm’s long-term sustainability is subject to the extent to which it engages with the different internal and external stakeholders. These stakeholders include employees, customers, creditors, the community, and the government (Fernado 2009).
In the course of their operation, the SMEs must be focused on understanding and responding to the needs of the different stakeholder groups. This goal can be achieved by formulating a comprehensive policy that stipulates how the SMEs approach the different stakeholder groups. For example, a policy that outlines how the firm responds to the employees’ needs on work-related aspects such as remuneration is critical in improving their level of satisfaction. Conversely, listening to the society and engaging in corporate social responsibility lead to the development of a positive corporate image. The outcome is that the community considers the business as a component of the community. Thus, their actions and response towards the firm are positive (Freeman et al. 2010). Therefore, this pillar is fundamental in the SMEs’ quest to establish a long-term relationship with the stakeholder. The overall effect is that a business gains a sustainable competitive advantage.
Pillar 9: Formulate a framework, setting out the family’s relationship with the business
This pillar underlines the importance of SMEs developing a framework that outlines how the family should relate to the business. Most SMEs are family-owned. Therefore, to sustain the businesses under such circumstances, the family members involved in the running of the business must be guided by a set of values (Huse 2008). Therefore, the level of commitment amongst the family members in ensuring that the firm achieves the intended goal is considerably high. For example, during the initial stages, some of the family members may forego or accept low salaries and wages to ensure that the firm is established successfully.
Despite the sacrifice by the family members, entrenching corporate governance in such a business setting is complex. This assertion arises from the dominance of the emotional bond amongst the family members. Moreover, it might be relatively challenging to sustain the inherent strengths of the founders (Huse 2008). Therefore, later generations who might be involved in the business operation may affect the businesses’ approach towards corporate governance. Other challenges might arise from business ownership issues.
This pillar stipulates that it is important for the family to formulate a comprehensive constitution that outlines the family’s vision as a way of overcoming these challenges. Furthermore, the constitution should entail a set of policies outlining clear lines of authority concerning issues such as decision-making (Freeman et al. 2010). Furthermore, the constitution should entail a clear statement on the separation between the business and the family members.
Conclusion
The nine (9) pillars advocated by the Dubai SME underscore the most important issues in entrenching corporate governance amongst SMEs. Their relevance arises from the view that they have considered the different internal and external environments, which are essential in the successful implementation of corporate governance. Thus, the pillars have highlighted the importance of a multidimensional approach to corporate governance. The pillars have stressed the importance of establishing a balance between the internal and external environments in business operations. Besides, the pillars have conformed to different theories of corporate governance such as the stakeholder theory, the agency theory, and the resource dependency theory. Moreover, the pillars have highlighted the need for individuals within the managerial capacity to adhere to the formulated internal control frameworks, policies, procedures, and standards.
Works Cited
Dubai SME: A corporate governance code for small and medium enterprises 2015, Web.
Fernado, A 2009, Corporate governance; principles, policies and practices, Pearson Education, New Delhi.
Freeman, E, Harrison, J, Wicks, A, Parmar, B & Simone, C 2010, Stakeholder theory, Cambridge University Press, Cambridge.
Huse, M 2008, The value of creating board: corporate governance and organizational Behavior, Routledge, New York.
Mallin, C 2007, Corporate governance, Oxford University Press, Oxford.
Ittonen, K 2009, Audit reports and stock markets, University of Vaasa, Vaasa.
Tricker, B 2012, Corporate governance: principles, policies, and practices, Oxford University Press, Oxford.