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Personal Finance

Best governance practices SMEs should adopt to grow

workers in office
Hiring skilled directors helps SMEs to attract investors. FILE PHOTO | NMG 

A small or medium enterprise (SME) has been defined in several quarters including the Organisation for Economic Co-operation and Development as an enterprise that has less than 250 employees. SMEs, therefore, make up a large percentage of Kenyan businesses.

According to the Kenya National Bureau of Statistics, there are about 17 million registered SMEs.

Today, I would like to address the challenges SMEs face in governance.

Several scholarly articles have cited this as one major challenge with one professional body stating that the challenges could be due to a lack of a regulatory framework for managing SMEs. According to this body, the governance regulations in place cater mainly for listed firms and would be too strenuous for SMEs to implement.

Some of the contributors to this challenge include a lack of governance skills and awareness by SMEs. Most SMEs are not able to attract skilled directors as they do not have attractive compensation packages for the directors.

Not many SMEs are incorporated as companies, some are sole proprietorships and partnerships. In my view, any SME can put in place a board of directors no matter the type of business association.

The advantages of the board include enhancing accountability. There is a need to separate ownership from management and this is increasingly being the recommended practice. Board is one of the ways an SME can separate it ownership from management such that the latter is accountable for proper governance.

A board that includes different professionals, that is, a diverse board, would increase the performance of the SME as decisions are made holistically. Boards serve in an advisory capacity. An SME that has in place a good board, would be more attractive to investors than one without a board. An established board makes it easier for the SME to list in future.

Some of the ways SMEs can put in place boards include actively recruiting directors and paying well.

However, where the SME is limited in this, it can still seek out volunteer directors. This really depends on an individual and the sectors in which the SME operates. A social enterprise may be able to attract volunteer directors easier than a commercial venture.

Instead of incurring huge expenses in form of directors’ perks, the SME could opt to capitalise what would have been the directors’ dues. This means, ceding a certain percentage of shareholding to skilled directors. Venture capitalists — the investors who invest in your business for a return — would definitely seek a stake in the company and a slot in the board of directors.

Small businesses ought to be more open to this form of financing, understanding that this is the global trend. An enterprise that is reluctant to cede some percentage of control would not attract investors easily.

Finally, the SME can recruit board consultants and advisers. Rather than having these consultants full time, the SME can engage the consultants when a need arises, for example when drafting the strategic plan or undertaking specific projects. This allows the SME to access expert services at a cheaper cost rather than having a full-time board.

Good governance is key to good performance and ought to be implemented no matter the size of the enterprise.

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