Poor corporate governance worsens small business woes

Many small businesses struggle to survive in harsh operating environments. Their non-adherence to corporate governance has compounded their situation. DEBORAH DAN- AWOH writes on how SMEs can leverage corporate governance to successfully navigate the country’s challenging business environment

In Nigeria, the business environment is usually challenging. It is even worse for small businesses that have barely survived their first five years of operations.

Last year, Small and Medium Enterprises Development Agency of Nigeria disclosed that poor management and inadequate governance practices were responsible for the death of two million SMEs in the last two years. It noted most of these businesses experience a high rate of failure during their early stages.

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Effective corporate governance is critical to the success of any business. According to the Corporate Finance Institute, it is a system that guides the conduct of the people within an organisation, as well as the direction of the organisation itself.

Corporate governance is altogether different from the daily operational decisions and activities that are executed by the management of an organisation. The purpose of corporate governance is to ensure effective management of both entrepreneurial and startup delivery for long-term success.

The Organisation for Economic Co-operation and Development stated in a report that the adoption of corporate governance for SMEs is positively linked to their growth and long-term sustainability.  “Better governance is not a panacea to all problems faced by SMEs, but it is an undeniably important ingredient to their success,” it noted.

While it is easy for large firms to put in place good corporate governance, it is often challenging for small businesses to adopt good corporate governance. It has been linked to the reason many of them fold up before their fifth anniversary.

Some thriving businesses such as Enron and WorldCom have died because of failure to follow corporate governance guidelines. Cadbury Nigeria almost went down after its leadership allegedly decided to breach corporate governance principles.

Experts have argued that the poor corporate governance among small businesses has inhibited them from carrying out their critical role in the economy, being the livewire of any economy.

A Director at Comtrade Group, a SME that deals on agro-products, Jide Oladapo, told The PUNCH that most owners of small businesses were not prepared for business.

“The kind of education system we have does not prepare young people to imbibe corporate governance in business. Most people find themselves in business today out of a need to survive.

“When they were in school, they had lofty dreams to work in corporate organisations. None of them planned to venture into the business world until the realities of the job market hit. At this point, they discover strong skills that can be monetised, but when it comes to the managerial aspect of business there is a wide gap,” he explained.

The Nigerian Association of Small and Medium Enterprises, South-West Zone, Vice-President, Solomon Aderoju, claimed that corporate governance is concerned with the process, systems, practices and procedure that governs any business entity, which many small businesses do not put in place.

According to him, corporate governance would help to businesses be directed and controlled to enable profitability and long-term growth.

Aderoju highlights that “corporate governance is very essential, even for MSMEs, in order to enhance their performance, profitability and survival.” There must be transparency in decision-making as well as an effective control system that will provide a stimulus for the business survival.”

He notes that the problems facing MSMEs are numerous and “that many downplay the issue of corporate governance while some are just “one-man” board.

“Without any vestige of doubt, many consider the implementation of corporate governance structures as too high when compared with its benefits.”

Aderoju added that there was a general lack of awareness among MSMEs regarding corporate governance and its relationship with corporate performance.

“Many, therefore, consider lack of finance, good infrastructure, capacity building, multiple tax regimes, high level of corruption, etc., as problems facing MSMEs, which make the issue of corporate governance less important.”

The President of the Institute of Chartered Secretaries and Administrators of Nigeria, Mr Bode Ayeku revealed that there was a need to entrench corporate values and ethics in all businesses, and that was the only way they can be sustained.

According to him, the only guarantee for continuity in a firm is to put structures in place for the management of the business that will take care of the interests of all the stakeholders and enable the stakeholders to work together for the success of the company.

The Companies and Allied Matters Act (1990) is the guide for corporate governance issues in Nigeria. However, experts have argued that it has failed in sanctioning companies for violating the stipulated laws, especially in the area of non-compliance with its provisions.

There are many challenges to the effectiveness of corporate governance for businesses in Nigeria. They range from corrupt practices, ownership structures, and slow and inefficient judicial processes, to a lack of enforcement mechanisms by regulatory bodies, amongst others.

Speaking to the PUNCH, the acting Chief Executive Officer of the Institute of Directors’ Centre for Corporate Governance, Nerus Ekezie, said the impacts of corporate governance are monumental.

“Corporate governance is crucial even for SMEs to enhance their performance, profitability, and survival. Transparency in decision-making and an effective control system is crucial to provide a stimulus for the business’s survival. The problems facing SMEs are numerous and while some downplay the issue of corporate governance, others have a “one-man” board. Many consider the implementation of corporate governance structures too high when compared with its benefits.

“We can look at the impacts on private organisations. We can also look at the impact on a nation. Taking a look at corporate governance in private organisations ensures enhanced productivity. Also, the credit rating of such a company will be increased.

“Organisations with good corporate governance systems are guaranteed to reduce the cost of capital, and the cost of loans, because investment or lending firms are confident in loan recovery.  So, a major impact is that it lowers the cost of capital for the organisation,” he explained.

According to him, the infusion of corporate governance will attract quality human capital, and it also improves social value and protects the environment.

“On the public scene, it ensures institutional efficiency and because of the tools embedded in corporate governance, corruption is kept in check and reduced.

“If the Nigerian public sector embraces corporate governance, the needed foreign direct investment will flow into the country. If the institutions are doing well, it will enhance productivity and most importantly, social stability.

To him, corporate governance is not limited to business; every identity must embrace it.

“The Nigerian public sector needs to embrace corporate governance to attract foreign direct investment, enhance productivity, and improve social stability. If institutions are doing well, families will be happy, the young population will be gainfully employed, and the culture of idle hands will be curbed.”

Similarly, the Vice President of the Nigerian Association of Small-Scale Industrialists, Seun Kuti-George, maintained that corporate governance will put SMEs in vantage position to thrive, as it levels the playground for all through flexible regulations and policies.

He stated, “The issue of corporate governance is wide and is both internal and external. If you are looking at it from the internal point of view, they are systems that you build within the business to continue to drive it. But from the external point of view, these are requirements from the government that businesses need to comply with in order for them to succeed in the economy. For example, company registrations, payment of tax, etc.

“For me, the less stringent these requirements are the better for small businesses. If you make them very stringent it is not going to be helpful. Small businesses cannot fully comply with these things. Let’s take registration with NAFDAC as an example. The cost of registering your product with NAFDAC is very high, and you have to do that for every package. If you have the same product in 50cl, 75cl and 100cl. Each of them will have to bear a number. So, the cost is heavy on small businesses.”

According to him, there are other corporate governance policies that are weighing down small businesses.

“I am not saying that businesses should operate without any control or regulation, but we may not maintain the same standard across the board,“ he added.

George further explained that the issue of excise duty on sugar-based drinks for example, the likes of Coca-Cola, Pepsi and other big beverages drinks might afford to pay N100 per litre for excise duty.

“Big brands like Coca-Cola may not have any issues.  In fact, it was due to the increment that the cost of Coke rose from N100 to N150 and people were still buying it. But for an SME owner who is producing 30,000 litres in a month, the cost will be heavy. Someone like that can be taxed N20 per litre.  Of course, corporate governance is good, no doubt about that, but the implementation and requirements should be staggered taking into consideration the size of various businesses.”

The government has to ensure the adoption of corporate governance by small businesses in order to redress the challenge of the high mortality rate of SMEs, because the economy would boom when SMEs thrive.