Sunday, December 18, 2011

Corporate Governance can help SMEs

Corporate Governance can help SMEs

Corporate Governance is not an exclusive concept applicable only for large listed companies. It is a universal concept that can also help SMEs in creating value for all its stakeholders. Corporate governance for SMEs is not about number of board meetings held or role of independent directors. Rather, simple measures of segregating the business from promoter's personal activities and treating all stakeholders such as lenders, employees and vendors equitably are reflective of good corporate governance. This can help create a professional organisation and generate significant wealth for SME entrepreneurs in the long run. Good corporate governance can also help SMEs attract institutional investors such as venture capital and private equity firms, which can immensely help in growing the enterprise.

The key concept that underlies good corporate governance is separation of ownership and management.  For an SME, this implies adopting a few simple yet key changes such as charging meaningful salary for the entrepreneur, sparing the company from charging promoter's personal expenses, adherence to timely tax payments and complying with key employee related regulations such as ESI, PF, TDS, etc. While this may increase overall cost of doing business to an extent, the long term benefits will far outweigh such costs.

The cornerstone of good corporate governance is equitable treatment of all stakeholders including minority shareholders if any, lenders, employees, customers, suppliers and society at large. Each of these stakeholders can help in long term value creation for the SME. Track record of timely payment to lenders is key to future borrowings to fund growth. Fair treatment of employees can help attract good talent and reduce attrition. Nurturing vendors can help in scaling up operations and control sourcing costs. While each of these are fairly obvious to a lay reader, incorporating these in day-today decision making is challenging for SMEs, unless the entrepreneur imbibes corporate governance in its organization culture.

SMEs can derive several benefits by adopting good Corporate Governance practices. Foremost among them is the ability to attract institutional investors such as venture capital or private equity investors to invest in the SME, which is crucial to scale up the operations and create a sustainable institution.  Similarly, attracting professional talent is far easier in a professionally run organization with good governance practices. Other benefits of professionally run companies include better productivity and  lower attrition rates, better access to credit facilities and also better valuations in the event of exit.

N. Muthuraman is Co-founder of RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm and can be reached at
This is the blog of the Print Version published in Business Line dated 19th Dec 2011

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