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Small and medium enterprises share distinctive challenges that require specific governance practices. However, resources on corporate governance have mostly focused on large and publicly traded companies. This Guidebook is written with SMEs specifically in mind and provides insights into the particular risks that these businesses traditionally face. It proposes a tailored governance framework with structures, policies, and practices that mitigate these risks and support sustainable growth of business while recognizing the resource constraints typical of SMEs. For many SMEs, the initial incentive to improve their governance practices is an increase in access to cheaper financing options. Investors analyze governance practices of companies to evaluate their risk exposure and to determine a proper value to the shares of the company. However, benefits of good governance go beyond increased access to finance. Research and empirical evidence show that good governance improves business performance and increases the chances of a company’s long-term survival (IFC 2018). In practice, the most common SME governance challenges involve decision making, strategic oversight, recruitment and retention of qualified management staff, succession, and establishing standardized internal control mechanisms and policies. These challenges stem from the very nature of SMEs, many of them family businesses, which typically experience organic growth, and more often than not, the systems, policies, and processes required for the proper governance of the business lag behind. This organic growth—combined with ambiguity in business roles (with key personnel wearing multiple hats), an informal approach to business, family involvement at various levels, and an often insular leadership focus—is unsustainable in the long term. The objective of this Guidebook is to help SME entrepreneurs and their investors develop a highly tailored governance improvement plan to support sustainable growth of their companies. The SME Governance Methodology in this Guidebook represents a governance innovation by tailoring specific recommendations to the evolutionary stages of SME growth: Stage 1: Start-Up; Stage 2: Active Growth; Stage 3: Organizational Development; and Stage 4: Business Expansion. The recommendations are grouped around five governance topics: Culture and Commitment to Good Governance, Decision Making and Strategic Oversight, Risk Governance and Internal Controls, Disclosure and Transparency, and Ownership.

SME Governance Guidebook

Resource Key: GR9LRV6I

Document Type: Report

Creator:

Author:

  • IFC

Creators Name: {mb_resource_zotero_creatorsname}

Place: Washington D.C.

Institution: IFC

Date: 2019

Language:

Small and medium enterprises share distinctive challenges that require specific governance practices. However, resources on corporate governance have mostly focused on large and publicly traded companies. This Guidebook is written with SMEs specifically in mind and provides insights into the particular risks that these businesses traditionally face. It proposes a tailored governance framework with structures, policies, and practices that mitigate these risks and support sustainable growth of business while recognizing the resource constraints typical of SMEs. For many SMEs, the initial incentive to improve their governance practices is an increase in access to cheaper financing options. Investors analyze governance practices of companies to evaluate their risk exposure and to determine a proper value to the shares of the company. However, benefits of good governance go beyond increased access to finance. Research and empirical evidence show that good governance improves business performance and increases the chances of a company’s long-term survival (IFC 2018). In practice, the most common SME governance challenges involve decision making, strategic oversight, recruitment and retention of qualified management staff, succession, and establishing standardized internal control mechanisms and policies. These challenges stem from the very nature of SMEs, many of them family businesses, which typically experience organic growth, and more often than not, the systems, policies, and processes required for the proper governance of the business lag behind. This organic growth—combined with ambiguity in business roles (with key personnel wearing multiple hats), an informal approach to business, family involvement at various levels, and an often insular leadership focus—is unsustainable in the long term. The objective of this Guidebook is to help SME entrepreneurs and their investors develop a highly tailored governance improvement plan to support sustainable growth of their companies. The SME Governance Methodology in this Guidebook represents a governance innovation by tailoring specific recommendations to the evolutionary stages of SME growth: Stage 1: Start-Up; Stage 2: Active Growth; Stage 3: Organizational Development; and Stage 4: Business Expansion. The recommendations are grouped around five governance topics: Culture and Commitment to Good Governance, Decision Making and Strategic Oversight, Risk Governance and Internal Controls, Disclosure and Transparency, and Ownership.

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