Corporate Governance in Small- to Medium-Sized Enterprises

Introduction

When some people hear the term "corporate governance," they likely associate it with major publicly traded domestic corporations and multinationals. The need for good corporate governance, however, also applies to companies of all types and sizes, including small- to medium-sized enterprises (SMEs). As O'Sullivan explains, "Corporate governance is concerned with the institutions that influence how business corporations allocate resources and returns. Specifically, a system of corporate governance shapes who makes investment decisions in corporations, what types of investments they make, and how returns from investments are distributed" (2001, p. 1). With respect to how it is practiced within individual corporations, corporate governance "is normally directed toward the internal workings of the company and involves the balancing of the advantages of the corporate form — which includes the separation of ownership and management functions that ensures limited individual liability for corporate losses — with the need to exert effective oversight over managerial decision-making" (Detomasi, 2002, p. 421).

The need to "exert effective oversight over managerial decision-making" has become abundantly clear. Following a series of Enron-type corporate scandals in recent years, the need for good corporate governance has become increasingly apparent. In reality, however, the push for improved corporate governance began during the 1970s. According to Rose, "Corporate governance inevitably receives attention and calls for its reinvention following upheavals in the financial markets. Although the corporate governance industry received a significant boost because of Enron and WorldCom, the seeds of the modern corporate governance industry were sown in the 1970s, in response to the corporate dimensions of the Watergate scandal" (p. 888). The fallout from these major corporate scandals has been pervasive and severe. Consumer and investor confidence have suffered greatly as a result, and there is a growing need for corporate oversight that will ensure transparency and legitimacy in governance measures. In this environment, identifying opportunities to improve the corporate governance of small- to medium-sized enterprises represents a timely and valuable undertaking.

The significance of this study relates to the demonstrated importance of good corporate governance on organizational profitability for SMEs and its ability to produce a number of other important outcomes. In this regard, the World Bank emphasizes that, "A commitment to good corporate governance — well-defined shareholder rights, a solid control environment, high levels of transparency and disclosure, and an empowered board of directors — make a company both more attractive to investors and lenders, and more profitable. Simply put: it pays to promote good corporate governance" (The Irresistible Case for Corporate Governance, 2005, p. 3). Taken together, it would appear to be in any organization's best interests to aggressively pursue corporate governance practices that produce these desirable results; however, a number of issues must be considered when formulating, implementing, and administering good corporate governance practices, and these issues are discussed further below.

Background and Statement of the Problem

Although corporate governance has become the focus of an increasing amount of attention in recent years, there remains a glaring lack of uniformity in the application of corporate governance principles to different types of organizations. Rose (2007) emphasizes that, "There is no specific set of corporate governance rules, standards, and principles to which every U.S. corporation must adhere. Rather, corporations are directed by a variety of sources, some public, some private, which develop and enforce governance rules" (p. 887).

In fact, there is not even a universally accepted definition of corporate governance, with some authorities suggesting that this definition should be uniquely applied to each organization according to its specific circumstances and industry. The research shows that only one consistent theme emerges from the literature concerning definitions of corporate governance. Shu-Acquaye (2007) reports that, "While the exact definition of corporate governance should be specifically tailored to the requirements of each jurisdiction in which it is maintained, one concept is consistent: corporate governance relates to some form of company 'control'" (p. 583).

According to Ramirez (2007), implementing and sustaining good corporate governance practices is simply good business sense because it provides corporations with a competitive advantage over those where such practices are lacking. Ramirez notes that good corporate governance "will lead to superior outcomes, because if investors are confident that their reasonable expectations will be secured by law they will invest at a lower cost to entrepreneurs. Thus, investor protection is associated with higher economic growth" (p. 313). This assertion is further supported by a number of studies demonstrating a direct relationship between good corporate governance practices and organizational profitability (Ramirez, 2007).

Despite the benefits that can accrue to SMEs that apply sound corporate governance practices (Shu-Acquaye, 2007), there remains a dearth of timely research concerning the need for good corporate governance practices by SMEs — a gap in the literature that the proposed study intends to fill using the guiding research questions outlined below.

Research Questions, Aim, and Objectives

The proposed study will be guided by the following research questions:

1. What are the fundamental elements of good corporate governance?

2. Who are the primary stakeholders and actors involved in corporate governance?

3. How can improved corporate governance benefit the profitability of SMEs?

4. Can a set of best practices be discerned from corporate governance practices in larger corporations that are also applicable to SMEs, and if so, what considerations must be taken into account when applying these practices to a smaller organization?

The overarching aim of the proposed study is to develop a comprehensive assessment of the importance of corporate governance to the success of a corporation — defined in part by its profitability, but also by its contributions to the community, the manner in which it treats its stakeholders, and other measures of corporate success identified as the research process progresses. This overarching aim is supported by the following objectives:

1. Deliver a critical review of the relevant peer-reviewed and scholarly literature concerning corporate governance practices in general and how they apply to SMEs in particular.

2. Develop a valid and reliable custom survey instrument that can be used to collect primary qualitative and quantitative data from business leaders concerning their views on good corporate governance.

3. Administer the custom survey instrument to a study population that is sufficient in size and that possesses the requisite business experience to provide robust findings needed to answer the guiding research questions.

4. Conduct a statistical analysis of the primary quantitative data collected from the custom survey using SPSS Version 11.0 for Windows (Student Version).

5. Synthesize the results of the secondary and primary qualitative and quantitative data to answer the above-stated research questions.

Conclusion

The research showed that in an increasingly competitive marketplace, small- to medium-sized enterprises need a competitive advantage to remain viable, and sound corporate governance practices can provide this advantage. This was one of the few areas where there was a clear consensus in the literature regarding the importance of good governance practices. The research also showed that while there is no universal definition of corporate governance, the main thrust of the concept relates to how companies are controlled, with the specific definition being applied to each company's unique situation and circumstances.

Finally, the research demonstrated that although the issue of corporate governance has received an increasing amount of attention in recent years — particularly following the corporate scandals exemplified by Enron and others — there remains a dearth of timely and relevant studies concerning the need for good corporate governance practices in small- to medium-sized enterprises. This gap makes the proposed study a valuable contribution to the existing body of knowledge on the subject.

References

Anastas, J. W. (1999). Research design for social work and the human services. New York.

Dennis, C., & Harris, L. (2002). Marketing the e-business. London: Routledge.

Detomasi, D. (2002). International institutions and the case for corporate governance: Toward a distributive governance framework? Global Governance, 8(4), 421–422.

Fraenkel, J. R., & Wallen, N. E. (2001). Educational research: A guide to the process. Mahwah, NJ: Lawrence Erlbaum Associates.

The irresistible case for corporate governance. (2005, September). The World Bank. Retrieved from

Neuman, W. L. (2003). Social research methods: Qualitative and quantitative approaches (5th ed.). New York: Allyn & Bacon.

O'Sullivan, M. (2001). Contests for corporate control: Corporate governance and economic performance in the United States and Germany. Oxford: Oxford University Press.

Proctor, R. W., & Vu, K. P. (2005). Handbook of human factors in Web design. Mahwah, NJ: Lawrence Erlbaum Associates.

Ramirez, S. A. (2007). The end of corporate governance law: Optimizing regulatory structures for a race to the top. Yale Journal on Regulation, 24(2), 313–314.

Rose, P. (2007). The corporate governance industry. Journal of Corporation Law, 32(4), 887–888.

Shu-Acquaye, F. (2007). Corporate governance issues: United States and the European Union. Houston Journal of International Law, 29(3), 583–584.

Wood, G. D., & Ellis, R. C. (2003). Risk management practices of leading UK cost consultants. Engineering, Construction and Architectural Management, 10(4), 254–262.

Appendix A: Proforma Electronic Informed Consent Form

You are invited to take part in a research study of corporate governance in small- to medium-sized enterprises. You were chosen for the study because you satisfied the inclusion criteria (i.e., more than ten years of executive-level experience and agreement to participate). This form is part of a process called "informed consent" to allow you to understand this study before deciding whether to take part.

This study is being conducted by a researcher who is a doctoral/master's student at [University].

Background Information: The purpose of this study is to develop a comprehensive assessment of the importance of corporate governance to the success of a small- to medium-sized enterprise.

Procedures: If you agree to be in this study, you will be asked to complete an online survey in which you will remain completely anonymous.

Voluntary Nature of the Study: Your participation in this study is voluntary. This means that everyone will respect your decision of whether or not you want to be in the study. No one at [University] will treat you differently if you decide not to be in the study. If you decide to join the study now, you can still change your mind during the study. If you feel stressed during the study, you may stop at any time. You may skip any questions that you feel are too personal.

Risks and Benefits of Being in the Study: There are no perceived or discernible risks associated with completing the survey instrument, but the results of the study could potentially be enormously valuable for executives of small- to medium-sized enterprises.

Compensation: No monetary compensation is offered for participation in the research project; however, all respondents can obtain a copy of the completed research study by contacting the researcher.

Confidentiality: Any information you provide will be kept confidential. The researcher will not use your information for any purposes outside of this research project. Also, the researcher will not include your name or anything else that could identify you in any reports of the study.

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