Private Sector Opinion Governance for SME Sustainability and Growth 43 IFC Corporate Vladislava Ryabota and Alexey Volynets (IFC), Governance Axel Kravatzky and Helen Carrington (Syntegra/Tailored Governance) Knowledge Publication As small and medium enterprises (SMEs) evolve from start-up to maturity, they need to “grow into governance.” This paper introduces the IFC Governance Methodology for SMEs, a governance model designed to support the organic growth of small and mid-size businesses by offering solutions that are fit for purpose through each stage of their evolution. Foreword Significant changes in the global economic environment require major improvements in the governance of organizations. Such improvements are essential for SMEs led by an entrepreneur (or patron, in Spanish and French). These small businesses have a major impact on the economy as a main source of new jobs and are strong contributors to innovation. However, as a result of poor management and inadequate governance practices, SMEs experience a high rate of failure during their early stages. Plenty of information is available on how to improve existing governance structures in SMEs. But very few resources focus on the initial stages of growth in a company with only a successful CEO (in this case, “chief entrepreneur officer”) responsible for what to do to develop good practices and assure sustainability. This paper introduces IFC’s “growth-oriented governance model for SMEs,” a very effective tool for entrepreneurs around the world. It will be useful for business About IFC Corporate Governance Group owners as well as governments, academics, and governance professionals. The Group brings together staff from investment support and advisory I had the opportunity to advise SMEs in South America and in the United Arab operations into a single, global team. This unified team advises on all aspects Emirates, sometimes in one-day company seminars or with small groups of chief of corporate governance and offers executive officers from different kinds of businesses. I was especially impressed targeted client services in areas such as increasing board effectiveness, improving with the excellent proposals on “what to do during the first year, to start with,” the control environment, and family particularly in the groups of peers from different companies. It was noteworthy that businesses governance. The Group also all agreed that the recommendations must be good for their business at each stage helps support corporate governance improvements and reform efforts in of the corporate governance journey, which closely resonates with the main point of emerging markets and developing the IFC Governance Methodology. countries, while leveraging and integrating knowledge tools, expertise, and networks at the global and regional For example, with some smaller companies, I found that it was initially helpful levels. for the owner to have an adviser with whom to discuss ideas, as the methodology suggests. Just the process of presenting a project to an outside adviser usually significantly improves the entrepreneur’s own knowledge of the subject, and further improvement comes with fielding the adviser’s questions. This is one of the most basic methods for management improvement, and it paves the way for later establishment of a good board of directors for guidance and approval of strategies and plans. The framework also addresses other major concerns that I observed in SMEs. For example, it helps small businesses improve company culture and guides family-owned businesses through the process of formalizing family engagement through bodies such as family councils. This paper makes an excellent contribution to corporate governance knowledge. For entrepreneurs and professionals it offers practical guidance for improving governance. Marcos E. J. Bertin Chairman of the Quality in Governance Think Tank International Academy for Quality (Milwaukee, Wisconsin) Director of BQC Group Honorary member, FUNDECE and IPACE (EXC network) Member, IFC Private Sector Advisory Group 2 ISSUE 43 Private Sector Opinion Governance for SME Sustainability and Growth Vladislava Ryabota and Alexey Volynets, Axel Kravatzky and Helen Carrington1 Introduction Good governance is important for the growth and sustainability of organizations of all types and all sizes—large, medium, and small. While it is widely accepted that “one size does not fit all” (for example, Arcot and Bruno 2006), there is far less research and guidance on good governance for small and medium companies. Instead, most of the governance guidance currently available for SMEs amounts to scaled-down versions of governance solutions developed for larger, listed companies. This approach fails to account for a variety of unique SME risks, characteristics, and practices2 and thus has limited applicability in helping SME leaders fulfill their companies’ purpose and potential. This is especially true in emerging markets where companies often operate with severe resource constraints. For SMEs to benefit from the introduction of good governance, a fundamental shift in the overall approach is necessary. We need to help Scaled-down versions of governance solutions SMEs grow into governance organically by offering solutions that are fit developed for larger, listed companies. . . fail for purpose as the company evolves from start-up to mature business. to account for a variety of unique SME risks, characteristics, and practices. This paper introduces the IFC Governance Methodology for SMEs, originally developed by a multiregional team of IFC governance specialists3 and based on an innovative approach: • We started from the distinctive realities of SMEs at different organizational stages of growth. • Then we identified specific challenges that SMEs need to overcome at each stage. • Finally, we outlined governance-related tools and practices to help companies overcome these challenges and progress to the next stage of development. The methodology is explained in detail in the IFC SME Governance Guidebook, to be published in 2019. In this short paper, we provide a high-level outline of our approach to SME governance methodology and how it can help companies grow and compete. 1 Vladislava Ryabota heads the IFC Corporate Governance work program in the South Asia region. Alexey Volynets leads the IFC SME Governance Global Practice Group. Axel Kravatzky and Helen Carrington are directors of Syntegra Change Architects, where they guide governance leaders on tailoring good governance and provide leadership coaching to support sustainable growth. 2 For a good recent report on SME governance practices, see ACCA 2018. 3 In alphabetical order: Yehia El Husseiny, Alison Kibirige, Kiril Nejkov, Sheela Rahman, Vladislava Ryabota, Ashraf Shenouda, and Alexey Volynets. ISSUE 43 3 Private Sector Opinion Business Case for the New Approach to Governance of SMEs “Classic” corporate governance—developed initially for large publicly traded companies—is defined as the structures and processes by which companies are directed and controlled. Many guidance documents and industry, national, and sector codes relating to corporate governance have been written, starting with the Cadbury Report (Cadbury 1992). However, there is relatively little material that focuses directly on the specific governance needs of SMEs. We can roughly group the existing SME-related material into three categories: 1. Code-type documents developed for unlisted companies. One of the leading such documents was developed by European Confederation of Director Associations (ecoDa) in 2010. Corporate Governance Guidance and Principles for Unlisted Companies in Europe (ecoDa 2010) uses a phased approach, making a distinction between the use of a basic framework that applies to all companies, including the smaller and less complex organizations, and then more sophisticated measures for larger and complex organizations. EcoDa, like the others in this group, advocates a proportionate and tailored approach, but the recommendations are still relatively broad so as to apply to a wide range of companies. 2. Code-type documents with a section that specifies how listed, larger company guidance can be interpreted and applied by SMEs or that explicitly include SMEs in their scope. A good example of this approach is Southern Africa IoD’s Governance in SMEs—A Guide to the Application of Corporate Governance in Small and Medium Enterprises (IoDSA Undated). 3. Guidance documents that aim to account for the heterogeneity of SMEs by varying recommendations depending on key company characteristics, most commonly size, organizational complexity, and shareholding structure. A great example of this approach is Guidelines on Corporate Governance for SMEs in Hong Kong (HKIoD 2009). IFC has built on this foundation by adding another element: firm growth. As a development institution, IFC wants SMEs not merely to Governance recommendations should not only survive but also to grow and prosper. The governance recommendations help the company succeed at its current stage of should not only help the company succeed at its current stage of development. . .but also help it create conditions development (size, revenue, complexity, and so on) but also help it for moving to the next stage. create conditions for moving to the next stage. It is a growth-oriented governance model. Stages of SME Growth A lot of literature is available on the topic of company growth and evolution, largely under the broad umbrella of organizational lifecycle models.3 Collectively, there is no academic agreement on the number, sequence, and movement of stages, but we can see that the conditions vary along similar patterns as the SMEs grow, and there are common challenges at various stages of their development. These challenges stem from the very nature of SMEs, many of which start as family businesses that typically experience organic growth (World Bank 2018). This organic and periodically rapid growth—combined with ambiguity of business roles, an informal approach to business policies and procedures, family involvement at various levels, and an often insulated leadership—leads to episodes of crisis or special challenges that need to be overcome if the organization is to survive and move to the next stage. 3 For short and practical literature reviews on the topic, we recommend Matejun and Mikoláš 2017 and Nordström, Eun Choi, and Llorach 2012. 4 ISSUE 43 Private Sector Opinion For purposes of practical orientation and support we have defined four common stages or states that emerge in company evolution; these four stages not only are intuitively plausible, but they also resonate with IFC practical experience in SME-related governance consulting and advisory services:4 Stage 1: Start-Up. Product/service development and market testing are the first priorities. The company thrives under the entrepreneurial and often authoritarian leadership of the founder. Resources are stretched, and little priority is given to organizational development. “Small and informal” works well—until scaling operations and sales growth become urgent necessities. Stage 2: Active Growth. Need for growth through sales, people, and increasing complexity are the defining features of this stage. This growth remains largely organic, unplanned, and unbalanced, which works well until the company becomes so big or so imbalanced and unconnected that organic growth reaches its limit. Systemic organizational development becomes a necessity. Stage 3: Organizational Development. Once the organization has grown in size and complexity, it becomes a priority to correct the imbalances and develop the organization through specialization, professional policies, structures, and staff. The focus is on the company itself. Transitions are not necessarily linear, Stage 4: Business Expansion. Additional capital is often needed to take unidirectional, sequenced, and deterministic. the organization to the next level. When this capital comes in the form of equity, an increase in the number of shareholders necessitates more formality in the corporate governance arrangements.5 The company’s governance starts taking on the characteristics of “classic corporate governance,” including a board of directors. Transitions are not necessarily linear, unidirectional, sequenced, and deterministic. For example, the company can fail at any stage, or it can regress from a higher stage to a lower one. In Stages 1–3, the catalyst for change is most often the increasing business complexity precipitated by organizational growth. In the later stages (Stages 3–4), the transition is usually stimulated by a significant change in ownership. We stop at Stage 4, because this is where the company becomes sophisticated enough to start using “standard” corporate governance guidance for unlisted companies, which is already abundant. Specific Stage Characteristics To understand how corporate governance could offer practical solutions for companies at different stages of their evolution, we need to better understand specific characteristics of those stages as they relate to governance. All corporate governance practice deals with a common set of principles, namely how to direct, control, and hold the organization to account, and that includes relations with the shareholders as well as the culture and commitment that pervades all these dimensions. We thus have identified five governance topics for analysis (Figure 1, next page). These five topics draw on the IFC Corporate Governance Framework, which in turn is based on the OECD Corporate Governance Principles. Therefore, SMEs working with the IFC SME Governance Methodology will be able to graduate naturally into “corporate” governance as they become large companies. 4 IFC Corporate Governance Advisory Services in the Middle East and North Africa, for example, has provided advice and training services to SMEs for more than 15 years. 5 Complexity of the shareholding structure also may increase as the result of the founders passing the business to the next generation or inviting managers to become partners. ISSUE 43 5 Private Sector Opinion Figure 1: SME Governance Topics in Relation to the Organizational Governance Principles Ownership (Family & Shareholders) Risk Governance & Internal Control (Oversight/Control) Decision Making & Oversight (Direction) Disclosure & Transparency (Accountability) CULTURE & COMMITMENT Specifically, these topics aim to analyze the following: A. Culture and commitment to good governance is expressed in the policies, processes, and organizational structure. B. Decision making and strategic oversight pertains to who makes decisions that determine the direction of the organization, and how those decisions are made. The category also covers related topics of human resource management and succession planning. C. Risk governance and internal controls describes people and processes used to identify, assess, and control risks. This involves the oversight of internal controls, internal audit, and external audit. D. Disclosure and transparency involves providing appropriate information to external stakeholders (such as shareholders, family members, and the providers of capital) as well as communicating with internal stakeholders in appropriate and empowering ways. E. Ownership covers the role of the family in running the business, rights of shareholders, and shareholder dispute resolution. Leaders and advisers of an organization can determine what stage best describes that organization’s experience—and anticipate the challenges ahead—by matching their organizational characteristics to the descriptors in Table 1: 6 ISSUE 43 Private Sector Opinion Table 1: Evolution of Governance Topics for SMEs Defining Stage 1 Stage 2 Stage 3 Stage 4 Factors/ START-UP ACTIVE GROWTH ORGANIZATIONAL BUSINESS Parameters DEVELOPMENT EXPANSION Size* Small Small to Medium Medium Medium Growing (<50 employees) (50–75 employees) (76–150 employees) (151–250 employees) Enterprise Focus Developing products, Sales and growth, Optimizing own Further growth, testing the market increasing variety of structure/processes supported by products, creating after growth improved internal client base organization and processes Culture and Small multitasking Team is growing— Increased professional- Continuation of Commitment to team distinct functions ization of functions trends started in Good Governance and organizational Stage 3 High degree of Formalizing (Policies, processes, informality structure start organizational and organizational emerging Few systems, structure, policies, structure) Simple systems to and procedures established “on the go” enable functions to collaborate Decision Making Highly centralized Emergence of Professional managers Separation of and Strategic decision making by delegation to are hired strategic and Oversight the founder(s) management operational decision Decentralization of (Decision-making Autocratic leader- authority through making Consultative leader- process and bodies, ship style ship style—largely division/functional Institutional leadership style.) autocratic but with management decision-making input from key man- Collaborative style, based on de- agers and advisers management style fined organizational structure, roles, and procedures Risk Governance Founders are fully Introducing internal Detailing authorities Focus on proactive and Internal involved in opera- controls to support and accountability and strategic risk Controls tions—limited need delegation of Systems are formalized management (Internal checks and for checks and authority and automated balances) balances Developing practices to control main opera- tional risks Disclosure and Everyone knows Silos—good within, Internally: improving Optimizing commu- Transparency everything but challenging cross-divisional/ nication between between silos functional information management, (Communication Basic external sharing board, and share- with internal and external information shared Enhanced external holders stakeholders) on products offered business-related information Ownership Single owner or New minority share- New minority share- Common options: (Founders/-share- couple of individuals holders possible holders possible a. Founders, private holders/family) Founders personally (internal or related) (internal or related) equity, and other control every aspect Founders remain New investors infor- investors of business dominant and fully mally influence strat- b. Growing family engaged egy but are not directly ownership/genera- involved in operations tional change Increasing number of family members (If a major investor c. Go public (IPO) becoming involved in enters, company moves Investors require operations to Stage 4) tools for control and direction of the company May vary by industry, so this guidance is intended to be broadly indicative. * ISSUE 43 7 Private Sector Opinion SME Challenges and Focus of Stage-Specific Governance What we have shown thus far is that it is possible to identify patterns in the governance-related characteristics of SMEs in different stages of development, and that these vary according to the evolution of the organization itself (internal dimensions) and its evolution in relation to providers of capital and the family. Once we understand these characteristics, we can see that they present very specific challenges to a company’s prosperity and growth. This has direct implications for how “traditional” corporate governance needs to be changed to help SMEs survive and grow sustainably. Good Good governance for SMEs needs to focus governance for SMEs needs to focus on the attitudes, behaviors, systems, on the attitudes, behaviors, systems, and and organizational values that help it overcome the stage-specific organizational values that help it overcome the challenges in cost-efficient ways. In our experience, such an approach stage-specific challenges in cost-efficient ways. finds much greater resonance among founders, entrepreneurs, and their advisers than does a single common set of standards and practices that applies to all SMEs equally. Table 2 broadly summarizes typical challenges that are characteristic of each stage of development, and the overall focus of stage-specific governance recommendations that can benefit companies the most. Table 2: The Four Stages of SME Evolution Stage 1 Stage 2 Stage 3 Stage 4 Start-Up Active Organizational Business Business Growth Development Expansion The challenge is to allow The challenge is that The challenge is that The challenge is to the founders to fully the company is still in the company has grown manage an expanding realize their ideas and the process of defining dramatically in size and shareholder base by apply expertise with its strategy and business complexity; it has multiple instituting a governance flexibility and drive while model, so the founder’s centers of professional system similar to that minimizing risks from role remains essential and expertise, yet its structure of large organizations, lack of discipline and retaining flexibility is and processes remain but without hampering myopic leadership. paramount; yet focus on largely informal, often entrepreneurial spirit sales demands increasing unbalanced, with blurred and creating a slowdown Recommendations organizational size, lines of authority and because of ineffective and focus on adopting professionalization of responsibility. The costly bureaucracy. informal mechanisms for functions, and delegation business needs to be incorporating external and decentralization of professionalized while Recommendations provide advice, implementing decision making. minimizing disruptions, support for building cost-effective systems for bureaucracy, and staff “traditional” corporate cash flow management, Recommendations focus tensions. governance institutions identifying core on developing basic and policies (such as functions needed for organizational structure Recommendations focus a board of directors) further growth, and and processes. The on governance practices to balance interests of starting a gradual shift company should start that support the need various shareholders, to toward more inclusive defining its approach to for good administration, bring in new expertise management and longer- operational and strategic documentation of and perspectives, and term strategy. decision making. The processes and procedures, to support development founder/CEO should structured decision of long-term strategy. learn to delegate and to making, and professional External investors and consult with key personnel management. Overall, professional boards and external advisers the decision making require strong risk before making important should become more management, good decisions. Internal controls decentralized and internal controls, and should be introduced to collaborative. reliable financial and promote accountability nonfinancial reporting. and to secure assets. 8 ISSUE 43 Private Sector Opinion Some of the recommendations in Table 2, especially at Stages 1–3, relate more to management than to what is traditionally understood as “governance.” This is intentional. Certain management issues need to be addressed before governance can start to be effectively implemented. These might be called “pre-governance” issues, and they are an essential part of the SME governance agenda. Let’s illustrate some of the recommendations in the table with a few examples to show how SME governance differs from that of larger companies, and why the recommended solutions evolve as the companies grow. For example, SMEs in the early stages of development (1–2) are typically operated and owned by the same person or a small group of people. Yet much of classic corporate governance theory and practice are related to principal-agent risks, which arise when ownership is separate from control. (See Figure 2.) Therefore, the “classic” corporate governance focus on the interaction among three key decision-making bodies—shareholders, board of directors, and management—does not reflect the needs and Pushing classic corporate governance on realities of an SME. Since the business is relatively small and simple and smaller, simpler early-stage companies can be the shareholders are fully engaged in operations, an SME also finds very very counterproductive. limited appeal in the classic governance function of oversight and control. Pushing classic corporate governance on smaller, simpler early-stage companies can be very counterproductive. The SME owners feel a sense of danger from potential loss of control as they are told to give up decision-making power, possibly even to independent non-executive directors. They cannot see how their situations would warrant that, and the cost-benefit analysis of other elaborate governance solutions feels fundamentally wrong. At the same time, early-stage companies do need to set effective strategic direction; so they do have a business need for the value-adding function of strategic guidance and advice that governance provides. The founder who is just beginning to delegate operational decisions is highly unlikely to Figure 2: The Main Actors: Shareholders, Board of Directors, and Management SHAREHOLDERS Shareholders set the overall vision for the company s er Re old pre h re se ha nt Ele rs al an ct fo pit dr an al ca pit ep dd ide or ca ism tt ov ge o iss Pr na Ma Report periodically and implement strategy Guide and supervise MANAGEMENT BOARD OF DIRECTORS Management develops the The Board of Directors reviews strategy and runs the and approves the strategy and company’s operations oversees management ISSUE 43 9 Private Sector Opinion share strategic decision-making power with outsiders (such as an independent board of directors). The more appropriate recommendation is that he or she should engage external advisers and leverage the expertise of the company’s management talent in the form of an informal executive committee. If the company develops viable products and services and experiences initial “proof-of-concept” growth, then increased business complexity will lead to the growing need for the classic governance function of oversight and control (Stages 3–4). More importantly, companies would typically require financing to support further growth. If that financing is to come in the form of equity (Stage 4), more independent corporate governance arrangements start making more business sense. Investors typically screen companies for minimum acceptable governance practices and are willing to pay higher premiums for well-governed companies (Khanna and Zyla 2015). SMEs rarely have all the “classical,” “independent,” and “formal” governance arrangements in place, but investors look for companies that are ready to start introducing them in a way that will be effective in supporting company growth and sustainability. The enabling environment for corporate governance needs to be in place (what we referred to earlier as “pre-governance”), such as healthy company culture, competent and engaged management team, succession plans for the key-risk personnel, basic internal controls, and financial discipline. Once external investors enter the business, they typically insist on Once external investors enter the business, further governance improvements in expectation of three main benefits they typically insist on further governance (ACRA, ISCANUS, and NUS 2013): 1) higher operational performance improvements. with lower risks; 2) performance sustainability and therefore a longer run of higher returns; and 3) protection of their rights and interests in relation to the SME through fair treatment, an effective say in the company’s strategic development, and transparency. The last point remains germane even for the less sophisticated private investors, such as family, friends, or coworkers. SME Governance Matrix Our analysis so far has aimed to show that implementing governance in SMEs should be a gradual process, where solutions are coherent with one another as well as with prevailing state-specific business practices, challenges, and objectives. We have also identified an overall focus of governance interventions at each stage. To make this useful and practical for SME owners, we need to go one level deeper and outline specific, practical recommendations. This is precisely the objective of the IFC SME Governance Methodology, summarized in the Matrix in Table 3 on page 12. It fleshes out our recommendations for each stage of SME development along all five SME governance topics. It is important to keep in mind the following points about the Matrix: • The recommendations for each topic are cumulative—they build on the actions of the previous stages. • The contents of the five governance topics for each stage are designed to be interdependent and mutually reinforcing. A company needs to work the Matrix by column—meaning it is important to address all five topics for a given stage before your company can effectively move to the next stage. • The table is generalized for all markets and types of companies. Its relevance for specific companies may vary. Use your judgment and/or professional advisory services to identify recommendations relevant for your company. 10 ISSUE 43 Opinion Private Sector Opinion The SME Governance Matrix presents recommendations in a highly abbreviated way, aiming at governance professionals who understand this kind of language. To make our recommendations accessible to companies, IFC has prepared the SME Governance Guidebook, to be published in early 2019, which provides a much more detailed explanation of the IFC Governance Matrix and its recommendations. The Guidebook does not push entrepreneurs toward common “best practices.” Instead, entrepreneurs learn how to identify the stage of The SME Governance Guidebook. . .provides development of their business and to find practical solutions that will a much more detailed explanation of the IFC benefit their business—where it is right now—and promote further Governance Matrix and its recommendations. sustainable growth. Most importantly, the Guidebook includes the SME Governance Action Planning Tool that summarizes the guidance and recommendations in a workbook format designed to help companies develop a tailored governance-improvement plan. Conclusion It may be true that all corporate governance approaches involve the three fundamental and shared principles of directing, controlling, and accounting. However, to achieve the desired effects, the application of these principles needs to be tailored to each company, its situation, and its challenges. That is also why most corporate governance codes are principle-based rather than rules-based. In developing our innovative approach, we took three key actions: 1. We identified patterns of development across different stages of SME growth and grouped these into specific topics. This helps company leaders articulate governance challenges facing their companies and move away from the temptation to benchmark their experience against features and experiences of companies that are not appropriate for them. 2. We proposed stage-appropriate good governance practices for four main stages of SME development. This helps organizations develop stage-specific coherence—good practices across the full range of governance topics. 3. We assembled a Guidebook that founders, leaders, and their advisers can use to better understand their experience. It presents good governance practices—with examples, templates, and tools—and an overall process for how to arrive at a practical action plan. The most important message of this approach is the recommendation for stage-specific governance coherence over the nominally “highest-level practice” for one single dimension. We do not claim that all the characteristics that we describe in the stages will hold true across all economies, sectors, or types of SMEs. For example, it is quite possible for high-tech or capital-intensive start-ups or SMEs to take on external capital in the initial growth stage, in which case a company might need The most important message of this approach to adopt some features of Stage 4 to offer assurance to the providers of is the recommendation for stage-specific capital. Specific recommendations found in the five governance topics will governance coherence over the nominally also vary substantially depending on the country context and industry. “highest-level practice” for one single dimension. The framework we have presented here is intentionally broad. We hope it will encourage capacity-building organizations in various countries to develop their own SME governance guidance, tailored to the unique needs of their business environment. ISSUE 43 11 Private Sector Opinion 12 Table 3: Summary SME Governance Matrix ISSUE 43 Key Governance Stage 1 Stage 2 Stage 3 Stage 4 Risks Start-Up Active Growth Organizational Development Business Expansion Private Sector Opinion CULTURE AND Core functions identified Core positions filled Governance champion Governance action plan COMMITMENT TO Articles of association adopted Organization chart, key policies, TORs for key positions Company secretary function GOOD and statement of basic business Core processes documented Governance provisions GOVERNANCE principles A calendar of corporate events incorporated in the articles of association and bylaws DECISION MAKING Informal external advisers External advisers formally Continuous and structured A board of directors AND STRATEGIC involved* engaged outside advice is engaged Board procedures ensure effective OVERSIGHT Founder(s) make decisions in Key decisions are made in Enterprisewide discussions on meetings and input from all consultations with individual collaboration with executives strategy, financing, staffing directors executives as a group Executive/management (or similar) Succession-planning policy has Authority limits of key Limited delegation of signing committee formalized been approved by the board personnel have been authority formalized HR policies to attract, retain, and communicated Staffing priorities identified motivate staff Business continuity plan for Succession-planning framework CEO and key persons for key persons RISK GOVERNANCE AND Basic bookkeeping, cash flow Basic principles of business Detailed code of ethics and Effective internal controls systems INTERNAL CONTROLS management, and tax functions conduct business conduct (e.g., based on COSO) Cash sources, bank accounts Basic business risks—including Objectives, strategic planning, Independent external auditors are separate from those of the key-person risks—identified budget, key performance indica- Timely and secure recording and founder(s) Processes in place for tax tors, and clear accountabilities reporting for sales and accounts Basic understanding of payments, records, and filing A professional CFO regulatory requirements and Controls on cash management A basic internal audit function compliance Policies and procedures to monitor and mitigate strategic and operational risks Business units have clear authority, reporting lines, and guidelines (continued on next page) Table 3: Summary SME Governance Matrix (continued from previous page) Key Governance Stage 1 Stage 2 Stage 3 Stage 4 Risks Start-Up Active Growth Organizational Development Business Expansion DISCLOSURE AND Basic financial accounts Monthly bank account reconcilia- Financial statements in accord- Financial reporting is in accord- TRANSPARENCY prepared tion disclosed to all founders ance with national accounting |ance with the IFRS for SMEs The same financial information Founder(s), shareholders, and standards or U.S. GAAP (if having/seeking and data are used for all Point person for information foreign investors) directors periodically receive purposes consistent financial and sharing identified Financial statements are audited Key decisions are formally by a recognized auditing firm nonfinancial information communicated to all staff Periodic financial reports and The public profile of the Basic performance reports are comprehensive performance enterprise has been developed reports are provided to investors presented to external advisers Key nonfinancial information is An annual report (or equivalent) disclosed to the public is produced. Shareholders are provided with information on request OWNERSHIP The role and responsibilities The difference between non-family Clear distinction between the roles Policies and mechanisms to of the founder(s) clearly estab- and family issues is acknowledged of the founder(s), family members, regulate family members’ owner- lished Awareness of family succession and managers ship, employment, and other planning Clear career paths for non-family benefits Basic understanding of roles of Annual shareholders’ meetings executives All shareholders are regularly all founding family members Family succession plan updated on company policy, Shareholder dispute resolution Annual shareholders’ meetings in- strategy, and results mechanism clude discussions of key decisions Mechanism for resolving made, dividends, and plans governance-related disputes *Some jurisdictions require a board of directors at the time of company registration. Such boards are often just a formality. This Matrix does not assume the board to be effectively functional until Stage 4. Private Sector Opinion 13 ISSUE 43 References ACCA. 2018. How Vision and Strategy Helps Small Businesses Succeed: Governance Needs of SMEs. London, United Kingdom: Association of Chartered Certified Accountants. https:// www.accaglobal.com/content/dam/ACCA_Global/professional-insights/Governance-needs- for-SMEs/pi-governance-needs-SMEs.pdf. ACRA, ISCANUS, and NUS. 2013. Into the Minds of Investors: Investors’ Views of Financial Reporting, Audit and Corporate Governance. Singapore: Accounting and Corporate Regulatory Authority, Institute of Singapore Chartered Accountants, and National University of Singapore Business School. http://governanceforstakeholders.com/wp-content/ uploads/2013/07/ACRA-ISCA-NUS-Into-the-Minds-of-Investors-Final.pdf. Arcot, S. R., and V. G. Bruno. 2006. One size does not fit all, after all: Evidence from corporate governance. 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World Bank. 2018. Small and medium enterprises (SME) finance—Improving SMEs’ access to finance and finding innovative solutions to unlock sources of capital. Website. Washington, D.C.: The World Bank. http://www.worldbank.org/en/topic/smefinance. 14 ISSUE 43 Private Sector Opinion Notes 43 ISSUE 43 ISSUE 15 15 SectorOpinion PrivateSector Private Opinion © Copyright 2019. All rights reserved. International Finance Corporation 2121 Pennsylvania Avenue, NW, Washington, DC 20433 The fi ndings, interpretations and conclusions expressed in this publication should not be attributed in any manner to the International Finance Corporation, to its affi liated organizations, or to members of its board of Executive Directors or the countries they represent. The International Finance Corporation does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The material in this work is protected by copyright. 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