By Michael Eboh
The difficulties faced by Small and Medium Scale Enterprises (SMEs) in adopting good corporate governance principles have been brought to the fore, as an expert, Mr. Solomon Avbioroko has disclosed that adoption of corporate governance principles will lead to an escalation in operational costs of the SMEs. This may be blamed for the refusal of SMEs’ to list on the Nigerian Stock Exchange (NSE), despite the numerous windows provided by the authorities of the Nigerian capital market to encourage their listing.

According to Avbioroko, A Director of the Lagos Business School, corporate governance practices would lead to higher start-up costs for SMEs and would lead to a dampening of the entrepreneurial culture.

He noted that SMEs should not be forced to conform with certain principles of corporate governance, due to the fact that factors necessitating the adoption of corporate governance principles by large firms are absent in the SMEs.

He said, “There has been a recent growing call for the application of corporate governance to SMEs. The argument is that similar guidelines that apply to listed companies should also be applicable to SMEs.

“Corporate governance is largely associated with larger companies and the agency problem. The agency problem comes about when members of an organisation have conflicts of interests and within a firm, the separation between ownership and  control of firm is often cited.

“The SMEs are likely to have a few employees who might be the kin of the owner. Since there is no separation between management and owner in SME. some argue there is no need for corporate governance guidelines.

“As such at first sight, corporate governance would not  apply to SMEs since the agency issues are less likely to exist. Since SMEs only  comprises the owner who is the sole proprietor and manager.

“The introduction of corporate governance would increase operational costs for SMEs. To fill additional roles in audit, remuneration and nomination  committees, new and more directors have to be hired.

“The more active roles  and heavier responsibilities that non executive directors have to undertake  would also mean higher remuneration All this would translate to higher  start-up costs and deter people from setting up their own businesses and  dampen the entrepreneur culture.

“As many successful businesses worldwide started from small businesses, this outcome could prove  undesirable.”
Avbioroko, however, noted that the high operational costs for SMEs can be curtailed with the introduction of subsidies both by the regulatory authorities and the federal government.

He further stated that adopting good corporate governance principles will improve the SMEs chances of obtaining funding from banks and would ensure that they enjoy the patronage of investors and venture capitalists.

“Corporate governance has similar benefits to SMEs as to listed forms. As  entrepreneurial firms need access to resources for growth, the operations of resource dependence theory also apply to them. “Inputs on business operations, good strategy and best practices in industry sectors would be needed.