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Corporate governance tips for small business

Good corporate governance is one of the key drivers of organisational growth. Small businesses that have sound governance practises are more likely to experience growth as opposed to those that do not have any governance.

Good governance reduces risks, for example that of non-compliance. FILE PHOTO | NMG

A big percentage of Kenyan businesses are SMEs. A majority of the businesses do not practise good corporate governance and many are not even aware what the concept is. Indeed, there is less research on the subject of corporate governance for SMEs than there is for larger organisations. Corporate governance is the manner in which a business is managed and this includes rules, procedures and structures.It seems like an intimidating prospect for small businesses, especially those which are not incorporated as limited liability companies.This is a misconception as corporate governance is important for every business even mall ones.

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In fact, good corporate governance is one of the key drivers of organisational growth. Small businesses that have sound governance practises are more likely to experience growth as opposed to those that do not have any governance.Faced with a choice between two investment prospects, an investor is most likely to invest in a business with good governance as opposed to a one with average governance.The investor would conduct a due diligence to understand the structures, policies and if the business has adhered to statutory requirements. If this is found wanting, the investor may rate the business as high risk and therefore demand for higher returns, or he may demand for a higher equity stake in the venture.All these can be avoided if the business observed sound governance practises.Large companies are subject to corporate governance codes and rules which may be mandatory, voluntary or best practise oriented.Public companies have more detailed governance requirements as set out in the Companies Act.This does not mean that smaller businesses are not regulated as far as corporate governance applies.A business incorporated under the Companies Act, for example, is subject to the governance provisions of the Companies Act.Similarly, a business incorporated as a partnership is subject to governance provisions in the Partnership Act.Some of the provisions include duties of directors, meetings, voting rules and submitting financial information like accounts and audits. Other than this, some businesses are specifically regulated under the sector in which they fall.The importance of governance includes increasing the longevity of a business. A business with good governance is likely to have a longer lifespan than one without.Good governance reduces risks, for example that of non-compliance. It also makes it easier for a business to access funding as good governance increases its reputation. There is also better conflict management and planning.Smaller businesses face governance problems such as disputes where the owners are few.However, small businesses are highly rewarding for owners who want to maintain full control, especially if it revolves round an innovation.Governance tips for small businesses include establishing internal controls, clear office procedures, drawing business policies, established roles and job descriptions, risk management, setting up an independent board, and using mediation to resolve disputes.

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