Using corporate governance to enhance SME resilience

In a region plagued by unemployment and pursuing economic diversification through knowledge enhancement and skill building, entrepreneurs are regarded as the modern-day messiahs of innovation and long-term value creation. The good news is there are plenty of them in the GCC region. Their journey towards making meaningful economic and social contributions, however, is riddled with risks and roadblocks. Every enterprise that is starting out and scaling up faces challenges in the form of limited funds, attracting talent, brand building, reporting and management, to name just a few. While addressing them is certainly not an overnight process, there are tools that can help companies improve their readiness, resilience and reliability. One of these tools is corporate governance.
The Organisation for Economic Co-operation and Development (OECD) defines corporate governance as a "structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined". Ideally, the concept should include due diligence on all financial and operational aspects of the business, and the preparation of concrete plans and transparent audit statements that create a framework for instilling discipline across the organisation - from the smallest to the most strategic of tasks. With integrity, transparency and accountability as its central tenets, corporate governance promotes competitiveness and equitable businesses.
While there has been some uptake of corporate governance among more established companies in the region, it has been more challenging for SMEs given their management structure and financial constraints.
In 2015, research done by Dubai SME revealed that more than 45 per cent of mature SMEs in Dubai do not follow proper accounting processes or implement a recognised international financial reporting standard. The report also stated that only 18 per cent of the businesses adopted one or more key pillars of corporate governance, and only 13 per cent followed a formal mechanism for financial planning and management reporting.
However, the tide is turning. Earlier this year, Dubai SME launched RATE SME, a rating framework for small and medium-sized enterprises that seeks to increase the contribution of this segment to Dubai's GDP from 40 to 45 per cent by 2021. It is interesting to note that they used corporate governance as one of the indicators of SME readiness and resilience. This is an encouraging sign that its awareness is on the rise and will become a bigger priority for enterprises seeking an A+ rating, which only a small fraction of Dubai SMEs has been successful in receiving to date.
Unfortunately, in many cases, implementing a strong governance framework ends up at the bottom of the management's to-do list' over tasks perceived as more time-sensitive. While policymakers have a role to play in adopting regulatory reforms, strengthening insolvency and bankruptcy laws, and developing incubators, SMEs themselves can be proactive in applying governance practices to boost their reputation, and agility - and most importantly, access to capital, which is essential to keep the business running.
Over time, corporate governance can improve the country's 'ease of doing business' scores, which impact the influx of foreign investors and venture capitalists. SMEs in the Mena region find it very difficult to secure capital and private equity, and conventional debt models are still crucial to scale up their enterprises. A World Economic Forum article points out that only around five per cent of commercial banking activities in the Middle East cater to SMEs. Even when a company manages to raise seed capital, acquiring sustained funding is difficult. When approaching banks for funding, around 75 per cent SMEs encounter rejection, often forcing them to ultimately dissolve operations. Corporate governance is a legitimacy and reputation-building tool that consolidates future finances, a factor in contributing to diminishing the funding gap issue that most SMEs battle globally.
There is plenty of evidence to support that although implementation might be slow, the beneficial role of corporate governance has become clearer to SMEs, investors and governments. For example, Saudi Arabia's parallel market, Nomu, recently launched by the Capital Market Authority (CMA) and Stock Exchange (Tadawul) is expected to attract SMEs to list. Whilst the listing requirements are lighter than the main market and is to be restricted to investments by professional investors, this move is expected to increase access to funding and encourage corporate governance and transparency among SMEs. This is definitely a step in the right direction.
While there is no magic solution to fix the challenges that SMEs face, adopting corporate governance is a direct way to drive positive change that can boost your organisation's competitiveness and become more attractive for investors and lenders. It is imperative that all SMEs educate themselves on this simple yet effective commercial proposition that can maximise their After all, in today's unpredictable and disruptive economy, sustainable business health must be the number one concern for every SME.
The writer is the executive director of the Pearl Initiative. Views expressed are her own and do not reflect the newspaper's policy.