Corporate governance in small and medium enterprises: a review

• DOI: https://doi.org/10.1108/CG-10-2020-0470
• Published date: 20 August 2021
• Date: 20 August 2021
• Pages: 23-41
• Subject Matter: Strategy,Corporate governance
• Author: Kuldeep Singh,Deepa Pillai

Corporate governance in small and

medium enterprises: a review

Kuldeep Singh and Deepa Pillai

Abstract

Purpose –Research signifies that well-governed companies exhibit long-run financial results and

sustainable growth. In the context of SMEs, this paper aims to review the literature on corporate

governance, the implementation challenges of corporate governance and its relationship with

performance. Entwined with Indian scenarios, the study can be generalized to other emerging

economies,with geographic considerations.

Design/methodology/approach –Studies from1990 to 2020 are included in the literature review. Three

databaseswere used for the extraction of relevant researcharticles: Scopus, EBSCO and ScienceDirect.

To identify the relevantwork, keywords along with Boolean operators for literaturesearch were used from

the research databases. The selected articles were further refined based on the authors’ keywords,

journal type, data analysis methodologies and abstract analysis. Finally,115 articles were selected and

categorizedinto themes based on inclusion criteria for furtherstudy.

Findings –Corporate governance provides tangible and intangible benefits to SMEs. The study

emphasizes on designinga cost-effective discrete governancemechanism for SMEs than the prevailing

corporate governance code for large firms. Furthermore, implementing the corporate governance

structurewith a great level of discipline and stabilityis equally essential and related to performance.

Originality/value –Listing of SMEs is a relatively new phenomenonin emerging economies, including

India. Withlisting, corporate governance andfinancial performance are expected toshift. The inclusion of

the changing landscape of SME governance makes this study unique and relevant in the current

scenario. The study will benefitthe policymakers and firms to adopt optimum governancepractices and

link it optimallywith performance.

Keywords SMEs, Corporate governance, Financial performance, Board structure, Disclosures

Paper type Research Article

1. Introduction

Corporate governance has gained momentum over the decade amid researchers and

policyholders globally. Recent corporate failures and crises have made corporate

governance a watchword and debatable subject in the development of emerging

economies. Corporate governance is a system of management and control. It provides a

structure of monitoring for attaining the corporate objectives. Best governance practices

build investor confidence enhancing the value of the firm. Corporate governance metrics

are applicable for listed firms and lack universallyestablished metrics for small and medium

enterprises (SMEs). Corporate governance has become one of the most common terms in

business and finance in past 15years (Keasey et al.,2005). Research on corporate

governance can be cited since the 1930s, most of the studies focused on large

corporations from developed countries. In recent years, corporate governance research

has transitioned from large firms to SMEs (Huse, 2000). This has created the opportunity

and paved the way for SMEs to develop their business structures for the firms. Mainly

studies in India on corporate governance pertain to large public entities. Applicability and

implementation of corporategovernance to SMEs are overlooked to a great extent in India.

Kuldeep Singh and

Deepa Pillai are both based

at the Symbiosis School of

Banking and Finance,

Symbiosis International

(Deemed University), Pune,

India.

Received 19 October 2020

Revised 20 March 2021

12 July 2021

Accepted 26 July 2021

The authors acknowledge and

appreciate the efforts of the

reviewers for their valuable

suggestions.

DOI 10.1108/CG-10-2020-0470 VOL. 22 NO. 1 2022, pp. 23-41, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 23

Governance is the core for value creation which prominently existed for large listed

enterprises in India. Unlike large companies SMEs are privately or family-owned

businesses. Defining of power and distribution of ownership becomes a challenge as

owners are the managers of the business. Board composition is small and lacks diversity

and unavailability of expert independent directors, absence of formalized contracts also

creates room for frauds and misappropriations. These factors encourage the necessity for

corporate governance for SMEs. The paper presents a comprehensive review of literature

on the current state of corporate governance developments for SMEs.

The study reviews the status of corporate governance practices and their significance for

SMEs. SMEs are unparalleled to large corporate enterprises (Saxena and Jagota, 2015).

Heterogeneity in operations, diversity of firms and geographical dispersion are the

structural barriers for SMEs. Informal and complex structures are former factors that restrict

the implementation of corporate governance for SMEs (Gordon et al., 2012). Most

governance studies have limited consensus on the applicability of corporate governance in

SMEs (Gordon et al.,2012;Tshipa et al.,2018).

SME Listing in India has been a major reform for early-stage ventures and small firms.

Listing of SMEs on the SME stock exchanges has amplified the visibility and valuation of

these firms. Listed SMEs focus is on setting higher valuation for their businesses through

increased financial performance. These firms are concentrating on operational efficiency

and profitability for enhancing value per share. Transparency and effective governance

implementation are the enablers for SMEs in attaining their goals. SME exchange in India

underlines on profitability and firm valuation for investor confidence through the system of

corporate governance (Kulkarni and Chirputkar, 2014). This research investigates the need

for corporate governance for SMEs. The research states the challenges for implementation

of corporate governance practicesfor SMEs and also emphasizes on the need for separate

governance code which adds to the extant literature of corporate governance. The study

discusses the outcomes of good governance practices which can be beneficial for SMEs

for increasing their scale of operations, access to new sources of finance and become

sustainable. The review investigates the governance execution challenges and specify the

relevant policy interventions to promote different code of corporate governance at SME

level.

2. Motivation for the study

Previous studies focused on corporate governance practices in developing economies;

thus, it was essential to examine corporate governance from the context of emerging

economies for SMEs. SMEs form an integral part of any economy. SMEs contribute

significantly to national employment and have attracted both academic research and

government policy attention (Krishnan and Scullion, 2017). In India, SMEs have reaped

manufacturing competencies, reduced regional disparities and contributed to employment

opportunities. These firms have been restrained by financial access which has deprived

them of sustainable advantages. Several reasons for the failure of SMEs are attributable to

poor governance practices crippling the growth and development of these enterprises in

India. In emerging markets like India,the initial and after-market performance of SMEs is not

satisfactory (Dhamija and Arora, 2017), and is at a nascent stage. This sector must have a

corporate governance codeseparate from listed entities to ensure the sustainability of these

enterprises. Strong corporate governance procedures of SMEs will not only ensure the

survival of these entities but in the long run will be the enablers of competitiveness, new

investments, productivity and growth (Abor and Biekpe, 2007). The study reviews the

necessity for corporate governance for SMEs. The research discusses on the major

dimensions of corporate governance for SMEs. A comprehensive review of literature has

been undertaken to analyze the current state of corporate governance for SMEs with the

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