Private Capital & SME's in relation to corporate governance

1. The corporate governance functions in small and medium-size companies:
In Pakistan the SMEDA defines a manufacturing concern with less than 50 full-time employees
and productive assets of Rs30 million, a service provider with less than 50 workers and
productive assets of Rs20 million and a trader with less than 20 employees and productive assets
of Rs20 million as small enterprise.
Similarly, a manufacturing unit with 51-250 employees and productive assets worth Rs30-100
million, a service provider with 51-250 workers and productive assets of Rs20-50 million and a
trader with 21-50 employees and productive assets of Rs20-50 million falls in the category of
medium enterprise.
The understanding and implementation of a good corporate governance framework presents
SMEs a structured path to infusing better management practices, effective oversight and control
mechanisms which lead to opportunities for growth, financing, exit strategies and improved
performance.
Corporate governance is normally associated with joint stock companies that are listed on a
stock exchange and/or that have a widely dispersed shareholder base. It is not often that a
relationship is made between corporate governance principles and small and medium sized
enterprises (SMEs). This studies argues that certain corporate governance principles are as
relevant for SMEs as they are for larger companies to facilitate growth and competitiveness.
Transparency, openness and corporate social responsibility are also important aspects of an
SME’s operations in order to attract financing from banks and other lenders.
SMEs can also be required by law or the bank to have a board of directors protecting the
financiers. They also may be required to give balance sheets and profit and loss statements or
more sophisticated documents such as annual budgets, risk assessments or financial plans.
Although the legal requirements for smaller companies differ greatly from those for larger
companies, the principles related to running a business in an open and transparent manner in
order to attract financing are the same for most companies.
SMEs in the EU have responded to business opportunities, the desire to grow and the increased
competition by actively using corporate social responsibility as a business tool. Research shows
that millions of SMEs (47% of SMEs in the EU) are active in supporting sport, cultural and
health/welfare activities in the communities in which they operate. The reasons for SMEs to
invest in kind and with money in these activities include:
 Enhanced business reputation and image: with a better image, it is easier to attract
financing, trading partners, customers and employees and to build contacts with policy-makers.

2.  Increased sales and customer loyalty for the company’s products and services:
customers take corporate social responsibility into consideration when they purchase
goods and services.
 Ethical reasons (mainly altruistic): many SMEs have the desire to “give something
back to society.”
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Corporate governance focuses on SME's includes;
 Customer protection and the use of safety standards by companies.
 Production standards and the protection of the environment.
 Work ethics and the use of child labor.
 Working conditions of employees.
 Other social responsibilities of companies.
Issues of SME's related to CG:
 The organization of internal control and risk management systems.
 The quality of the management and if established, the board of directors.
 The relationship between the board of directors and the management.
 The reporting to partners and members.
 The independence of the auditor.
 The reporting of financial information to financiers (silent partners).
 The compliance with company legislation.
 The organization of the members or partners meeting each year.
 The production of reliable and timely financial information.