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Corporate governance and the small and medium enterprises sector: theory and implications
Joshua Abor Charles K.D. Adjasi
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Corporate Governance: The international journal of business in society, Vol. 7 Iss 2 pp. 111 - 122
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 Corporate governance and the small and
medium enterprises sector: theory and
implications
Joshua Abor and Charles K.D. Adjasi
Joshua Abor and
Charles K.D. Adjasi are
Lecturers in the Department
of Finance, University of
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Ghana Business School,
Legon, Accra, Ghana.
DOI 10.1108/14720700710739769
Abstract
Purpose – The purpose of this paper is to identify the extent to which the corporate governance
framework can be applied to small and medium enterprises (SMEs), and discuss these issues further
within the Ghanaian context.
Design/methodology/approach – After considering some of the key issues, the paper shows how
relevant these issues are to the SME sector.
Findings – It is clear that corporate governance brings new strategic outlook through external
independent directors and enhances firms’ corporate entrepreneurship and competitiveness. Again the
problems of credit constraint and managerial incompetence in the Ghanaian SME sector could also be
overcome with a good corporate governance structure in place.
Research limitations/implications – The discussion mainly focuses on corporate governance within
the context of Ghanaian SMEs.
Originality/value – This paper provides conceptual insights on the application of corporate
governance among SMEs.
Keywords Corporate governance, Entrepreneurialism, Small to medium-sized enterprises, Ghana
Paper type Conceptual paper
Introduction
Corporate governance has dominated policy agenda in developed market economies for
more than a decade and it is gradually warming its way to the top of the policy agenda on the
African continent. The Asian crisis and the relative poor performance of the corporate sector
in Sub-Saharan Africa have made corporate governance a catchphrase in the development
debate (Berglof and von Thadden, 1999). Developing countries, of which Ghana is no
exception, are now increasingly embracing the concept of good corporate governance,
because of its ability to impact positively on sustainable growth. It is believed that, good
governance generates investor goodwill and confidence. Firms are now improving their
corporate governance practices knowing it increases valuations and boosts the bottom line.
Corporate governance is seen as the process and structure used to direct and manage the
business affairs of the company towards enhancing business prosperity and corporate
accountability with the ultimate objective of realizing long-term shareholder value, whilst
taking into account the interest of other stakeholders. Claessens et al. (2002) maintain that
better corporate frameworks benefit firms through greater access to financing, lower cost of
capital, better performance and more favourable treatment of all stakeholders. In addition
there is the related issue of stakeholder theory and its implications in corporate governance.
Should all stakeholders in a firm be represented on the board of a firm for effective
governance of the firm? Whether such reasoning is plausible for SMEs is also explored in this
study.
The issue of corporate governance has been a growing area of management research
especially among large and listed firms. The limited studies in the area with respect to SMEs
VOL. 7 NO. 2 2007, pp. 111-122, Q Emerald Group Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 111
 have focused mainly on developed economies (see Eisenberg et al., 1998; Bennett and
Robson, 2004). It is crucial to examine corporate governance in the SME sector from the
context of a developing economy. This paper theoretically examines the importance of good
corporate governance in the SME sector, the implications of the extension of corporate
governance principles to SMEs and the impact this will have on value creation through
corporate entrepreneurship. The discussions are done with respect to the Ghanaian SME
sector given the important role they play in the economy.
Small enterprises have been noted to contribute about 85 per cent of manufacturing
employment (Steel and Webster, 1991) and account for about 92 per cent of businesses in
Ghana. SMEs in Ghana have an important role to play in spurring economic growth given
that they represent a vast portion of the firm tissue in the economy. The lack of proper
governance mechanisms have been attributed for the failure of state owned enterprises in
Ghana. This phenomenon may well cripple the effective development and growth of SMEs
as well in Ghana. It is important then for proper management of this sector to ensure
enhanced performance. A study of corporate governance issues in the Ghanaian SME
sector is therefore a relevant research area.
The compliance with codes of corporate governance has become the norm for listed firms all
over the world. In most countries, SMEs do not strictly comply with such codes but it has
often been argued that such codes should also apply to these SMEs. Since corporate
governance forms the environment for the internal activities of a company and appropriate
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environmental conditions are crucial for corporate entrepreneurship to flourish in a company,

it is apt that these two topics be discussed in relation with each other. Corporate governance
mechanisms may result in greater performance for SMEs as well, if appropriate measures
are mandated by the regulators.
The rest of the paper is organised as follows: section two takes a brief look at SMEs, section
three also examines corporate governance, corporate entrepreneurship and the benefits of
corporate governance to SMEs. Conclusions are drawn in section four.

Small and medium enterprises

The issue of what constitutes a small or medium enterprise is a major concern in the SME
literature. Different authors, in most cases have given different definitions to this sort of
business. SMEs have indeed not been spared with the definition problem that is usually
associated with concepts and with many components. The definition of firms by size varies
among researchers. Some attempt to use the capital asset; others use skill of labour and
turnover level. Some even define SMEs in terms of their legal status and method of
production.
Weston and Copeland (1998) hold the view that, definitions of size of enterprises suffer from
a lack of universal applicability. This in their view is because enterprises may be conceived
of in varying terms. Size has been defined in different contexts, in terms of the number of
employees, annual turnover, industry of enterprise, ownership of enterprise and value of
fixed assets. Van der Wijst (1989) considers small and medium-sized business as privately
held firms with 1-9 and 10-99 people employed, respectively; Jordan et al. (1998) define
SMEs as firms with less than 100 employees and less than e15 million turnover; Michaelas
et al. (1999) consider small independent private limited companies with less than 200
employees and López and Aybar (2000) analyze companies with sales below e15 million.
The British Department of Trade and Industry has maintained that the best description of a
small firm remains that used by the Bolton Committee in its 1971 Report on Small Firms. This
stated that a small firm is an independent business, managed by its owner or part-owners
and having a small market share (Department Trade and Industry, 2001). In February 1996
however, the European Commission adopted the definitions for SMEs as firms with less than
250 employees; less than e40 million turnover and less than e27 million total assets; Positive
equity resources (shareholders’ equity) and also positive net income (Mira, 2002).
Storey (1985), tries to sum up the danger of using size to define the status of a firm by saying
that in some sectors all firms may be regarded as small whilst in other sectors there are

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 possibly no firms which are small. This fact suggests that there is not a general consensus
over what a small business is. It is however, generally admitted that most definitions of firms
by size are centred on the number of employees. In Ghana, the classification of firms by size
as given by the Regional Project on Enterprise Development (RPED) Ghana manufacturing
survey paper defines SMEs as firms with employee size of less than 100 (Teal, 2002).
SME development in Ghana is hampered by a number of factors, notable amongst which are
finance, equipment and technology, access to international markets etc. (Thomi and
Yankson, 1985; Anheier and Seibel, 1987; Steel and Webster, 1992; Baah-Nuakoh and Teal,
1993 and Aryeetey, 1994). One other issue has to do with the lack of managerial
competencies which in some cases have been noted to swamp efforts at attracting finance
and thus are the main barriers to SME development (Gockel and Akoena, 2002).

What is corporate governance?

A number of definitions have been given to corporate governance. According to Mayer
(1997), corporate governance is concerned with ways of bringing the interests of (investors
and managers) into line and ensuring that firms are run for the benefit of investors. Corporate
governance is concerned with the relationship between the internal governance
mechanisms of corporations and society’s conception of the scope of corporate
accountability (Deakin and Hughes, 1997). It has also been defined by Keasey et al.
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(1997) to include ‘‘the structures, processes, cultures and systems that engender the
successful operation of the organisations’’. Corporate governance is also seen as the whole
set of measures taken within the social entity that is an enterprise to favour the economic
agents to take part in the productive process, in order to generate some organisational
surplus, and to set up a fair distribution between the partners, taking into consideration what
they have brought to the organisation (Maati, 1999). The Cadbury Committee (Cadbury,
1992, p. 15) defines corporate governance as ‘‘the system by which companies are directed
and controlled’’.
From these definitions it may be stated more generally that different systems of corporate
governance will embody what are considered to be legitimate lines of accountability by
defining the nature of the relationship between the company and key corporate
constituencies.
Corporate governance systems may be therefore thought of as mechanisms for establishing
the nature of ownership and control of organisations within an economy. In this context,
corporate governance mechanisms are economic and legal institutions that can be altered
through the political process – sometimes for the better (Shleifer and Vishny, 1997).
Company law, along with other forms of regulation (including stock exchange listing rules
and accounting standards), both shape and is shaped by prevailing systems of corporate
governance. The impact of regulation on corporate governance occurs through its effect on
the way in which companies are owned, the form in which they are controlled and the
process by which changes in ownership and control take place (Jenkinson and Mayer,
1992). Ownership is established by company law, which defines property rights and income
streams of those with interests in or against the business enterprise (Deakin and Slinger,
1997). The definition of ‘‘ownership’’ is problematic in this context (Njoya, 1999). At the
bottom, differences in conceptions of ownership lead to differences in forms of control and,
therefore, differences in the formulation and implementation of corporate strategy (Deakin
and Hughes, 1997).
Corporate governance describes how companies ought to be run, directed and controlled.
It is about supervising and holding to account those who direct and control the
management. For an SME, it concerns the respective roles of the shareholders as owners
and the managers (the directors and other officers). It is about setting rules and procedures
as to how the company is run. It is also about putting checks and balances in place to
prevent abuses of authority and ensure the integrity of financial results. As a result, the role
and independence of the auditor has been under the microscope. The main corporate
governance themes that are currently receiving attention are:

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 B adequately separating management from the board to ensure that the board is directing
and supervising management, including separating the chairperson and chief executive
roles;
B ensuring that the board has an effective mix of independent and non-independent
directors; and
B establishing the independence of the auditor and therefore the integrity of financial
reporting, including establishing an audit committee of the board.

Governance systems
In designing a corporate governance system, it is important to include all the stakeholders. It
should involve the company and all interested parties. The system of governance could thus
help or hinder internal corporate ventures. It is in the best interests of owners to resort to
control mechanisms that move the operations of the firm to full efficiency by aligning the
interest of managers and all stakeholders. The stakeholder theory argues about the
importance of a firm paying special attention to the various stakeholder groups in addition to
the traditional attention given to investors (Freeman, 1984; Gibson, 2000). These various
groups of stakeholders which include customers, suppliers, employees, the local
community and shareholders are deemed to also have a stake in the business of a firm.
Proponents of stakeholder theory thus argue for representation of all stakeholder groups on
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boards for effective corporate governance. The stakeholder theory also emphasizes the role
of non-market mechanism, such as the need to determine an optimal board size, the need to
design a committee structure that allows for the setting up of specialised committees. Such a
structure would allow, for example, the setting up of productivity-oriented committees and
monitoring-oriented ones (John and Senbet, 1998).

There is recognition of the issue of multiplicity of stakeholders under the stakeholder theory.
John and Senbet (1998) argue that certain actions of management might have conflicting
effects on various classes of stakeholders. This implies that managers have a multiplicity of
objective functions to optimise. Jensen (1993) sees this as an important weakness of the
stakeholder theory because it violates the proposition that a single-valued objective is a
prerequisite for purposeful or rational behaviour by any organisation. He suggests a
refinement of the stakeholder theory – the enlightened stakeholder theory. The modified
form of the stakeholder theory proposes one objective that managers should pursue: the
maximisation of long-run value of the firm. If the interest of any major stakeholder were not
protected, the long-run value maximisation would not be achieved.

The governance system should include not only the ideal and clear-cut systems which often
correspond to corporate governance values of accountability but provision should also be
made for allowances. These allowances include allowing loose groupings of staff across
functions, innovation champions. Indeed there is some justification in allowing for some level
of optimal stakeholding in designing such systems. We argue that for SMEs in particular the
role of other stakeholders must be well articulated through a bottom-up approach where
unions’ (in the case of workers) views are explicitly laid out at board meetings. In this case
there should be explicit rules governing the channelling of such views to board meetings.
Indeed the interest of communities, customers and allied stakeholders could be channelled
through similar processes. The application of a broad view of corporate governance should
not be limited to the boardroom and this view allows us to take into considerations issues that
encourage corporate entrepreneurship. Particular attention must however be paid to the
possible tensions that will exist between owners and the board in the case of sole proprietors
especially in an economy like Ghana where traditional cultural practices about ownership
tend to scoff into businesses. A well designed system will result in reaping the benefits and
thus attract other SMEs into adopting corporate governance systems.
It is important to note here that fostering good corporate governance mechanisms greatly
impacts innovative ideas in corporate business. Enforcing corporate governance practices
result in strict and stringent mechanisms which could dampen corporate entrepreneurship

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 though this need not be so. For instance shareholders may question the importance of R&D
expenditures and other efforts which seek to promote innovation and creativity. Corporate
entrepreneurship which comprises of creativity and innovation in corporate values must
therefore be taken into consideration whilst pursuing corporate governance mechanisms.
The next sub-section looks at corporate entrepreneurship and the possible linkages with
corporate governance.

Corporate entrepreneurship
In implementing corporate governance, one important consideration is the value creation in
entrepreneurial firms. The competitive edge of entrepreneurial firms lies in the creativity and
innovation. It would be disastrous should corporate governance undermine value creation
efforts, which in the instance of firms that have gone past the survival and development
phases of growth would take the form of corporate entrepreneurship. Thus far our
consideration of corporate governance has not considered the impact on internal operations
of the entrepreneurial firms. At this point, we need to consider the implications of corporate
governance on value creation in these firms. Corporate entrepreneurship refers to the efforts
on the part of companies to foster entrepreneurs, innovation and new ventures in the
corporate setting. Corporate entrepreneurship is important as a growth strategy and
competitive advantage (Pinchot, 1985; Zahra, 1991; Kuratko, 1993; Merrifield, 1993). It also
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contributes to organisation renewal (Guth and Ginsberg, 1990) and profitability (Zahra,
1991). By harnessing innovation and effort of the members of corporation through corporate
entrepreneurship, value creation is possible. A conducive environment would allow firms to
tap into the innovative talents of their employees and managers. (Hornsby et al., 2002). Thus,
it is important that the organisation’s climate has elements that employees consider
conducive. Corporate governance and corporate entrepreneurship are seemingly different
topics. Corporate governance, whether broad or wide, focuses on facilitating the profit
maximisation objective of firms. Profit motive and corporate governance mechanism would
contradict efforts to encourage corporate entrepreneurship.
Corporate entrepreneurship can take various forms which Schollhammer (1982) has
elucidated. These include administrative, opportunistic, acquisitive imitative and incubative
entrepreneurship. Administrative entrepreneurship involves the company taking a step
beyond having a traditional R&D department. A philosophy of corporate enthusiasm for
supporting researchers exists. This is accompanied by the provision of extensive resources
for making new ideas commercial realities. In the case of opportunistic entrepreneurship, the
company encourages champions to pursue opportunities for the company, and through
external markets. Corporate managers are also allowed to seek new opportunities outside
the company thus promoting acquisitive entrepreneurship. These opportunities include
mergers, acquisitions, new technologies and strategic alliances. Imitative entrepreneurship
is greatly epitomized by Japanese firms. This form of entrepreneurship largely involves
reversing engineering of others’ products. Another form of entrepreneurship, Incubative
entrepreneurship occurs when semi-autonomous new venture development units are
formed that provide seed capital, access to corporate resources, freedom of independent
action and responsibility for implementation from venture concept to commercialisation.
The above issues point to the fact that it is important for firms not to lose sight of innovation
and creativity which adds value to firms, when implementing corporate governance
mechanisms. Stringent corporate governance rules governed primarily by addressing the
interests of shareholders and thus profit maximisation of the firm could reduce efforts to
encourage innovation and creativity. Hence it is important to have explicit obligations by
firms on value creation, their merits and the need for these in a firm.

Corporate governance and the internal operations of the firm

Good corporate governance could greatly impact on the internal operations of a firm. The
four main aspects on the internal operations include strategic direction, financial
expectations, transparency issues and shareholder activism. These are discussed in turn.

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 Strategic direction defines the firm’s long term direction. Corporate governance requires the
appointment of board members. Appointing the board must bring in right thinking
individuals into the organisation in order not to adversely affect the entrepreneurial direction
of the firm. The appointment of right-thinking individuals in the firm will usually result in more
attention being paid to innovation and R&D.
Corporate governance requires financial results and in some cases quarterly returns. This
might fall into short-term horizons for research and development, innovation and other
corporate entrepreneurial activities. Thus if the attention is on return on investment, it could
affect the selection, retention and termination of projects, venture teams and employee
entrepreneurial initiative. The greater emphasis of application of profit centre concept to
units that are undertaking internal corporate ventures may shut in the short-term these units.
The reason being that corporate governance concentrates on continued profitability. In
some cases projects that do not give short-term profits may be rejected without considering
their long-term benefits which may be better. Managers usually tend to pick projects which
have immediate results since their performance is tied to projects they choose. But this
practice normally goes to dampen the entrepreneurial efforts. What is more worrying is that if
the performance is pegged with profit but rewards are not shared with employees, the
obvious consequence to this phenomenon is absence of corporate entrepreneurship. Thus
an organisational culture could be affected by decisions at the boardroom.
Issues bordering on transparency have also been touched by corporate governance reform.
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Guidelines have been drawn as to disclosure of information on board activities. External and
internal audit committee is a requirement for corporate governance. All these measures seek
to control management abuse and fraud and also to regulate the activities of over zealous
auditors to control in value creation activities.
An emphasis of corporate governance reform has been to address the concern of
shareholders. However, many shareholders who invest in the firm for the short term are less
inclined to consider the longer term perspective and there is room for arguing that the
balance of the need to know how the firm is performing and interfering with the firm’s
activities. Thus in the extreme, shareholders could even question the R&D expenditure or the
firm’s expenses on the development of organisational learning and corporate
entrepreneurship.

Corporate governance and SMEs

Traditionally, corporate governance has been associated with larger companies and the
existence of the agency problem. Agency problem arises as a result of the relationships
between shareholders and managers. It comes about when members of an organisation
have conflicts of interest within the firm. This is mainly due to the separation between
ownership and control of the firm.
It is tempting to believe that corporate governance would not apply to SMEs since the
agency problems are less likely to exist. In many instances, SMEs are made up of only the
owner who is the sole proprietor and manager (Hart, 1995). Basically, SMEs tend to have a
less pronounced separation of ownership and management than larger firms.
Some argue that because SMEs have few employees who are mostly relatives of the owner
and thus no separation of ownership and control, there is no need for corporate governance
in their operations. Also, the question of accountability by SMEs to the public is non-existent
since they do not depend on public funds. Most, especially the sole proprietorship
businesses do not necessarily need to comply with any disclosure. Because there is no
agency problem, profit maximisation, increasing net market value and minimizing cost are
the common aims of the members. Members also disregard outcomes of organisational
activities that will cause disagreement. They are rewarded directly and as such need no
incentives to motivate them. Thus disagreement does not exist and hence no need for
corporate governance to resolve them.
In spite of these arguments, there is a global concern for the application of corporate
governance to SMEs. It is often argued that similar guidelines that apply to listed companies

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 should also be applicable to SMEs. Jensen (1993) gives an example of what should be
looked at when trying to improve a governance structure. Efficient systems have six key
elements. Effective governance systems are characterised by:
1. limited partnership agreements at the top level that prohibit headquarters from
cross-subsidizing one division with the cash from another;
2. high-equity ownership on the part of managers and board members;
3. board members who in their funds directly represent a large fraction of the equity owners
of each subsidiary company;
4. small boards of directors (of the operating companies), typically consisting of no more
than eight people;
5. CEOs who are typically the only insiders on the board; and
6. CEOs who are seldom the chairman of the board.
Applying the stakeholder approach, a firm is not just responsible to its shareholder but also
its constituency of stakeholders. This approach emphasizes long term performance
enhancing contributions by stakeholders and also views businesses as socially responsible
institutions. Thus, an appraisal of a firm will not only include financial performance but also
employment, market share and growth in trading relations with suppliers and customers.
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Indeed potentially cogent arguments have been made regarding merits of including
stakeholders in governance mechanisms of corporate bodies, a class of firms which
includes SMEs. The possible pros and cons of such advancements with respect to SMEs are
issues we discuss further in this paper.

Benefits of corporate governance to SMEs

There are those who advocate that the advantages of corporate governance should attract
SMEs especially growing entrepreneurial firms to adopt it. This section looks at such benefits
and discusses them, as well as highlighting them in the Ghanaian SME context. By definition,
growing entrepreneurial firms are firms that have the growth and orientation to expand
beyond their state of survival. The benefits of corporate governance to listed firms could
apply to SMEs as well. In this case, the benefits that accrue from corporate governance
practices further assist SMEs to grow rapidly.
Entrepreneurial firms need access to resources for growth. They need inputs on business
operations, good strategy and best practices in the industrial sector. These resources can
be provided for through the presence of non-executive directors or external board members
as in the case of listed firms. Research on listed firms has shown that strategy influences
corporate performance (McGahan and Porter, 1997) and external board members
challenge strategies by management (Pettigrew and McNulty, 1995). Thus the existence of
external board members could lead to better management decisions and help SMEs to
attract better resources. As has been noted, access to finance is one main obstacle to
growth and performance of the SME sector in Ghana. Incorporation of corporate
governance into the sector could greatly reduce this constraint. The infusion of external
board membership in this case is crucial since there is a high incentive for the board
member(s) to introduce ways of attracting finance. Non-executive directors could also
introduce creativity and innovation through opinions and suggestions during decision
making. In the Japan Small Enterprise Agency, SMEs with very high growth rates use
non-executive directors more actively than larger firms.
Also, as entrepreneurial firms grow, the need to introduce professional governmental
practices and managers arises. This begins the process of separation between
management and owners. However, agency problems will still exist between non-family
professional managers and owners. The underlying fact is that these non-family
professionals would have to be motivated with incentives in order to gain from their
expertise. In addition, for best performance from managers, governance of business units
must be clear and distinct. Accounting controls and internal audits will have to be put in

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 place to help assess the performance of these managers. This merit has dire implications for
the SMEs in Ghana which are run largely by less competent managerial staff, mostly the sole
proprietor and family. Corporate governance makes room for the composition of a board
which will include external directors not necessarily linked to the owner and thus induce
more independent best practice methods of running the business and attaining profits. The
possible tension here is that which may develop between the owner and board of directors
(especially in sole proprietorships). In Ghana, as noted, one of the banes of SME
development is poor managerial competencies, an SME with a corporate governance
structure will better overcome these problems via the expertise and more stringent internal
control measures introduced by the board members.
Also, it will free up the owner operator from operational duties as well as prevent disputes.
The separation of management from control of the board mimics the division of the manager
from the owner. A large listed entity faces the same issue when seeking to ensure that the
managers are accountable to the owners. Often in closely-held companies, fallouts amongst
the people involved revolve around misunderstandings between the managers and the
owners or a failure to separate the two functions.
Corporate governance paves the way for possible future growth or a sale. Often businesses
seeking new funds find that they have much work to do before confidently going to the
market. It normally takes some time to be fully listed. It is within this period that corporate
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governance becomes crucial and the learning curve is steep. A consistent track record of
good governance will greatly assist when that point comes. If SMEs infuse corporate
governance structures at an early stage, they will gain experience and instil discipline in the
management of the firm. This is important as external parties ensure sound management
practices. Corporate governance allows firms to prepare for their pending initial public
offering (IPO). For example, in Ghana, early introduction of corporate governance would
prepare an SME well enough even before it gets listed under the provisional listing regime.
Efforts by the Ghana Stock Exchange to encourage listing by SMEs on the market can be
complemented and sped up where such firms have effective governance structures. The
existence of a board will induce rapid growth strategies in the SME for rapid profits; this will
at a point require the firm going public for larger finances. Thus the transition from a small to
medium and finally large company will be smoothly aided by an effective corporate control
system.
Similarly, good corporate governance practices assist SMEs in improving on their prospects
of obtaining funding from investors and financial institutions. This is an exact consequence
of proper bookkeeping and accounting practices and information disclosure which
increases the confidence of investors in the firm. The SME will also have a healthier growth
and be committed to business efficiency due to the presence of external supervisory parties.
Applying good governance principles reduces the problems associated with information
asymmetry and makes the SME less risky to invest in.
However, attention should also be drawn to the disadvantages of corporate governance. The
introduction of corporate governance will mean additional roles in audit, remuneration and
nomination committees, new and more directors have to be hired. The non-executive
directors will also have to be paid higher remuneration because of active roles they will be
playing. Thus introduction of corporate governance into activities of SMEs will increase
operational costs in the form of higher start-up cost which could deter many from starting
business. The government can resolve this problem through the introduction of subsidies for
the SMEs.
It is important at this stage to dwell on a previously alluded to issue of stakeholder theory on
corporate governance. From the analysis so far it is quite clear that corporate governance
bothers around the role a board plays in directing the agent (manager) of a firm to attain the
prime objective of its principal (shareholder) to fulfil a contractual obligation. However, for
proponents of stakeholder theory, shareholders are only a proportion of an important
stakeholder group. Hence corporate governance mechanisms must incorporate these other
stakeholders. The incorporation of these groups of stakeholders on the board of firms will

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PAGE 118 CORPORATE GOVERNANCE VOL. 7 NO. 2 2007
 help promote corporate governance by promoting the interests of these previously excluded
groups.
In as much as stakeholding can help augment corporate governance mechanisms, it must
be noted that it can result in an SME pursuing policies with sub-optimal outcomes. Indeed
even though all stakeholders are purported to have a common interest in the business of an
SME, this common interest may not necessarily result in a unified individual (owner’s)
interest. As noted by Heath and Norman (2004), individuals could ‘‘free-ride’’ or shirk in work
efforts contrary to the common interest goals. They further note that in reality the demands
(example, inflationary wage demands) of some stakeholders, which is typical of a country
like Ghana, could result in sub-optimal outcomes not only for the SME but for the whole
economy if all SMEs were to include all stakeholders on boards. Indeed we argue further that
stakeholding could result in some ill-informed stakeholders holding such firms to ransom
unnecessarily and making it difficult for boards to take action. Such actions could result in
potential shareholders shying away from the provision of much needed capital and finance
for SMEs. As Heath and Norman (2004) explain, the merits and reasoning in awarding
shareholders the prime role in corporate governance issues is due to the fact that they are a
source of a prime input for the firm; capital and finance. Friedman (1970) notes that the
‘‘social responsibility of business is to maximise profit’’. Put differently ‘‘the business of
business is business’’[1]. We do not by any means argue that the stakeholder theory is a
superfluous one for corporate governance; however care must be taken to balance out the
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issues more appropriately.

Conclusion
The relevance of corporate governance cannot be over emphasized since it constitutes the
organisational climate for the internal activities of a company. In Ghana corporate
governance can greatly assist the SME sector by infusing better management practices,
stronger internal auditing and greater opportunities for growth. Corporate governance
brings new strategic outlook through external independent directors; it enhances firms’
corporate entrepreneurship and competitiveness. It is not a threat to value creation in
entrepreneurial firms if the guidelines on corporate governance are properly applied. Hence
it is important to have explicit obligations by firms on value creation. Good governance
mechanisms among SMEs are likely to result in boards exerting much needed pressure for
improved performance by ensuring that the interests of the firms are served. In the case of
an SME, board members bring into the firm expertise and knowledge on financing options
available and strategies to source such finances thus dealing with the credit constraint
problem of SMEs as well. Often businesses seeking new funds find that they have much
work to do before confidently going to the market. A consistent track record of good
governance will greatly assist when that point comes. We also argue that for SMEs in
particular the role of other stakeholders must be well articulated through a bottom-up
approach where, for example, unions’ (in the case of workers) views are explicitly laid out in
board meetings. It must be noted that good governance does not guarantee business
success. However, poor governance could be symptomatic of a business failure. More
importantly, lifting the confidence of existing owners and potential new ones is a valuable
goal.

Note
1. We thank anonymous reviewers of this paper for their insightful comments and suggestions on this
and other stakeholder perspectives.

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Corresponding author
Joshua Abor can be contacted at: joshabor@ug.edu.gh
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