Most of the local investment businesses in Kenya fall under the Micro and Small Enterprise (MSE) business sector which employs about 74.2% of the Kenyan workforce and contributes to about 18.4% of the country’s Gross Domestic Product (GDP). The government of Kenya therefore considers this as an important area in the development process, and is in the process of putting in place some programmes to develop it. The Economic Recovery Strategy Paper for Wealth and Employment Creation (ERS) 2003-2007 identifies SMEs and in particular Jua Kali expansion as one of those activities that will assist in economic recovery and growth.
In Kenya, these are businesses employing 1-50 workers in all the sectors of the Kenyan economy. In the just recently read budget, The Treasury set aside over Kshs. 3.2 Billion for the Small and Medium Enterprises financing, growth. Besides that, Hon. Uhuru’s budget also indicated that the Microfinance Act is to be amended to facilitate use of third party agents by Deposit Taking Microfinance Institutions. This is believed to be targeting Capacity development for the Microfinance Institutions which comprise of the larger constituency of the value chain that provides financial services for the Small and Medium Enterprises right from the Start up levels to a point when they are fully established in business and operations.
It is important to note that a regular Kenyan SME has a lifecycle with various stages in which it grows either heading towards successful establishment of a fully fledged firm, corporate or towards collapsing for one reason or another. This brings me to the entire reason why I thought of putting down this post. The major weakness I have noticed over time through Career Ranks and Consultancy in Project Accounting, Business Development Advisory and Investment Analysis of or for Small Businesses in Kenya has to do with Corporate Governance.
Corporate Governance simply refers to the set of internal policies, rules, and procedures that a company follows on a regular basis to ensure that it operates in a fair, equitable, and appropriate manner for the benefit of the company, its management and its shareholders. A corporation usually has a board of directors and a senior management team. Most small businesses do not have these organizational entities clearly defined and functional. For private companies that are registered as a corporation and have investors require these entities to have a governing board. Yet many small businesses incorporate for tax issues and do not necessarily pay attention to the concepts of corporate governance.
Most of these businesses are family owned and the idea of letting professionals manage the businesses hardly sinks down the throats of the ownership. Most of the families like one I evaluated for some business proposition lately runs two sets of accounts; one that the employees know about (so that they are not able to determine the actual net worth of the business, perhaps for remuneration purposes), another for tax purposes and the actual accounts that shows all the good, bad and ugly of the business position. Usually when most of these businesses go out to seek financing, they have a whole set of new accounts in place to create a worthwhile impression to the financiers who then advance them loan facilities under impression that they will be able to sustain payments and grow the enterprise further. If we are to take an example of how Indian Businesses work; They Train themselves, or take their children to school in fields they believe will be beneficial to the business. For instance if a family runs a Hospital, they will train kids through Medical School, they will have another go through Business School and another will be in a people related, administration area. They manage to build internal capacity by themselves. thats perhaps why they excel far much better than African businesses.
The above combined with hesitance to bring in qualified Financial Controllers and Business development/ growth advisors; they end up finding themselves in financial turmoil. Usually, they start delaying in repayments to their banks, eventually falling into arrears, nonpayment of suppliers hence resulting to drop in production and eventual dismissal or departure of staff hired whose salaries and wages cannot be met. As earlier said, these businesses are largely family owned; personnel employed are usually sourced cheaply from the locals, relatives even. When they realize that the business is not doing well, they usually are the very people who spread word and with this, the locality which usually forms the core market for outputs or the core suppliers of inputs withdraws support hence sudden death of these businesses. This is when banks come in, albeit too late to recover whatever they can by selling what was agreed upon as collateral. This is the sad story of Corporate Governance in most SME’s and MSE’s.
So how should Corporate Governance apply to Small Businesses? All businesses should look at their organizational structure and continually assess what will allow the company to perform in an optimal way. The simplest way to implement this is to have an advisory board. The advisory board is non-paid individuals that have business or industry specific backgrounds that can contribute ideas or mentor management. In more formal and traditional cases a small corporation has a board of directors comprised of the founders, a spouse, an employee and maybe – just maybe an outside director.
The focal point of corporate governance within small businesses is that all businesses need to set company strategic goals, provide the leadership to put them into effect, supervise the management of the business, and if the company has stockholders, report to the stockholders on their stewardship. For those small businesses that do not have the hierarchical structure in place to implement formal corporate governance plans, it is recommended that regular self assessment of the company will be the starting place for accountability, to enhance performance, grow the company and be a greater contributing force in the economy. At the end of the day, if you follow some set of policies and procedures and are reporting your stewardship of the company to some authority then you have accountability that is key to corporate governance practices.