BİR ÖDEV İÇİN ACİL ÇEVİRİ YARDIMINA İHTİYACIM VAR

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the Limited Range of Research into Best Practice in this Field
Best practice notions tend to be drawn from a wide range of sources: the anecdotes of SME oıvners are useful for gauging the variety and distinctive nature of the governance problems in this sector. The SME sector is the home of many family firms and the creation of a private companj' is often an important device for the perpetuation and development of these businesses. As family firms develop, the difficulty of succession often becomes a problem, along with the founder members needing to take wealth out of the business. The need for the introduction of professional management to supplement or replace family menıbers is also a tricky issue to negotiate. The introduction of corporate status can help to bring experienced and independent ouiside directors on to the board of the family firm, but as Sir Adrian Cadbury notes in his reflections on the fortunes of his own family firm, all parties have to accept the need for such changes and agree to abide by arbitration if such board appointments are made (Cadbury, 1994). He commehts favourably upon making the family firm a public company, as this can help unlock the famiiy's investments in the firm and help to reıvard long-standnıg employees with shares and other incentives. Additional capital for the expansion of the company can also be found, and the increased scrutiny of performance can act as a spur to better company management in the longer term. The obvious doıvn-side may be that the control and donıination of the company from family iıiterests has to decline, and a more professional relationship betıveen the company and family be alİowed to develop. There are some recent exanıples of private family-dominated companies (Virgin, Amstrad) going public and then being brought back to private status, because leading figures regarded the demands of wider accountability and loss of control as too onerous.
Best practice can also be drawn from the codes of practice on corporate governance (London Stock Exchange, 1999). For example, board sub-committees feature prominently in the combined code but when an SME board consists of only three people (chairman and chief executive, finance director and one non-executive director) the scope for sub-committees might seem to be a little limited. Nevertheless, there comes a point in the growth of an SME when the need to set up sub-committees to help delegate some of the board's work might arise. An audit committee might be needed. This could be facilitated by the one or two non-executive directors meeting with the auditors without the executives present. Here, concerns over company practices can be raised independently of the executives. in time, other committees might be set up for overseeing executive remuneration, nominations to the board, or preparations for listing or changing into a public company.
Some studies of the governance problems in SMEs are driven by theoretical assumptions and research strategies, which can contribule to the development of best practice. A recent study by Mailin.and Ow-Yong examined the corporate governance practices of small companies listed on the Alternative Investment Market, which was set up in the UK m 1995 (Mailin and Ow-Yong, 1998). Under the stock exchange rules for this market, the company to be listed must have a nominated ****or and broker who will play an important role in the small firm in terms of monitoring the management of the company as well as offering advice about best practice. The study looked at the disclosures in admission documents lodged by companies with the A1M in matters related to corporate governance. The findings of the study suggested that companies with an ****or paid more attention to the Cadbury code on corporate governance, had more directors appointed to the board, had more non-executive directors, had split the roles of chairman and chief executive, had set up audit and remuneration committees, and had drawn up policies on corporate governance. The benefits to the corporate governance procedures adopted in companies with an ****or led the authors to conclude that the stock exchange should encourage more comparıies to take on an ****or who can help an SME make the transition to better corporate governance procedures and structures.
A study by Zahra et al. into the entrepreneurial quallties of SMEs and the effect of ownership and governance structures on this activity was published recently in the USA (Zahra et nl, 2000). The study was informed by agency theory assumptions and sought to explore (in an empirical investigation of 231 SMEs in manufacturing) whether more successful companies had senior executives that had stock in their companies and/or had a snbstantive shareholder who actively monitored and contributed to the company's deliberations over stıategy. Data from the study led the authors to conclude that the more enterprisinğ companies were the ones where executives owned stock in theh companies, where the chairman and chief executive were different individuals, where the board was medium in size (6-11 members), and where the outside directors owned stock in the company. Much of this study tends to confirm its own assıunptions with regard to agency theory, namely that ownership has a positive value-enhancing effect upon the company, and that this relationship often gets into trouble when the transition is made from owner-managers to professional managers.
Another study based on the framework of âgency theory is that of Lee. el al., which looks at the value of outside financial directors on corporate boards in the USA (Lee el ah, 1999). The dataset used in the study was of 146 firms that had announced during the period 1981-85 that they were appointing an outside director from a commercial bank, insurance company or investment bank. This was then correiated with changes in the firm's share price a month later. From this limited study, the authors concluded that the appointment of an outside financial director to the board was associated with positive abnormal returns for the SMEs in the sample. They also found that investment bankers were appointed to the boards of smaller companies more frequently than commercial bankers or insurance executives. They concluded that smaller firms, which may have limited access to financial markets and less financial expertise, benefit substantially from these appointments. The assumptions of agency theory are thereby affirmed: that board composition is a factor in company valuation by the stock market, and that outside directors in general, and financial diıectors in particular, are selected in the interests of shareholders.
A recent sıuvey conducted by Berry and Perren in the UK into 1103 SMEs foımd that when a firm had more than 50 employees it was twice as likely to engage a non-executive director (Berry and Perren, 2001). SMEs with fewer than 50 employees, when they had appointed non-executive directors, particularly valued their financial advice; whereas SMEs with over 50 employees and non-executive directors placed more emphasis on their outside objectivity, contribution to strue-tured board procedures and the director's personal reputation. The authors of this survey suggested that an SME might need to change its non-executive directors as its development progresses, to help the board deal with new challenges and opportunities. While the study did not gather enough evidence to demonstrate a significant difference in performance in SMEs that had non-executive direc¬tors, managing directors who had engaged them claimed that their inputs were valued. Most non-executive directors were engaged through personal networks, or through banks and accountancy firms. Berry and Perren concluded by suggesting that a large nımıber of in-depth case studies need to be conducted to shed more light on the role and influence of non-executive directors m SMEs, and to help policy-makers deride on how to make further ünprovements in SME corporate governance.
Another source of insight into the problems of SMEs and the search for best practice can be found from comparative studies of corporate governance. Such studies in other competitor nations have shown that there are often interestüıg differences between the institutional arrangements in the conduct of corporate life (Charkham, 1994). Law review bodies are often charged with a duty to examine the governance regimes of what appear to be successful nations in terms of their economic performance to see if alternative structures can bring better results, particularly in the small-business sector. A brief mention of some of the majör characteristics of the different systems of corporate governance will now be given.in the USA, company law is a matter of state jurisdiction and the laws in states can differ considerably, although there is some federal oversight on securities regulation and a general willüıgness to follow the leading states; New York, Callfornia and Delaware. Consequently, the Model Business Corporations Act which came into force üı 1984, and the American Law Institute Principles of Corporate Governance 1994, tend to guide most aspects of US practice. However, states conipete for incorporations and Delaware is one of the most competitive centres for this administrative activity. This competitive contest has tended to give favourable. terms for directors, enabling them to claim indemnity for breaches of duty, and scope for the preferment of outside interests over those of shareholders in some circumstances. in comparison with the UK, the interests of shareholders are not as closely protected but in terms of the performance of share values this does not seem to have caused any detrimental impact. Company law in Delaware is very flexible in other ways: part of the proceeds of a capital issue can be distributed, and there are extensive provisions for informal operations and [. decision-making in small firms. There is a willingness to experiment with different versions of the corporate form, such as closed companies and limited Hability, so as to be favourable to new business development.
In Europe, there is an attempt to harmonise company law under Article 54 of the Treaty of Rome, but progress to date has been blocked by various member states. in terms of individual European countries, the German system is the most highly developed and has had an impact on other countries companies acts. German company forms are divided between 'share' companies (Aktiengesellschaften) and limited companies (Gesellschaften mit beschrankter Haftung). The former tend to have detailed and prescriptive constilutions and are similar to public companies, with power to raise funds publicly; the latter have limited numbers of members and allow for more flexible internal constitutions and are the nearest equivalent to the private company in the UK.
Until the 1970s most Commonwealth countries tended to follow UK company law with adaptations of the 1948 or 1927 Acts. However, since then a process of reappraisal and simplification has been taking place in many countries, moving them in the direclion of the US model, in Australla, the First Corporate Law Simplifications Act was passed which relaxed the rules for small businesses including single member companies, accoıuıting exemptions, İiberallsed share buy-backs and relaxed requirements for company registers. Another Company Law Review Act in 1998 allowed for the formation of a company without the need for a constitntion, simplified the process for conducting shareholder meetings, facilitated the use of electronic technology for meetings, eased changes to share capital values and reduced administrative burdens for company returns.
Competitive Advantage in Governance: Compliance and Performance
As was noted above, most studies of corporate Governance are compliance-oriented and tend to lead in the direction of the formallsation and codification of good practice. Compliance becomes a hygiene factor in the corporate Governance debate and often revolves around the agency theory of boardroom roles. in this theory, the governing board acts as a ratifier of the decisions to be implemented by the management, and as a controller in monitoring their implementation and performance. These prescribe the following activities as appropriate for the board: the selection of the board; the evaluation of compensatıon for senior executives; the selection, monitoring and removal of executives; the review of the company's financial objectives, plans and policies; the reviewing and monitoring of the company's aucliting and accounting practices; and ensuring the company is in compliance with regulatory demands and requirements. What is often underemphasised is the need for performance and the creation and maintenance of a complex set of relationships around the firm. in the growîng firm, it is very important that these are developed and broadened as the business develops. the transition from owner-manager to professional management and the incorporation of outside perspectives on the management and efficiency of the business are crucial steps towards successful growth. The need for business performance and relationship management in corporate governance shoıûd not be neglected.
Performance is often felt to be the key to competitive advantage; the actuallsa-tion of the SME. it is recommended that the board's role in this respect js to ensure that the management is effectively and continuously striving for above-average performance, taking into account the risk factors (Hilmer, 1993). in this respect the board should pay atlention to the fohowing activities: the selection and appoint-ment of the chief executive; the foımulation of strategies and policies; budgeting and planning; reporting to shareholders on regulatory compliance; and ensuring the board's own effectiveness.
If we study corporate governance from the agency theory perspective, then control becomes the most important function of the process. But there are other equally important roles for the board to perform, and other theories that would put them in the forefront of their analysis and prescription. Stakeholder theory is a sociological approach that deseribes the nature of the relationship and interaetions between the company and society and the variety of interests whieh are served. As yet, there is no coherent and consistent framework of theory which covers all the funetions of the board and the scope and processes of corporate governance specifically in SMEs (Hung, 1998). Such a theory would need to integrate the functional aspects and provide a valld explanatioı\ of the majör roles and processes in the corporate governance arena for both large and small companies.
Policy Issues for Corporate Governance in SMEs
As the result of this brief analysis, a number of policy implications for the development of best praetice in SME corporate governance are considered. First, best-praetice guidelines for SME corporate governance. These guidelines would be similar to the Cadbury code but written specifically with SMEs in mind. They would issue guidance on the following issues: the need to conduet an annual review of the chief executive; an annual review of the firm's strategy to determine if it is working and what changes need to be made; an annual appraisal of the organisation's efficiency, and the performance of the board itself, ineluding the appraisal of individual directors, processes and membership. Another important device for improving SME corporate governance is the drawing up of shareholder agreements or family constitutions, which lay down detailed provisions that wîH guide dispute resolution in the firm or family, should they develop. Shareholder agreements typically cover issues such as definitions of the business to be pursued by the company; intended capitallsation and the financing structure of the company; composition of the board; the intended policy for the distribution öf profits; procedures for the resolution of disputes between shareholders; the transferability of shareholdings, suitable exit routes and the method of 'valuing the shares being sold or transferred.
Second, there is clearly a need for more research using different perspectives on corporate governance. The new stakeholder agenda in corporate governance should not be ignoıed by the SME sector. SMEs need to take advantage of the positive and active environmental strategies that can lead to both inınıediate and longer-term benefits for businesses of all sizes. Customers are increasingly screening potential suppliers for their 'green' credentials. SMEs should not ignore this development and should obtain environmental standards accreditation and certification. Even if the cost of this is prohibitive in some SMEs, then smaller steps in this direction can be taken. Starting with energy efficiency initiatives, companies can then move on to revienvs of their packaging and waste disposal policies. This can lead to cost savings and recycling opportunities as well as minimising the SME's risk of exposure under the duty of çare provisions of the Environmental Protection Act. increasingly, access to new sources of capital may be heavily influenced by the social and environmental stance of the firm. All main UK clearing banks are in the process of building social and environmental issues into their credit management policies. SMEs looking to list on the AIM (Alternative Investment Market) also need to start building environmental concerns into their listing strategies because the due-diligence procedures of the reporting accountants and lawyers take into account environmental risk. Helping SMEs embrace this new agenda should be an important aim of the government's business ****ory services.
Third, a review of the appropriate corporate forms to be recommended for SMEs. Freedman has brought to wider attention the fact that, although the case for limited liability is widely accepted for larger companies, for the SME the efficiency arguments are less clear-cut. For SMEs, the allocation of risk to those most capable of bearing it tends to be weakened by the adoption of limited liability. Creditors, employees and owners are often more liable than shareholders. This could in fact slow down the growth of the small-business sector since the failure of one SME frequently pulls down other SMEs. SMEs which think that they are limited in their exposure may find themselves taking undue risks and yet stili end up as personally liable. This was most recently highlighted in the case of the employees in the private company Easy Group, where the owner, Stelios Haji-Ioannou, reduced the value of employee shares from £1 to İp at an extraordinary meeting of shareholders by casting his 75 per cent voting rights in the company. Employees who had taken shares in place of higher salaries ended up taking a substantial part of the risk (and losses) in this business (Finch, 2001). Moreover, the role of limited liability in reducing monitoring and transaction costs in SMEs is much less than is often imagined. Without the divorce of ownership from control, the agency problem does not arise, and the business has merely added a layer of disclosure cost that it could have done without. The encouragement of SMEs into incorporation should be carefully considered as this is only appropriate for grou'th-oriented businesses, rather than a blanket measure for all SMEs. Indeed, the call to dcregulate and simplify company law for small businesses has to be tempered, since these regulations and requirements are also there to protect other stakeholders in society and to avoid the creation of moral hazards.
[» Finally, training for governance and clarification of board roles in SMEs can help the growing firm manage the difficult transition to limited liability and its ultimate public company status. A manager who has succeeded in rurming a business using command and control skills often finds that when he creates a board of directors that this approach to decision-making is no longer appropriate. What is required is the effective use of personal power, and the ability to influence others by reasoned argument and persnasion. Consequently, directors must learn new types of behaviour: advocacy and consensus building. Board members are all collectively responsible for the fortunes of the business, so all members of the board need to become familiar with all aspects of the business, even those outside their fımctional expertise. The perspectives of objectivity and collective responsibility also have to be developed. Training and mentoring can help, and gaining experience on the boards of other companies is invaluable. Helping SME directors gain this experience and training would be a real contribution to improving SME governance processes. Help for SMEs with contacts and lists of outside directors in the difficult transition period would also make a useful contribution.

BİR ÖDEV İÇİN ACİL ÇEVİRİ YARDIMINA İHTİYACIM VAR

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