The Governance Differentiation among Large, Medium and Small Enterprises
The Governance Differentiation among Large, Medium and Small Enterprises
Dr. Sadeq AlAbdulwahab
AlAbdulwahab (2020, July) clarified that corporate governance should apply eight principles to control an organization, to annul a corruption, and to overcome a crisis. The eight principles are (1) strategic objectivity, (2) representative agency, (3) ethical leadership, (4) professional fairness, (5) regulatory compliance, (6) total accountability, (7) smart transparency, and (8) sustainability. The implementation of those principles requires several applications. Although the large enterprise may have the capability to activate those applications, small and medium enterprises are not always ready to have the governing applications, because they have lack of budget, staff and time. This paper will concentrate on describing the governing applications that the large enterprise should have to apply the eight principles of governance. Then, the paper will guide each small enterprise and medium enterprise to how apply alternative practices that help them to apply the eight principles of governance as much as the large enterprise can govern the organization.
Large Governance Applications
Large enterprise is the enterprise that manages more than 1000 full-time employees and gains an annual revenue exceed $10 million (Sangoma Customer Success Team, 2020). The governance of large enterprise should have a board of directors. According to King Committee (2009), the board of directors not only represent the shareholders in the company, but it manage structured process of engagement between a company and its stakeholders. Stakeholders include shareholders, institutional and potential investors, creditors, lenders, suppliers, customers, regulators, employees, unions, media analysts, consumers, and auditors. The board of directors should activate the structured process of engagement through subsidiary committees reporting to the board of directors. King Committee (2009) declared that the board of directors should form two major committees. Audit committee monitors the financial compliance; and governance committee activates the accountability and sustainability. Several codes of corporate governance recommend the board of directors to form a nomination committee and a remuneration committee. However, the both committees can be merged into the governance committee, or they work as subcommittees reporting to the governance committee depending on the complexity of stakeholders’ engagement process and decision making process.
AlAbdulwahab (2014) demonstrated a novel structure of governance committee, whereas it include five units. First, a strategizing unit manages the strategic objectivity and the representative agency in the company. Second, a monitoring unite heeds the regulatory compliance and the smart transparency in the company. Third, a judging unit activates the accountability and the fairness in the company. Fourth, a mentoring unit develops the sustainability and the ethical leadership. Fifth, a crisis unit ensures the business continuity and the risk management. Every unit in the corporate governance should be equipped by an infrastructure of contemporary digital platforms and informative applications.
The strategizing unit should have a digital dashboard of balanced scorecard. According to PAT Research (2020), the strategizing unit in the governance committee should select CEO Balanced Scorecard Software. It is a system that gives an umbrella view of organization performance. It also looks at the general strategic objectives of the company as well as key performance indicators. Overall, CEO Balanced Scorecard Software should be able to be linked with cascaded Balanced Scorecard of every department, branch and subsidiary in the corporation. Balanced Scorecard Software should be easy to customize the objectives, measures and target in the corporate strategy. Also, it should be easy to use by different stakeholders in the company. CEO Balanced Scorecard Software should have smart reporting features to organize qualitative and quantitative reports of the company, whereas it generates figures, charts and tables that help the strategizing unit to estimate accurate descriptive and predictive analyses.
The monitoring unit should systemize the transparency in the company by using a smart platform of board documentation management. According to Rathod (2019, January 28), the board of directors (BoD) should use a digital platform of documentation management. This platform supports BoD to achieve a professional decision-making process through sophisticated software systems. For example, governance, risk and compliance (GRC) software supports both the board and committees to create meeting minutes in an organized communicative transparent manner. It also systemize the access levels of information and communication depending on information sensitivity and personal authority. This software helps to disclose any conflicts of interest within the stockholders. It also helps to evaluate the opinions of stakeholders through lunching online questioners and surveys (Rathod , 2019, August 9).
Another example is Entity Management Software, which stores entity information, documents and organisational charts in a highly secure database to create a single source of truth. It improves the data flow among subsidiaries and parent companies or among franchisors and franchisees. It also helps the board of directors to plan for regulatory compliance by simplifying the demonstration of regulatory requirements, auditing schedules, compliance notifications, and field verifications (Rathod, 2020). Moreover, the monitoring unit should link the board documentation platform to a scorecard of compliance. Panitz, Wiener, & Amberg (2010) found that experts of compliance advise the companies to develop a stand-alone solution of compliance scorecard that allow the managers to full control in measuring and mentoring the conformity of standards, regulations and laws. AlAbdulwahab (2014) suggested that compliance scorecard should look like a diagnostic measure module to show the standardizing level of every function in the organization such as operations management, technology management, quality management, and so on.
The judging unit should implement a whistleblowing system in the company. The whistleblowing system is a service that enables stockholders to report malpractice, unlawful or unethical behaviour within the workplace. Whistleblower through this system can report about any breach of ethical acts such as human rights, fraud, corruption, harassment and discrimination. According to ENGIE (2020), the whistleblowing system should provide the whistleblower a channel to reports about wrongdoing through secured telephone and email plus to a cloud system to upload the evidences and documents confidentially. External service provider should handle the whistleblowing notification to guarantee the information confidentiality, the whistleblower’s protection, and the alert fairness. Then, the external service provider should report the case to the judging unit (usually called Ethics and Compliance Department) for examination and investigation of the case within restricted protocols. According to UNODC (2020), the judging unit should classify the whistleblowing cases into three protocols depending on the case circumstance. First protocol is the open-reporting case, where the judging unit openly discloses the information and results of investigation to the public media. Second protocol is the confidential-reporting case, where the judging unit handles the case internally and confidentially. Third protocol is the anonymous-reporting case, where the external service provider hides the names and sources of whistleblowers.
The mentoring unit should manage a digital dashboard of succession planning platform. According to Price (2006), succession planning platform should include three categories. First category is the leadership succession planning, where it plans the developmental programs of successors to the leading positions of the board of directors, board committees, chief executives officers, vice presidents and departmental directors. Second Category is the executive succession planning, where it plans the developmental programs of successors to executive positions of second-line managers, first-line managers, professionals and senior staffs. Third Category is the emergent succession planning, where it plans the developmental program of temporary successors to the vacant positions during the crisis or disasters. Temporary successors may become retired people, outsourced staffs, civil defenders, military soldiers, trained volunteers and university students. According to Ginac (2017 ) and Ginac (2018), the dashboard of succession planning should show, for every employee, the successional level of target position (e.g. training level, developing level, eligible level). The dashboard should show the training programs that employee passed and the assignments that he/she achieved in the developmental programs. The dashboard should show the result of psychometric tests and 360 assessment for every employee. Numerically, assessment results should the competence level of self-management, task management and relation management. Additionally, the dashboard shows constructive feedbacks about every employee from the opinion of subordinates, customers and managers. Finally, the succession planning platform is highly recommended to be linked to balanced scorecard and performance management system in the company.
AlAbdulwahab (2020, April) concluded that the corporate governance should include a crisis unit. This unit should work in an integration with other four units for playing continuous roles in prevention, containment and recovery of crisis and disasters. The crisis unit should play four major roles: (1) strategy of crisis containment, (2) business continuity (BC) planning, (3) disaster recovery (DR) methodizing, and (4) emergency succession planning. Playing this role requires digital system, platform and software. According to Zev (2020), business continuity planning system (BCPS) should include a digital dashboard that demonstrate the map of business processes with showing the risk tier of each work unit with determining the recovery time objective (RTO), the data recovery point objective (RPO) , and the maximum tolerable period of disruption (MTPD). BCPS should include a device of alertness to alert the responsible crisis teams to activate DR & BC plan after any accident occurrence. It should allow the crisis team to join in immediate virtual meetings. BCPS should include an action management platform that simplifies to track the action plan against every risk on the BCP scenarios.
Small Governance Applications
Small enterprise is the enterprise that manages less than 100 employees and gains an annual revenue less than $5 million (Sangoma Customer Success Team, 2020). According to CIPE (2011), small and medium enterprises (SMEs) should invest in developing the corporate governance, whereas the corporate governance can help SMEs to attract investors, motivate employees, manage the risks, and strategize the growth of enterprise. However, the previous section shows that the infrastructure of corporate governance requires many applications and a lot of staff to manage this effective governance. SMEs are not capable to provide the required applications of governance, because those applications are so expensive. Moreover, the small enterprise has limitation of employees. Thus, the large governance may diverge the employees to not focus on the core business of the enterprise. Therefore, AlAbdulwahab (2014) believes that small enterprise should focus on achieving the eight principles of governance by using simple applications. The applications of small enterprise are (1) board of governance, (2) financial audit, (3) quality audit, (4) manual of governance, and (5) balanced scorecard.
Huse (2000) reviewed a summary of publications that discussed SME board of directors. The summary reveals that SMEs require a board of governance (BoG) including 3 major members who are chief executive officer (CEO), chief risk officer (CRO), and chief governance officer (CGO). In the startup micro enterprise, the board of governance may start with only CEO belong to external financial auditor and external quality auditor. In compliance of BoG roles with codes of SME governance such as the code issued by Dubai SME establishment, CEO should develop a strategic balanced scorecard (BSC) in the company. CEO can start with a simple BSC by using Excel sheets, and then improves it gradually until BSC becomes a platform with digital dashboard. CRO may play similar roles that the chief financial officer (CFO) plays in the large enterprise. CRO should maintain the credible books of accounts, evaluate the external financial audit, and issue the financial statements. Furthermore, CRO should activate the accountability of CEO performance based on BSC results. Moreover, CRO should review the risks of decisions that CEO approach to make, and work gradually to develop a business continuity plan of the company.
CGO can play core roles of governance in the small enterprise. CGO roles are (1) to develop a manual of governance practice, and (2) to activate total quality management in the company. According to AlAbdulwahab (2020, July), the company at any size should prepare a manual of governance to regulate the acts of the eight principles of governance. The governance manual should include five sections. First, code of ethics should list the ethical values, behavioral conducts and penal systems in the workplace. Second, a canon of fairness regulates the power distribution related to (1) decision rights, (2) wedges, (3) procurements, (4) recruitment, (5) authorities, and (6) budgeting. Third, a policy of inclusiveness regulates (1) information sharing, (2) interest disclosure, (3) public relations, (4) intellectual properties, and (5) blabbing penalties.
Fourth section is the compliance of total quality management (TQM). According to Mahmud & Hilmi (2014) and Lal (2008), TQM is the most effective system in governing SME performance. The compliance of ISO 9000 can give SMEs opportunity to have a good governance by developing good leadership practices, designing a process approach of works units, and approaching an organized system of management. The compliance of ISO 9000 can help SMEs to optimize the effectiveness of governance by approaching the factual decision making, focusing on the customer satisfaction, and structuring the involvement of stakeholders. Therefore, SMEs should ensure the development of governance through conducting an annual audit of quality by hiring external quality auditor. ISO (2011) emphasized that quality audit should issue quality auditing report as per to six principles: 1) integrity, 2) fair presentation, 3) confidentiality, 4) independence, 5) evidence-based approach, and 6) professionalism. SMEs should hire the external quality auditor based on six criteria: (1) practical experience, (2) relevant specialization, (3) factual reporting, (4) auditing record, (5) auditing role, and (6) auditing tools. Accordingly, the proper compliance of quality management relies on proper documentation of quality management. Thus, the manual of governance should include a quality documentation, which includes quality policy, process flowcharts, quality control plan, and templets of quality control forms (Schlickman, 2003).
Fifth section is the franchising system. According to HAYES (2020) and Wikipedia (2020), franchise is a joint venture between franchisor and franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor's goods or services under an existing business model and trademark. The franchising is the best choice of SME to grow in the market with less investment and short time. Most franchisors such as Macdonald’s, Zara and Dream Vacations were originally small enterprises with a one shop in the market. Based on well governance of franchising system, they grew to become large enterprises with an incomes approaching to tens billion dollars. Therefore, SME should make the franchising system as a major part of governance manual. The governance of franchising system can support SME to attract the investors and to get their trustworthiness. The franchising system in the governance manual should include the concepts, terms and conditions of franchise agreement. Moreover, this section should describe the control process of franchising system. It is so important of franchisor to impose the franchisee to apply a governance, which is obligated to the franchisor’s governance manual and system.
Medium Governance Application
Medium enterprise is the enterprise that manages less than 1000 employees and/or gains an annual revenue less than $10 million (Sangoma Customer Success Team, 2020). SMEs represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. Therefore, medium enterprise should have an effective governance for ensuring a trustable investment, a secured jobs creation, a useful innovation, and a fair economy (WBG, 2020).
The medium governance is a transitional governance, whereas the medium enterprise begins with a small governance, and gradually develops it to become a large governance. The development of medium governance should consider the financial growth of enterprise, the cost of governance applications, and the total benefits of governance acts. According to CIPE (2011), Ghassan Nuqul, deputy chairman in Nuqul group, stated that Nuqual group was established as a small retail family company in Kingdom of Jordan at 1952. Now, Nuqul group owns 30 companies in Middle East, because it applies a well governance. When Ghassan Nuqul was appointed as a deputy chairman in 1985, Nuqul was not knowing about anything about governance. He only thought about what Nuqul needs to make successful strategic decisions, what they need to attract trade agencies from international companies, and what they need to have competent loyal employees. This way of thinking was the driver to develop effective governance in Nuqul group.
In the first step of developing governance, Nuqul group established a board of governance. This board included 3 members of Nuqul and 2 independent experts. The board of governance established two committees. First, audit committee, under the head of chief financial officer, works to audit the financial accounts in the group of companies. Second, management development committee, under the head of deputy chairman, works to develop a succession plan and fair policies of recruitment, wedges and procurement. The second step was an establishment of governance manual, which they called “Nuqul Family Business Constitution”. The family constitution set a strategic BoD structure of representative agency, a strategic method of leadership succession planning in the family group. Then, Nuqul board of governance decided to separate the role of chairman from the executive role by appointing chief executive officer who was not member of Nuqul family. Third step was implementing scorecard of compliance and sustainability by using Global Reporting Initiative (GRI G3). This scorecard includes numbers of indicators divided into three categories. Social category concerns of human capital development; economic category concerns of financial capital development; and environmental category concerns of national capital development (GRI, 2011). Forth step was the enhancement of transparent governance, whereas Nuqul group improved a transparence system for publicizing financial statements and GRI reports plus to open a communication channel of investors’ relations.
Nuqul group is a real case study, which approves that SMEs can develop small governance applications to approach the large governance applications. However, the concerned people may expostulate that this case study is limited to the circumstance of a family group of companies. In fact, not all SMEs under an umbrella of family group that can govern its SMEs through centralized board of governance. Actually, all SMEs can be governed through a centralized board of governance by using three alternatives. Those alternatives can provide SMEs by the infrastructure of large governance applications. First alternative is the franchising system. The franchisor, who succeeded to have number of franchisees, should develop a centralized system of governance as same as this paper describes it in the section of large governance application. Hence, the centralized system of governance should become an integrated part of franchising system and cost (HAYES, 2020). Second alternative is the accelerator. According to Vandeweghe & Fu (2018), the accelerators now provide rental offices to the startup business with administrative and consultative services. However, the accelerators should play an important role in developing the SMEs governance. The accelerators can provide a full digital toolkit of governance applications based on a cloud system. Thus, SMEs can get an opportunity to rent the governance applications from an accelerator by a reasonable rental charges.
Third alternative is the operating holding company. According to Madan (2020), the idea of operating holding company is that number of SMEs owners transfer some shares from their operating companies to the holding company. While the operating company managerially works independently, the holding company strategically provides governance applications to the operating companies. Today, a lot of governments yield financial grants to support SMEs. It is better that those governments establish operating holding companies to acquire SMEs partially. The operating holding company with a centralized board of governance can ensure compliance, accountability, fairness, and transparence of SMEs governance. Moreover, it can harmonize SMEs in a common national sustainable strategy.
Conclusion
The effective governance should be based on infrastructure of informative applications including balanced scorecard, scorecard of compliance, documentation management platform, whistleblowing system, succession planning software, and business continuity planning system. However, the large enterprises have the capability to establish and to manage this type of governance infrastructure, while small and medium enterprises (SMEs) have a limitation in applying a similar governance. Therefore, SMEs should not focus on applying similar applications of large governance rather than SMEs should focus on applying the principles of governance as much as the large enterprises do.
The small enterprises can apply the principles of governance through implementing balanced scorecard, financial audit, and ISO 9000 compliance. Moreover, small enterprises should establish a board governance that applies a governance manual including of code of ethics, canon of fairness, policy of inclusiveness, TQM compliance process and franchising system. In other hands, medium enterprise should apply a transitional governance, which gradually develops the small governance to become a large governance. Overall, SMEs has opportunity to have equivalent applications of large governance through three alternatives: (1) franchising governance system, (2) accelerator center of governance, or (3) operating holding company.
In conclusion, there is differentiation among large, medium and small enterprises in applying the governance though the principles of governance are same of all kinds of organizations. Therefore, it should be no one code or standard of governance for all sizes of organizations. Governments and international regulators should regulate three different codes for the large governance, the medium governance and the small governance. Each code should include different requirements that concern the capability and the limitation of the organization on applying governance, depending on their size of employees’ number and revenue amount. The differentiation of governance code can lead all organizations to focus on applying the principles of governance rather than the toolkits of governance.
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