Theory, policy and practice perspectives from Royal Holloway

The role of corporate governance for social and environmental responsibility in SMEs

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Kiril Nejkov

Kiril Nejkov, International Finance Corporation, World Bank Group

Corporate governance is a significant part of discussions regarding corporate social responsibility and sustainability. What should the structure and composition of the Board be? How should accountability be embedded in an organisation’s systems and structures? Who is the right chief executive officer? Which standards are signed up to and complied with? A less well-trodden topic is how governance issues relate to sustainability in smaller firms, where we know there is a lack of bureaucracy, systems and structures, with informal management and the combination of ownership and control being the norm. Academic literature has failed to develop substantive theory and has neglected policy implications with regards to the role of appropriate governance frameworks for encouraging socially responsible behaviour among emerging and developing country Small and Medium Sized Enterprises (SMEs). A seminar co-organised by RHUL’s Centre for Research into Sustainability (CRIS) sought to address these gaps.

The context of corporate governance can differ enormously, for example, the diversity of corporate governance regulation between different emerging markets. Adding further complexity, corporate governance concerns of SMEs can vary widely for example, between listed firms and family-owned unlisted firms. It is perhaps no surprise that the importance of good corporate governance practices is more compelling for medium-sized firms (defined by the World Bank as below 300 employees or US$ 15 million annual turnover) than small-sized firms (defined as below 50 employees or US$ 3 million turnover). This extreme diversity calls for greater than usual differentiation in terms of training and tailoring of advice regarding governance structures for SMEs.  More academic research is also required to understand what contextual factors matter to SMEs and under what circumstances governance issues become most pertinent.

Tracy Gordon

Tracy Gordon, Centre for Corporate Governance, Deloitte

There are a wide range of impediments to integrating CSR concerns in corporate governance, including corruption (as SMEs in developing economies can get stuck in a corruption trap) and the practical lack of internal resources (as SMEs in developing economies may lack financial resources, qualified staff or even a basic understanding of the role of the Board). Despite these challenges, seminar participants agreed that SMEs would benefit from a better understanding of governance, as corporate boards demonstrably lead to effective management and there is an arguably virtuous flow of CSR. Established corporate governance mechanisms could demonstrate to stakeholders that the business is committed to good governance, although these connections are not necessarily yet clear from existing research.
There are some important challenges around the relatively hard measures of corporate governance versus softer aspects of CSR. While there is convergence between the two, it might be that CSR is more important for SMEs in developing economies, especially with their strong community links and ‘local social gaze’. Given the importance of community-related issues, another possible developing economy perspective might be the focus on charitable foundations as a socially-responsible arm of the business. In all of these discussions, we need to consider the merits of regulation (including compliance) versus culture in terms of corporate governance in developing economies. We will continue these discussions at our future seminars and in the forthcoming Edward Elgar Handbook of Research on Small Business Social Responsibility: Global Perspectives.

This blogpost is based on  discussions at the ESRC Seminar Series on 19 November 2014 at the Association of Chartered Certified Accountants (ACCA), London and was co-organised by their Small Business Unit. For more information on the seminar series and Edward Elgar Handbook go to www.sbsr-global.net, follow@Prof_LSpence and #sbsrglobal
A version of this blog written by Professor Prof Jedrzej (George) Frynas was first published on the SBSR Global Blog

Laura Spence (Director of CRIS, RHUL) and Jedrzej (George) Frynas (Middlesex University)

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