INTRODUCTION
The Financial Reporting Council of Nigeria (FRC), on Thursday 30 May 2024, issued the Small and Medium Enterprises Corporate Governance Guidelines (‘SME-CGG’ or ‘the Guidelines’). The Guidelines aim to enhance, transparency, accountability and performance among Micro, Small and Medium-sized Enterprises (MSMEs), increase their capacity to strengthen governance practices, foster stakeholder trust, and facilitate access to finance for sustainable economic growth. In view of the fact that the MSMEs constitute about 96% of businesses in Nigeria, the Guidelines are meant to improve Nigeria’s business environment, increase the longevity and sustainability of MSMEs while increasing business confidence and access to capital and trade for adhering entities
Following the footsteps of Dubai (in United Arab Emirates), Hong Kong, Sri Lanka and a few other countries, the FRC unveiled the SME-CGG in an effort to make the principles of good corporate governance and ethical business administration accessible and operational by MSMEs.
In this edition of our newsletter, we reviewed the SME-CGG under the following key headings:
- Application of the SME-CGG
- Key Principles
- Next Steps to be taken by MSMEs
- APPLICATION OF THE SME-CGG
The SME-CGG applies to Micro, Small and Medium Enterprises in Nigeria. The new classification of the MSMEs in Nigeria as laid out in the revised National Micro, Small and Medium Scale Enterprise Policy (2021-2025) is as follows:
| S/N | Size Category | Employment | Turnover (N Million) |
| 1 | Micro Enterprises | 3-9 | 3-25 |
| 2 | Small Enterprises | 10-49 | 25+ but less than 100 |
| 3 | Medium Enterprises | 50-199 | 100+ but less than 1000 |
The classification may change after 2025 when the National MSMEs policy is further revised. The Guidelines are meant for adoption and application by entities with turnover thresholds as captured in the above table. MSMEs are not compelled or mandated but encouraged to apply the Guidelines in line with their readiness and stage of development as the Guidelines only serve as reference and frameowk for understanding and practicing good corporate governance. MSMEs are however required to take into consideration their unique circumstances or peculiarities in applying them. Consequently, there are no penalties for non-compliance with the SME-CGG as they should be viewed as a set of recommendations as well as a benchmark of best practices.
Benefits of Applying the SME-CGG
Since it is not compulsory to apply the SME-CGG, are there benefits in adopting the recommended principles? Yes, there are. Applying the Guidelines will help MSMEs to establish robust business processes and prepare for future expansion, become more accountable and transparent in their operations, and more bankable and investable.
The Guidelines will assist MSMEs to achieve structures that will facilitate and enhance growth, profitability and sustainability.
Entites that apply the recommended principles and practices in the Guidelines stand a better chance to access finances as providers of funds (finance houses and investors) will be more comfortable transacting with well governed entities. In summary, the benefits of adopting the recommended principles and practices in the SME-CGG include:
- Growth and sustainability;
- Greater confidence from investors and financiers
- Greater access to funds
- KEY PRINCIPLES
There are 11 principles in the Guidelines covering the folloqing six (6) key areas:
- Corporate Governance Policies and Procedures
- Board of Directors
- Control Environment
- Stakeholder Relations
- Family Governance
- Environment, Social and Governance Considerations
They are also practices recommended by the Guidelines for the implementation of each principle. It is important to mention that these key principles are drawn from the Nigerian Code of Corporate Governance (NCCG) 2018 and international best practices and adapted to the peculiar needs and circumstances of MSMEs.
The SME-CGG enjoins MSMEs to put in place the following:
- Governance Framework
MSMEs are encouraged to prepare and adopt a formal corporate governance framework outlining the roles of key governance stakeholders such as partners, shareholders, board of directors and management. The governance framework should be closely related to the MSMEs’ mission, vision and values and the expectations of its owners and key stakeholders.
The framework is expected to outline the decisions that should be taken by those who directly manage the business and those reserved for the Directors as well as the investors (shareholders). The framework should also contain plans for orderly succession and appointments to the board and to senior management as a way to maintain an appropriate balance of skills and experience within the entity.
- Board of Directors
MSMEs should endeavor to set up a formal Board of Directors with a clear mandate, role and mode of operation. Smaller entities may wish to set up an “advisory” board with no formal decision-making powers, but which offers its expertise and networks to guide and support the business. The Guidelines recognize that two to three people are a sufficient size for an advisory board for a small business.
Medium-sized entities (depending on the size) are encouraged to have up to ten directors on the board that will function in full capacity (directing the affairs of the entity, reviewing and formalizing decisions and strategies) and not just in advisory capacity.
The board of directors should be mixed in terms of independent non-executive, non-executive and executive directors and in terms of family and non-family members, where applicable.
Medium-sized entities should consider separating the roles of the Chairman and the Chief Executive. However, in smaller entities, the Guidelines recognize that such a separation may not always be possible or feasible.
- Credible Compliance Program
MSMEs should maintain credible books of accounts which are free from material misstatements and reflect a true and fair view of the financial performance of the entity. The accounts should be prepared in accordance with the financial reporting framework issued or adopted by the Financial Reporting Council of Nigeria (FRC).
Micro and Small-sized Entities can prepare reliable statements necessary for operations and need not undergo external audit reporting unless statutorily required. However, Medium-sized Entities should utilize the services of a reputable independent accounting firm in the audit of their Financial Statements.
There should be an IT Governance framework that considers the performance of information systems to enable the entity have an adequate process that addresses the risks posed by the technology in use.
MSMEs are also encouraged to have an Internal Control Framework in place and ensure the entity’s risks are regularly reviewed and appropriate mitigation mechanisms emplaced.
To ensure proper management of risks, SMEs are encouraged to consider establishing an internal audit function and set up a board committee responsible for risk management.
- Effective Stakeholder Engagement Plan
MSMEs should recognize that various stakeholders are interested in their existence and operations for varied reasons including satisfaction (customers), sound regulatory compliance, product safety, health and safety of the environment in which the entity operates. These stakeholders include regulators, shareholders, employees, customers, suppliers, creditors, the community, the environment, and generally parties with any business relationship with the enterprise.
MSMEs should formulate policies to govern the entity’s relationships with its stakeholders while targets or key performance indicators for satisfying different stakeholders should be set and the implementation thereof adequately monitored.
MSMEs should also ensure effective communication with investors and other stakeholders. Annual reports should contain adequate and clear information on the company’s governance structure, policies, practices, environmental/social risk and opportunities, insider or related party transactions and conflicts of interests.
- Charter for Family Participation
The SME-CGG recognize the peculiar circumstances of MSMEs that are family owned and run as well as the fact that there may be need to:
- deal with issues relating to successfully handing over the business to the next generation of the family owners,
- manage the diverging interests of some family members from those of the business,
- address conflicts between non-family executives who, frequently, are reluctant to be subordinate to less competent family members,
- deal with narrow perspectives of some family members in a fast-changing competitive environment,; and
- grapple with challenges about obtaining finances where the business is family owned and run.
MSMEs are encouraged to emplace a Constitution (or a Charter) setting out the family’s relationship with the business and clearly defining the role of the council. The Constitution should set out the vision, values and policies regulating the family’s relationship with the business.
The Constitution should also contain procedures to facilitate effective communication and coordination between family members and the other stakeholders of the business.
In later generations as the family and business get more complex, families should consider establishing a family governance structure such as a “family council” which institutionalizes cooperation in large families and serves as the link between the family and the business.
It should be noted that the Constitution or Charter could be made part of the entity’s Governance Framework, in the immediate or future.
ESG Considerations
MSMEs are encouraged to be sensitive to the effect of their business on the environment that they operate in as well as how they engage and influence a wide range of stakeholders from diverse backgrounds within their communities.
SMEs should align their activities to be environmentally friendly by reducing, reusing, and recycling to promote efficiency and reduce waste. They are required to ensure compliance with applicable laws or regulations and align their strategies and activities to be socially conscious and responsible; for example, showing appreciation towards the community and stakeholders to cultivate good relationships. They should also commit to the best practices in the use of natural and human resources.
- NEXT STEPS:
It is important for MSMEs to carry out gap analysis on their governance architecture to take advantage of the benefits of adopting the governance procedures outlined in the SME-CGG. DCSL Corporate Services Limited is available to assist with this task and identify key compliance requirements as well setting out an implementation plan that helps the entitities to achieve best practice standards.