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*Corresponding author: [email protected]
The Influence of Corporate Governance Practices on Financial Performance of Small and Medium-Sized Enterprises in Ghana
ABIGAIL PADI*
ALHASSAN MUSAH
Takoradi Technical University, Ghana
Abstract: This study examined the influence of corporate governance practices on the financial performance of Small and Medium Sized Enterprises (SMEs) in Ghana. The study surveyed 320 owners/managers of SMEs through a stratified random sampling technique. The main instrument for data collection was a questionnaire; whiles data were analyzed using statistical tools such as mean and standard deviation and regression techniques to answer the research questions. The results of the study showed that all the four areas of corporate governance practices examined in the study, which include the size of the advisory board, the composition of the board, managerial competence as well as financial disclosure, and transparency, were positively associated with the financial performance of SMEs in Ghana. However, there is poor financial disclosure and transparency among SMEs in Ghana. Weak legal controls, law enforcement, and poor financial disclosure systems affect the corporate governance practice among SMEs. The study concludes that the corporate governance practices of SMEs significantly impact their financial performance. Based on the above findings and conclusion, it was recommended that SMEs' shareholders ensure that their respective enterprises have active and sizeable advisory boards that meet regularly to support the management of the firms. Also, managers of the firms should improve their managerial competence through training and development programs as that affects the performance of SMEs in Ghana.
Keywords: Advisory Board, Corporate Governance Practices, Firm Performance, Managerial Competencies, Small and Medium-Sized Enterprises.
Abstrak: Penelitian ini menguji pengaruh praktik corporate governance terhadap kinerja keuangan Usaha Kecil dan Menengah (UKM) di Ghana. Penelitian ini melibatkan survei terhadap 320 pemilik/pengelola UKM melalui teknik stratified random sampling. Instrumen utama pengumpulan data adalah kuesioner sedangkan data dianalisis menggunakan alat statistik seperti mean dan standar deviasi serta penggunaan teknik regresi untuk menjawab pertanyaan penelitian. Hasil penelitian menunjukkan bahwa keempat bidang praktik tata kelola perusahaan yang diperiksa dalam penelitian yang meliputi ukuran dewan penasihat, komposisi dewan, kompetensi manajerial serta pengungkapan dan transparansi keuangan berhubungan positif dengan kinerja keuangan UKM di Ghana. Namun, ada pengungkapan dan transparansi keuangan yang buruk di antara UKM di Ghana. Kontrol hukum dan penegakan hukum yang lemah, serta sistem pengungkapan keuangan yang buruk adalah beberapa kendala
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yang mempengaruhi praktik tata kelola perusahaan di kalangan UKM. Studi ini menyimpulkan bahwa praktik tata kelola perusahaan UKM memiliki dampak yang signifikan terhadap kinerja keuangan mereka. Berdasarkan temuan dan kesimpulan di atas, direkomendasikan bahwa pemegang saham UKM harus memastikan bahwa masing-masing perusahaan memiliki dewan penasihat yang aktif dan cukup besar yang bertemu secara teratur untuk mendukung manajemen perusahaan. Juga, manajer perusahaan harus meningkatkan kompetensi manajerial mereka melalui program pelatihan dan pengembangan yang mempengaruhi kinerja UKM di Ghana.
Kata Kunci: Advisory Board, Corporate Governance Practices, Firm Performance, Managerial Competencies, Small and Medium-Sized Enterprises.
1. Introduction
Corporate governance is the process and structure used to direct and manage the business affairs of companies toward enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholder value while taking into account the interest of other stakeholders (Owiredu & Kwakye, 2020;
Musah & Adutwumwaa, 2021; Tamburini, 2016). The issue of corporate governance has been a growing area of management research, especially among large, publicly listed firms and financial institutions (Nasrallah & Khoury, 2022; Obeng, 2021; Musah et al., 2019). The reason for this biased corporate governance research toward large firms and ignoring SMEs is based on the premise that agency problem is higher in large firms compared to SMEs (Ahmed, 2019; Abor & Adjasi, 2007). In many SMEs in developing countries like Ghana, there is less separation of ownership and management, reducing the potential for conflict of interest that necessitate good corporate governance practices (Nasrallah & Khoury, 2022; Afrifa & Tuaringana, 2015). For Small and Medium-Sized Enterprises (SMEs), corporate governance is about the respective roles of the shareholders as owners and the managers (Nasrallah & Khoury, 2022; Abor &
Biekpe, 2007; Abor & Adjasi, 2007; Ahmed, 2019). In SMEs, the resources, stewardship, and control offered by directors, for instance, may be very different from and more direct than in large corporations (Zvereva & Zvereva, 2017). According to Amoateng, Osei, Ofori & Gyabaa (2017), SMEs operating within emerging economies
251 face performance difficulties that are primarily blamed on poor corporate governance practices.
In Ghana, the recent financial sector crisis, which saw the collapse of at least seven commercial banks and over 200 microfinance companies, was largely a result of weak corporate governance practices, according to the report by the Bank of Ghana (Musah et al.2022; Kusi et al. 2018; Troku & Laryea, 2021). Good corporate governance is crucial for the economic survival of every entity and the economy at large. The Ghanaian private sector has been primarily led by the private sector, with about 90% of all private sector businesses classified as SMEs (Musah et al., 2018; Musah,2017).
Furthermore, the SME sector is estimated to employ about 60% of all workforce in the country and is also a significant contributor to the country's economic growth and prosperity. For instance, Amoateng et al. (2017) argue that the SME sector accounts for about 18% of Ghana's Gross Domestic Product (GDP) apart from its job creation role.
The governance of entities that form the primary economic base of a country cannot be overlooked as that will affect the country's economic prosperity (Ahmed, 2019). Even though several private sector initiatives have been rolled out over the year to support the growth of SMEs, especially in the area of access to capital, little has been done in the area of supporting SMEs to have the proper corporate governance structure that will allow them to function and compete favorably in the 21st century.
Research has shown that if the government and the relevant stakeholders pay attention to the SME sector in Ghana, it can create about 100,000 jobs per year which is critical to the country given the rising graduate unemployment situation in the country and revamping the manufacturing sector of the country (Amoateng et al. 2017). Data from the National Development Planning Commission (NDPC) shows that the SME sector is the most consistent contribution to GDP, which has improved significantly from 11.3% in the year 2000 to over 22.5% by 2015 (NDPC, 2016). Despite the above improvement, it is estimated that the sector growth is far below its potential as a result of inherent challenges that plagued the sector, notable among them include lack of adequate financing, lack of managerial competencies, and poor corporate governance practices (Musah, 2017; Ansong, 2015; Amoateng et al., 2017). The lack of adequate
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financing opportunities for the sector has been linked to the poor governance framework for most businesses in the sector (Padi et al., 2022; Abor & Adjasi, 2007). This means that an improvement in the corporate governance practices of SMEs will enhance their capacity to attract more finance in line with the resource dependency theory and improve their efficiency and effectiveness.
Despite the above contribution of the sector to the Ghanian economy and the importance of corporate governance to business growth and survival, corporate governance research in Ghana and many parts of the world have mainly focused on listed firms because of the availability of data as well as financial institutions (Obeng, 2021). A review of corporate governance research in Ghana shows less research on SMEs despite their significant role in Ghana's economic development. Previous research on corporate governance shows that most firms, including SMEs, exhibit poor corporate governance systems, which in most cases affect their level of performance (Otman, 2014; Vu & Nguyen, 2017). Furthermore, SMEs' poor corporate governance structure and practices are mainly responsible for the inability to attract the needed capital to expand their operations and compete favorably with their foreign counterparts (Abor & Adjasi, 2007). There is also evidence of a lack of managerial capacity, which has hindered the growth of SMEs across the globe of which Ghana is not an exception (Padi et al., 2022; Bhagat & Bolton, 2018; Ansong, 2015; Asunka, 2017; Oppong, Arora, Sachs & Seidu, 2016). Also, it is not clear in the literature what factors hinder SMEs from adopting good corporate governance practices even when they know the benefit they can have on their organizations. The African Intercontinental Free Trade Area (AfCTA), which was recently launched, will see Ghanaian SMEs competing with their counterparts from other parts of the continent for the same market. The Ghanaian SME sector cannot compete favorably if its governance structure and the needed managerial competence are not in place to support the operations of these SMEs. Also, given the numerous pieces of evidence supporting the link between good corporate governance practices and firm growth and survival, the corporate governance practices of SMEs be reviewed through empirical studies such as this to inform future policy direction for the sector (Obeng 2021; Musah et al. 2019; Dzigba, 2015). In light of the
253 above, this study was conducted to examine the corporate governance practices of SMEs in Ghana and their effect on their financial performance, as well as obstacles to implementing good corporate governance practices in the sector.
2. Theoretical Framework and Hypothesis Development 2.1 Significance of the Study
The study makes a significant contribution to the literature on corporate governance, the policy, and the practice of corporate governance for SMEs. In the area of literature, the study extends previous studies on corporate governance in Ghana from listed firms and financial institutions to SMEs using primary data. Secondly, the study includes important governance variables such as the managerial competence of the board and its influence on financial performance. Also, the study, unlike previous studies on corporate governance in Ghana that have relied on secondary data from the annual report of companies, collected primary data from SME owners and managers using questionnaires allowing the researchers the opportunity to examine critical corporate governance practices in proper detail using a variety of questions. The study results will be useful for owners and managers of SMEs and guide them to put in place the right corporate governance practices to enhance the performance of their organizations. The result will also inform regulators of private sector businesses and other stakeholders on the good corporate governance practices SMEs need in Ghana and the obstacles SMEs face to implementing sound corporate governance practices. This study also allows other researchers to examine other essential components of corporate governance practices in SMEs to help streamline the sector and make it competitive before fully implementing the free trade area in the next 2 to 3 years.
2.2. Empirical Review of Literature
The importance of corporate governance practices to corporations has resulted in several studies conducted on the subject matter in Ghana and other parts of the world (Osei et al., 2019; Musah et al., 2019; Ozili, 2021; Musah et al., 2022). These studies have primarily focused on public and listed entities and financial institutions, with fewer
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studies on small and medium-scale enterprises despite the more significant impact of SMEs on many countries especially developing countries like Ghana. A number of these studies on public and listed firms have examined the effect of corporate governance on various firm outcomes such as firm value, firm performance, earnings management, and disclosures, among others (Ofoeda, 2017; Owusu &Weir, 2018; Musah et al. 2019;
Adeabah et al. 2019; Ali et al. 2019; Agyei-Mensah, 2019; Musah & Adutwmnwah, 2021). The missing link in the literature is the link between corporate governance practices of SMEs and how that affects some of these firm outcomes.
SMEs in Ghana form the largest group of private sector entities and create most jobs in the private sector (Ahmed, 2019; Musah et al., 2018; Abor & Adjasi, 2007). One of the significant factors that have affected the growth and performance of SMEs in Ghana is the lack of access to finance, which has been linked to weak governance structures and practices in these companies (Abor & Quartey, 2010; Abor & Adjasi, 2007). Good corporate governance practices, according to previous studies, have the potential to improve the internal operations of a firm and also allow them to attract capital to expand its operations (Afrifa & Tuaringana, 2015; Mahzan & Yan, 2014). The internal operations of a firm that can be impacted positively by good corporate governance practices include strategic direction, financial expectations, transparency, and shareholder activism (Abor & Adjasi, 2007). This means that good corporate governance practice has the potential to impact the financial outcome of SMEs, as has been reported by public entities (Mahzan & Yan, 2014).
One area that has received varied opinions concerning corporate governance studies is the suitable governance structures and practices that have the potential to influence the firm outcome (Nasrallah & Khoury, 2022). The major areas of corporate governance practices that have received more attention in the literature are the size of the board, the independence of the board, CEO duality, and tenure. Some studies have also advocated for the inclusion of variables such as the level of managerial competence exhibited by the board as well as the level of financial disclosures and transparency as part of corporate governance practices (Ofoeda, 2017; Ansong, 2015; Asunka, 2017; Oppong, Arora, Sachs & Seidu, 2016). The extent to which these variables affect the financial
255 performance of SMEs varies from one study to the other, perhaps due to the difference in characteristics of SMEs as well as differences in corporate governance regulations.
For instance, Afrifa & Tuaringana (2015), in their study on the effect of corporate governance on the performance of listed SMEs in the United Kingdom (UK), found that the size of the board was a significant determinant of SMEs' performance in the UK.
The study further found that the proportion of non-executive directors does not significantly influence the performance of SMEs in the UK. In the Ghanaian context, Abor & Adjasi (2007) conducted a conceptual paper on the corporate governance of SMEs and argued that good governance practice would enhance the financial performance of SMEs, improve their access to capital and improve the level of managerial competence. Their study, however, did not examine the factors empirically that this study seeks to address. Mahzan & Yan (2014), in their study, found that good corporate governance practice among SMEs is very low. However, it can potentially improve these entities' financial performance if it is given the needed attention. So far, the review shows little evidence of how corporate governance practice affects SMEs' financial performance, hence the justification for the current study.
2.3. Theoretical Review
The agency theory is one of the applied theories in corporate governance literature because of the agency problem between managers and shareholders (Musah et al., 2022;
Ofoeda, 2017; Afrifa & Tuarigana, 2015). The need for good corporate governance practice is to help reduce agency conflict and align the interest of managers and shareholders (Musah & Adutwumwah, 2021). However, Abor and Adjasi (2007) argue that the agency problem in SMEs is minimal since there is little separation of ownership and management. They further argue that in developing countries like Ghana, most SMEs are managed by the owners, which eliminate the possibility of agency problem and the need for corporate governance structures. The above evidence points to the fact that the agency theory might not explain the motivation for good corporate governance practices by SMEs in Ghana.
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This study, therefore, relied on the resource-dependency theory as the theoretical framework for the study. The resource-dependency theory of corporate governance focuses on the role of the board or its equivalent in enhancing the firm's performance (Afrifa & Tuarigana, 2015). The theory sees the board as a crucial structure in providing resources for the firm to operate (Liu et al., 2014; Arnegger et al., 2014). This can be achieved first through the diversity of expertise of board members, which will help to enhance firm performance, and secondly, the extensive link of the board with external parties, which enhances the firm access to resources and other opportunities for growth (Afrifa & Tuarigana, 2015; Liu et al. 2014). In line with the above argument, the theory predicts a positive relationship between firm performance and board size (Afrifa &
Tuarigana, 2015). Also, the expertise of the board will be positively associated with firm performance and the proportion of non-executive directors. It can also be deduced that the duality of the CEO and board chairperson will reduce the board's capacity to enhance its external network and improve financial performance; hence the theory predicts a negative relationship between CEO duality and performance.
2.4. Conceptual Framework
The study developed the conceptual framework presented below from ideas generated from the literature on corporate governance practices on SMEs and their potential impact on performance. Also, the observation and major themes from the responses in the data collection helped to focus on the most pressing corporate governance practices that SMEs currently focus on and how that affects their performance. The framework shows that the corporate governance practices by SMEs that has the potential to influence their performance positively can be classified into major themes such as the composition of the advisory board of SMEs, size of the advisory board, managerial competencies, and financial disclosure and transparency.
These dimensions are used as independent variables in the case of this study. The dependent variable is firm performance, whiles the above-named corporate governance practices are the independent variables. The conceptual framework is shown in Figure 1.
257 Figure 1.
Effects of Corporate Governance Practices on Firm Performance
Source: Author’s construct
The study argues that if the various SMEs can adopt and implement appropriate corporate governance practices as effectively as expected, they will likely increase their performance. That is, if corporate governance practices such as meaningful composition and size of the advisory board, a board with members who have relevant knowledge in accounting, marketing, and legal matters; effective managerial competencies; and financial disclosure and transparency are adopted and perceived positively, SMEs are in a better position to boost their performance in general.
3. Research Methodology
The researchers adopted the quantitative approach for this study. The use of quantitative design was because the study used statistical tools to establish the extent to which certain corporate governance practices predict the financial performance of SMEs, which can only be done through quantitative analysis. The study relied on a survey approach by administering questionnaires to business owners and managers to gather the relevant data needed for the study. The study population consists of registered SMEs recognized by the National Board for Small Scale Industries (NBSSI) and the Association of Ghana Industries (AGI) in Sekondi-Takoradi in the western region of Ghana. The use of registered SMEs was to ensure that the sampled SMEs have some corporate governance structures in place, as that is a requirement for registering them into the associations mentioned above. Also, such businesses have more structured organizational systems and governance which can be easily evaluated to determine their Firm
Performance
Composition of the advisory board
Size of the advisory board
Managerial competencies
Financial disclosure and transparency Corporate Governance Practices
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impact on financial performance. Current records show 595 medium-sized and 997 small-sized registered and active SMEs in the study area (GSS, 2019; NBSSI, 2019).
Therefore, the study population was 1,592 owners/managers of SMEs.
Approximately a sample size of 320 owners/managers of SMEs in the capital was used for the study. This comprised 120 medium-sized and 200 small-sized businesses (See Table 1). The sample size used was based on Slovin’s (as cited in Gravetter &
Forzano, 2018) recommended formula below, which was deemed appropriate. The formula is n = N ÷ [1 + N(e2)], where n is the sample size, N is the population size, and e is the level of precision.
n = 1,592 ÷ [1 + 1,592 (0.05)2] = 1,592 ÷ 4.98 = 319.68 ≈ 320
The proportional sampling technique was used to calculate the corresponding samples of the strata using 20.1% of the population size. The study focused on owners/managers of the various SMEs because they are believed to have the requisite information about the corporate governance practices in their organization and the financial performance of their organizations. About the sampling procedure, the owners/managers were sampled using the stratified random sampling procedure that uses the computer method of simple random sampling technique. They were first portioned by the various strata, as presented in Table 1. After grouping the owners/managers into the various strata, the computer method of simple random sampling technique was used to select them.
Table 1.
Population and Sample Distribution of Respondents
Scale of Business Population Size Sample Size
Medium-sized 595 120
Small sized 997 200
Total 1,592 320
Source: GSS, 2019; NBSSI, 2019
The researchers used the Microsoft Excel tool to help design the random sampling table above to select respondents from the two strata. Ultimately, the study selected 320 positions in the random number tables generated for owners/managers operating small-
259 sized businesses. The selection process continued until the total number of respondents sampled (320) was obtained.
The study adopted a structured questionnaire as the main instrument for data collection, with a reliability coefficient of 0.791. The questionnaire was administered personally by the researchers but with support from 3 research assistants who acted as field officers in retrieving the distributed questionaries. A total of 320 questionnaires were administered, retrieved, and used for analysis to achieve the study's objectives.
The data collection process was carried out in two phases. The first phase involved the administration of the questionnaire, while the second phase focused on retrieving the questionnaires administered. With the help of the field officers, all 320 questionnaires were retrieved and duly completed, which were used to conduct the analysis. The study relied on statistical tools such as simple descriptive statistics in the form of mean and standard deviation and multiple regression techniques consistent with the quantitative research design.
Measurement of Variables and Regression Model
This study relied on the questionnaire as the main instrument of data collection, where the four dependent variables were measured based on a statement on a scale of 1 to 4. Respondents were given various statements that define the various components of the corporate governance variables that were used for the study, and they were asked to rank the extent to which the statement applies to their organization on a scale of 1 to 4, in line with previous literature (Amoateng et al.2017; Ansong,2015). For instance, six questions on the board's composition combined background and competencies in accounting and finance, among others. The questionnaire also had ten questions on managerial competence, focusing on delivery on the job and not just mere qualifications.
A similar measure was used for financial disclosure and transparency. The dependent variable for the study is a financial performance which is also measured using ten different statements that define the performance of organizations on a scale. The summary of the responses was then used to conduct the regression analysis presented in table 2.
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The regression model used to estimate the coefficients is presented below.
𝐹𝑃 = 𝛽1𝐶𝐴𝐵 + 𝛽2𝐵𝑆𝐼𝑍𝐸 + 𝛽3𝑀𝐴𝑁𝐶𝑂𝑀𝑃 + 𝛽4𝐹𝐷𝑇 + 𝜀
Where:
Variable Definition Measurement
FP Firm performance Rank on a scale of 1 to 4
CAB Composition of board Rank on a scale of 1 to 4
BSIZE Board size Number of board members
MANCOMP Managerial competencies Rank on a scale of 1 to 4
FDT Financial disclosures and
transparency
Rank on a scale of 1 to 4
4. Results and Discussion
The first aspect of the analysis focused on the influence of corporate governance practices on the financial performance of SMEs. The four aspects of corporate governance practice that the study examined include the size of the board, the composition of the board, the competence of managers, and the financial disclosure and transparency of the firms. The multiple regression method was the statistical technique used to achieve the above objective with the aid of the Predictive Analytic Software.
The study used the variance inflation factor (VIF) to examine the presence of multicollinearity in the model. The presence of multicollinearity in a regression model may result in misleading results and inflation of the standard errors (Pallant, 2010). The results of the VIF, as presented in Table 2, shows the absence of multicollinearity in the model. The adjusted R-square, which measures the explanatory power of the independent variables, shows that the independent variables account for 57% of the changes in the dependent variable. The results suggest that the independent variables have high explanatory power as the value is above the threshold set using the rule of thumb of 50%. The results of the regression analysis are presented in Table 2.
As depicted in Table 2, all the dimensions of corporate governance practices of SMEs in Ghana contributed positively to their performance. In order of importance, the dimensions that impacted positively on performance of the enterprises were managerial competencies (b = 0.217, p < 0.01), financial disclosure and transparency (b = 0.143, p
< 0.01), composition of advisory board (b = 0.131, p < 0.05), and size of advisory board (b = 0.123, p < 0.05). It is, however, significant to observe that the total contribution of
261 corporate governance practices of SMEs to the variance in their performance is 0.593 with an adjusted R2 of 0.571. This means that the corporate governance practices of SMEs can predict or explain 59.3% of the variance in the performance of the firms. That is, quite apart from the entered dimensions of corporate governance practices, other variables that are not yet considered in the model have a chance of contributing 40.7%
to the performance of SMEs in Ghana.
Table 2.
Effects of Corporate Governance Practices on Performance of SMEs
Variables
Unstd. Coef.
Std.
Coef.
t-value Sig.
Collinearity Statistics B
Std.
Error Beta () Tolerance VIF
Composition of the advisory board 0.144 0.060 0.131* 2.406 0.017 0.501 1.899 Size of the advisory board 0.150 0.061 0.123* 2.448 0.015 0.626 1.599
Managerial competencies 0.204 0.060 0.217** 3.371 0.001 0.377 2.655
Financial disclosure and transparency 0.098 0.031 0.143** 3.142 0.002 0.754 1.326 (Constant)
R R Square
Adjusted R Square
1.464 0.711 0.593 0.571
Dependent Variable: Firms’ performance *p < 0.05, **p < 0.01 (N = 320) Where Std. = Standardised and Coef. = Coefficients
The model's first component of corporate governance practice, which is the size of the firm's advisory board or the board of directors, revealed a positive coefficient with SMEs' financial performance. The positive coefficient between the two variables was also statistically significant at a 1% significance level, suggesting that a large board size increases the financial performance of SMEs. The results suggest that large board sizes allow SMEs to bring people with the right knowledge, expertise, and skill-set, as well as experience, to help drive the organization forward (Musah et al. 2019). This result is consistent with the expectations of the resource dependency theory. It affirms the assumption that a large board size allows for greater diversity which translates into effective corporate governance and improved financial performance. The findings imply that SMEs should be encouraged to have a larger board size that will allow them to attract highly skilled and experienced board members to help direct the affairs of
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management towards improved performance. The positive and significant association between board size and financial performance of SMEs is contrary to the results of previous studies such as Ansong (2015); Afrifa & Tuarangana (2015), and Amoateng et al. (2017), who both established that the size of a board negatively affects the financial performance of the firms. The above finding is, however, consistent with the argument of the resource-dependency theory, which advocates for large board sizes. The positive association between board size and SMEs performance is consistent with the findings of Afrifa & Tauringana (2015), who found similar results for SMEs in the United Kingdom. However, the result is contrary to the outcome of Bhagat and Bolton's (2018) study, where it was revealed that board size has no significant influence on the financial performance of the firms.
The second variable in Table 2 focused on the composition of the board and its effect on SMEs' financial performance in Ghana. The result of the regression analysis showed a positive relationship between the advisory board's composition and SMEs' performance. The positive relationship between the composition of advisory boards and the financial performance of SMEs was also statistically significant at a 1% significance level which implies that board composition significantly predicts the financial performance of SMEs. The above result is consistent with the expectation of the resource dependency theory and the findings of Dzigba (2015), who found that board composition positively influences firms' performance. The results also agree with the findings of Ansong (2015) and the argument by Abor & Adjasi (2007) that diverse boards bring the right combination of experience, knowledge, and skills needed to improve the performance of entities. The result implies that SMEs should diversify their board composition to bring on the right skill-set required to position the organization to compete in the 21st century strategically. This result is, however, contrary to the findings of Afrifa & Tauringana (2015), who reported an insignificant association between board composition and the financial performance of SMEs.
The next variable in the model focused on the influence of managerial competence on the financial performance of SMEs. The result of the regression analysis in table 2 shows that the competence of management is positively related to SMEs' financial
263 performance. The positive association is also statistically significant at a 1%
significance level which shows that managerial competence is a significant determinant of SMEs performance. The results suggest that competent leadership is critical for the improved financial performance of SMEs and that a good corporate governance practice should consider the competence of board members and senior management of the company. The above result is consistent with the results of Abor & Adjasi (2007), who concluded that board competence plays a critical role in improving the financial fortunes of SMEs.
Finally, the study also revealed that financial disclosure and transparency positively influence the financial performance of SMEs. The association between financial disclosure and transparency and firm performance was also statistically significant at a 1% significance level, suggesting that financial disclosure and transparency are significant determinants of SMEs' performance. Transparency and information disclosures allow firms to attract good capital at the right cost to expand their operations and improve their financial performance (Abor & Adjasi, 2007).
Disclosure and transparency are essential components of legitimization, a major aspect of the resource dependency theory. The above suggests that this result is consistent with the expectation of the resource dependency theory of corporate governance.
The rationale of the second specific purpose of the study was to
look at the possible obstacles that affect the practice of corporate governance among SMEs in Ghana. Multiple close-ended items were used to collect data on thisissue. The results are presented in Table 3. As indicated in Table 3, the obstacles
that affect corporate governance practices of SMEs in Ghana are weak legal
controls and law enforcement (Mean = 2.76, Std. Dev. = 0.83), lack of legal and
regulatory systems that govern SMEs’ activities (Mean = 3.51, Std. Dev. = 0.87),
the state of the Ghanaian economy (Mean = 2.92, Std. Dev. = 0.85), and poor
financial and non-financial disclosure systems (Mean = 3.01, Std. Dev. = 0.89).
264 Table 3:
Possible Obstacles that Affect the Practice of Corporate Governance among SMEs in STM Statements on obstacles that affect corporate governance Mean Std. Dev.
Weak legal controls and law enforcement. 2.76 0.83
The Ghanaian culture and that of the community. 2.33 0.69
Weak accounting and auditing profession. 2.30 0.77
Poor-quality accounting and finance education. 2.31 0.91
Weak infrastructures of financial institutions. 2.25 0.82
Lack of legal and regulatory systems that govern SMEs’ activities. 3.51 0.87
Government interference in business activities. 2.19 0.79
The state of the Ghanaian economy. 2.92 0.85
The costs of practicing good corporate governance outweigh the benefits.
2.29 0.88
Poor financial and non-financial disclosure. 3.01 0.89
Source: Field data Where Std. Dev. = Standard Deviation (N = 320)
However, the Ghanaian culture and that of the community (Mean = 2.33, Std. Dev.
= 0.69), weak accounting and auditing profession (Mean = 2.30, Std. Dev. = 0.77), poor- quality accounting and finance education (Mean = 2.31, Std. Dev. = 0.91), weak infrastructures of financial institutions (Mean = 2.25, Std. Dev. = 0.82), and government interference in business activities (Mean = 2.19, Std. Dev. = 0.79) were not considered as obstacles that affect corporate governance. Also, the view that the costs of practicing good corporate governance outweigh the benefits (Mean = 2.29, Std. Dev. = 0.88) was not considered an obstacle.
The findings show that weak legal controls and law enforcement and the lack of legal and regulatory systems that govern SMEs' activities are some of the obstacles that affect the practice of corporate governance among SMEs in Ghana, supporting the comments of Asunka (2017) who posits that SMEs in Ghana have been left out of the corporate governance. The study further argues that corporate governance codes and regulations have focused on listed firms and financial institutions. There appears to be less regulatory attention to corporate governance practices of SMEs beyond the provisions in the company's Act of 2019, Act 992. The governance structure per the Companies Act is limited to companies having a minimum of two directors and a competent secretary. The enforcement of these requirements is limited to the point of company registration with no follow-up for continuous compliance. This is perhaps why
265 most SMEs do not practice good corporate governance and rely on excuses such as the high cost of implementing the right governance structures. The result of the obstacles to good corporate governance practice for SMEs shows how the weak regulatory environment contributes to many SME owners not taking corporate governance practice more seriously.
5. Conclusions, Recommendations, and Limitations
The benefits of good corporate governance practices for all categories of businesses have been highlighted in several empirical studies, even though SMEs are the least represented in such research. In today's dynamic global business environment, corporate governance practices play a critical role in building a competitive advantage in the industry. The importance of SMEs to the Ghanaian economy in terms of job creation and contribution to GDP means that their governance should be essential to all concerned. The results of the regression analysis further emphasize the importance of corporate governance practices to the growth and profitability of SMEs in Ghana. The results specifically revealed that the size of the SME board, as well as the composition of the board, positively predicts SMEs' performance. The result is consistent with the resource dependency theory, which predicts that a large board allows for a proper representation of competence, skills, and experience, allowing the firm to attract more resources to enhance its operations and performance.
Furthermore, the large board size allows the board to constitute a more diversified board with the right skill of expertise and knowledge to steer the affairs of the company.
The results also emphasized the need for the right board composed of more external directors with the right skills and experience to guide management in the organization's running. The study also found that the managerial competence of the entities is positively associated with SMEs' financial performance. Finally, the result showed that the level of financial disclosures and transparency influence firm performance among SMEs. In effect, the result of the study revealed that good corporate governance practice predicts the financial performance of SMEs in Ghana. The study further examined some of the major obstacles preventing SME owners and managers from implementing good corporate governance practices. The study found that the major obstacles to good
266
corporate governance practices by SMEs in Ghana include but are not limited to weak controls, poor law enforcement, and poor financial disclosure practices. Overall, the results suggest that good governance mechanisms among SMEs are likely to result in advisory boards exerting much-needed pressure for improved performance by ensuring that the interests of the firms are served. Ensuring proper advisory board size, the composition of the advisory board, adequate disclosure of financial information, and a high level of managerial competence are likely to increase the performance of SMEs.
5.1 Recommendations
Based on the findings and conclusions, the following recommendations are made to help improve the SME sector: 1). Owners/managers of SMEs should ensure that their respective enterprises have active and sizeable advisory boards that meet not less than four times a year to support the management of the firms. The official meetings should focus on more strategic and planned management issues than routine operational issues.
Inexpensive and informal meetings with board members can complement official meetings to reduce the cost of operations; 2). Owners/managers of SMEs should ensure that their respective advisory boards are composed of professionals who understand bookkeeping, corporate law, marketing, and other relevant knowledge. This means the composition of the advisory boards should include an accountant, lawyer, marketer, human resource manager, and technician in a relevant field; 3). Managers of the firms should improve their managerial skills and competence through further training and development programs in their respective domains, and 4). Owners/managers of the various SMEs should ensure that their respective enterprises produce an annual financial statement for their stakeholders/shareholders to ensure a high level of transparency.
They should ensure that the firm's financial and other related matters are disclosed to shareholders and advisors for an effective decision-making process. Lack of information in the management process leads to poor decision-making.
5.2 Limitations
The study was delimited to SMEs in Ghana and, as such limited by geography.
About respondents, the study focused on owners/managers of SMEs in Ghana. This group of respondents was considered because they have more in-depth knowledge and
267 understanding regarding the study issues. Concerning variables, the study focused on four indicators of corporate governance practices: composition of the advisory board, size of the advisory board, managerial competencies, and financial disclosure and transparency of the enterprises. The study also focused on the firm performance variable, which was made up of 10 multiple items that were formulated based on the enterprise return on assets (ROA), return on investment (ROI), return on sales (ROS), goal attainment, accountability, optimal use of resources, relevancy to the economy, and job creation.
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