Corporate Governance Norms for SME Dr Indrajit Dube

Corporate Governance Norms for SME Dr. Indrajit Dube Dean, RG School of IP Law Indian Institute of Technology Kharagpur

About My Law School at IIT • IThas beenestablished four years back with the generous donation of Mr. Vinod Gupta, a illustrious alumni and business magnet of USA. • The objective of the school is to promote legal education interfacing with Technology and Management. • At present the school runs an executive program called LL. B [Specialization in IPR] and a research program [Ph. D]. • The School also carries multi – disciplinary action research.

About theme • Times editor commented in an interview with NDTV that India is not affected to that extent in the global recession because of its microeconomic structure and SME. • According to me, SME will be driving factorofour economy in coming days. • To achieve that end, SME should be transformed from ‘informal organizational form ’ to ‘formal organizational form’.

Issues SME faces • Inadequate public support and infrastructure facility • Deficiency in organizational planning and modeling • Organizational succession plan • Ignorance and inability of risk management

The Present Research was Funded by National Foundation for Corporate Governance [NFCG]

About Research • Time frame : About twenty months • Universe : » Geographically entire India » Strata broadly divided in Production and Service Enterprises • Sample Method: Random • Sample Size: Two thousand two hundred and eleven • Research Tools: » Schedules administered in person » Schedule administer through web » Interview

Findings of Primary Survey Organizational Structure & Formation Capital of Enterprises • 86% belong to informal organizational form [Like partnerships & Proprietorships] • Rest of them belong to Co-operative [0. 2%], Private Co. [12%], Public Unlisted & Listed co. [2% & 0. 7% respectively] • More number of SME’s formed after liberalization • Substantial growth in the capital • Substantial growth observed in audited profit

Findings of Primary Survey Knowledge of Risk Management & Manpower • Majority involved in the similar trade • 87% said there is no separation between ownership and management • Apex management [Proprietor & Partners] are in general professionally qualified • 91% employees aware of organizational activity • 75% enterprise employee given suggestion for better organizational function • 58% enterprises employee participate in the professional training program

Findings of Primary Survey Financial Disclosure and Enterprise Audit Regulatory Compliances • 62% enterprises said that the accounts are audited by chartered accountant firm • 79% enterprises said they prepare only one annual account • 61% enterprises said they didn’t face any regulatory hurdle • 75% enterprises said regulatory cost is not more than ten percent of their profit • 53% enterprises said they have information about the promotional scheme

Findings of Primary Survey Exposure to Information Technology • 61% enterprises have less than five computers • 26% enterprises preferred not to answer the question • 45% enterprises file return online at present • 75% enterprises interested to file return online in future

Why and What • SME to be a partner to the inclusive growth • Better organizational structure, better credit worthiness, better employer, better contributor in economic growth • Draw a succession plan for sustainable growth Corporate Governance based on stakeholder approach not on agency problem

Recommended Corporate Governance Norms for SME’s Prepare and Publish ‘Mission Statement’ of Enterprises Enterprise Policy Statement to Manage Business Growth Enterprise Succession Plan Annual Management and Accomplishment Statements Management Structure and Level of Professional Qualification as relevant to Industry • Method of accounting and disclosure of audited account • Stakeholder relations and welfare undertaken by the enterprise • Legal and regulatory Compliances • • •

Mission Statement • A simple statement of objective of business and purpose, which is a public statement about the organization mission and commitment to its stakeholders. Enterprise Policy Statement • Annual policy statement is about the business growth from the perspectives of capital deployment, management, productions/business, consolidation of the organizational structure, human resource management, business risks it would be subjected to and stakeholder relations relating to above issues [like regulator, creditor and supplier relationship with the enterprise]. The statement should also include enterprises proposed growth in coming year [within one month of the financial year beginning] and the time line within which it wants to achieve that growth.

Enterprises Succession Plan • Enterprise succession management plan should be determined in advance giving appropriate weightage towards professional qualifications and experience in the relevant business. Annual Management and Accomplishment Statement • Annual Management and Accomplishment Statement is the self assessment statement as compared to the policy statement made at the beginning of the financial year.

Management Structure and Level of Professionalism • Existing managers of the enterprises should go though regular professional training programs regarding efficient capital deployment, business risk management and organizational growth. Method of Accounting and Disclosure of Audited account • Simple and standard accounting procedures and software may be proposed and developed jointly by the Indian Institute of Chartered Accountancy and the Indian Institute of Cost Accountancy or any other Institute of similar nature suitable for this sector.

Stakeholder Relation and Welfare Undertaken • Concept of business is no more the maximization of financial interest of promoter/partner/shareholder. Rather, it goes much beyond and stands for sustainable business. The enterprise activities should be towards the benefit of the employees, consumer and creditor. Further, its activity should be environment-friendly and towards the protection of basic human rights. Legal and Regulatory Compliance • The compliance of law ensures that external governance strengthens the internal governance structure. The corporate governance of SME’s can be introduced by strengthening public Institutional framework.

Thank you