Why Corporate Governance Matters for Small Businesses

In this article we discuss:

• What Is Corporate Governance?
• Benefits and Challenges of Corporate Governance
• How to Implement Corporate Governance

Corporate governance is often associated with large corporations, where formal structures and oversight help guide decision-making, ensure compliance, and build investor confidence. But governance isn't just for enterprises with expansive boards and complex hierarchies. Small and medium-sized businesses (SMEs) also benefit from strong governance practices, even if their structures look different.

A nine-year study conducted by MSCI found that companies with effective governance consistently outperformed those who didn’t against a series of notable KPIs. Not only were they more profitable, but they had more reliable earnings metrics, and experienced lower volatility.

For SMEs—especially those that are scaling with limited resources—corporate governance provides a necessary framework for making informed decisions, mitigating risks, and maintaining accountability. By implementing governance practices early, SMEs can create a foundation for sustainable growth. 

More than just a set of rules, corporate governance for small and medium enterprises helps to establish clarity in leadership and ensure strategic decisions always align with long-term goals. Well-structured governance enables small businesses to scale with confidence and positions them for long-term success in dynamic, fast-changing markets.

What Is Corporate Governance for Small Businesses?

Corporate governance is a system of rules, processes, and structures that guide how a business is managed and controlled. It keeps strategy decisions aligned with business objectives, protects stakeholder interests, and promotes long-term stability. 

Good corporate governance is built on three key pillars:

• Transparency: Ensures that business operations and financials are clear to investors, employees, and regulators. Open communication builds trust and reduces the risk of fraud or mismanagement.
• Accountability: Establishes clear roles and responsibilities that hold leadership and employees to high standards. This structure prevents conflicts of interest and promotes responsible decision-making.
• Ethical decision-making: Guides business practices to align with legal standards and company values. Ethical leadership strengthens reputation and fosters long-term relationships with customers, employees, and partners.

Unlike large enterprises with formalized boards and compliance teams, SMEs often take a more flexible approach to governance. Instead of a full board of directors, they may rely on advisory boards, external consultants, or structured internal policies. But the goal remains the same—to make sure that leadership decisions support the overall well-being of the business.

Benefits and Challenges of Corporate Governance for SMEs

Corporate governance provides a strategic advantage for small and medium-sized businesses, but it also comes with challenges—particularly for businesses with limited resources or informal structures. Understanding the importance of corporate governance and the potential hurdles can help SMEs create a governance approach that works for their size and stage of growth.

Corporate Governance Benefits

A study analyzing 1,357 European SMEs from 2014 to 2020 found a positive and significant relationship between corporate governance mechanisms and SME performance, demonstrating that structured governance frameworks directly contribute to business success. 

The importance of good governance isn’t limited to Europe, however. A deeper dive into the aforementioned MCSI report found similar results in the U.S.—between 2018 and 2023, governance leaders earned a cumulative 26.3% higher returns than laggards. 

These results happen through governance-driven benefits that include:

• Risk management: Helps businesses anticipate and mitigate financial, operational, legal, and reputational risks before they become major challenges.

• Better decision-making: Creates a structured process for evaluating opportunities and challenges, leading to more informed and strategic choices.

• Transparency and trust: Builds confidence among investors, employees, customers, and suppliers by ensuring business operations are open and accountable.

• Regulatory compliance: Helps businesses stay aligned with legal and industry requirements, reducing the risk of penalties or legal issues.

• Long-term sustainability: Provides stability and scalability on a day-to-day basis, making it easier for SMEs to adapt, grow, and attract investment.

Corporate Governance Challenges

While the benefits of corporate governance make it a valuable investment, many SMEs struggle with implementation. Without the dedicated resources that large corporations have, smaller businesses often face hurdles in establishing formal governance frameworks. Common challenges include:

• Limited resources: Many small businesses lack the time, personnel, or financial capacity to implement formal governance processes.

• Resistance to change: Owners and leadership teams may be hesitant to adopt governance practices that feel bureaucratic or unnecessary.

• Scaling governance: Governance structures that work for a small business may need to evolve as the company grows, requiring ongoing adjustments.

• Balancing flexibility with structure: SMEs need enough governance to create accountability without stifling agility and innovation.

• Compliance complexity: Navigating laws and regulations can be overwhelming, especially for businesses operating in multiple markets.

How to Implement Corporate Governance for Your SME

To reap the benefits of strong governance while addressing and mitigating its challenges, SMEs need structured processes and tools for oversight. Here’s where to focus.

1. Define Roles and Responsibilities

Start by clarifying who is responsible for what in your business. Establish clear decision-making authority, accountability structures, and reporting processes to avoid confusion and ensure that the right people are making key decisions.

Document policies and procedures so expectations are consistent across teams. This will help to create stability, making it easier to onboard employees, attract investors, and manage leadership transitions as your business evolves.

2. Create an Advisory Board

Even if you don’t have a formal board of directors, assembling an advisory board can provide valuable outside perspective. Seek out experienced business leaders, financial experts, or legal advisors who can offer strategic guidance and challenge your assumptions.

Regular meetings with board members and advisors can help you navigate compliance, manage risks, and develop long-term growth strategies. The key is to choose advisors who bring relevant expertise and will actively contribute to your business’s success.

3. Implement Internal Controls and Audits

Put financial oversight measures in place to track spending, prevent fraud, and maintain compliance. Set up approval processes for major expenses, automate financial reporting where possible, and schedule regular reviews to catch issues early.

Internal audits can help you verify financial accuracy, identify potential risks, and build credibility with investors and lenders. Even if you don’t have a dedicated finance team, adopting basic internal controls will create greater transparency and accountability.

4. Leverage the Right Software Tools

Streamline governance by integrating technology into your processes. Start by identifying the most time-consuming or error-prone tasks, such as tracking compliance, managing financial oversight, or documenting key decisions. Use software to automate these workflows, reducing manual effort and ensuring accuracy.

Establish a central system for storing governance records, making them easily accessible and up to date. Regularly review and refine your technology stack to ensure it supports growth without adding unnecessary complexities. When implemented effectively, technology tools can simplify governance activities and allow you to stay focused on strategy.

5. Engage Stakeholders Regularly

Your employees, investors, customers, and suppliers all play a role in your organization’s success. Keeping them informed and involved strengthens trust and fosters collaboration. Provide regular updates on company performance, create opportunities for feedback, and align stakeholder expectations with your business goals. 

Whether it’s through town halls, investor reports, or employee check-ins, open communication helps you address concerns early and build lasting relationships.

6. Commit to Ethical and Responsible Practices

Make integrity a core part of your business strategy. Establish clear policies that promote ethical decision-making, fair treatment, and responsible leadership. Aligning with ESG principles can give you a competitive advantage by attracting customers and investors who value sustainability and ethical leadership.

Hold your leaders, your employees, and your partners to the same high standards to make good governance more than just a policy, but a value embedded in the way you do business.

Next Steps Toward Corporate Governance

Corporate governance helps build businesses that can grow with confidence. When governance is done right, it strengthens decision-making, reduces risk, and builds trust with the stakeholders who matter most. Governance ensures leadership is accountable, finances are well-managed, and the business stays resilient in a changing market.

For SMEs, the challenge isn’t just implementing governance—it’s making it work within the realities of limited time, resources, and evolving priorities. But governance doesn’t have to be rigid or complicated to be effective. By establishing clear roles, implementing smart oversight, and using the right tools, you create a system that supports long-term success, without slowing you down.

Learn more about how Workday can position your small business to take advantage of new opportunities, scale with confidence, and build something that lasts.