13th Annual International Management Conference Proceeding

Corporate Governance of Kenyan SMEs For Economic Development
By
Jimmy Macharia, Assistant Professor of Information Systems, School of Business.
United States International University
PO BOX 14634 Nairobi 00800 Kenya. Tel. 254-20-3606299 254-0722-779770
Email: kmacharia@usiu.ac.ke
Abstract
There is a wide gap between the big and smallest firms that must be filled if African countries like Kenya has to grow
and meet the millennium development goals (MDGs) by 2015. One such gap is the practice of corporate governance
in the Small and Medium Enterprises(SMEs). Consequently this paper examines the status of corporate governance of
SMEs in Kenya. This study, has presented the need for this and described the specific background of corporate
governance in Kenyan SMEs. Then, the consequences and risks arising from the current situation with special regard
to corporate governance have been discussed. The important question here is: What are the consequences of neglecting
Corporate Governance in Kenyan SMEs? Further, some advice has been given on the necessary steps to overcome this
problematic situation.
The methodical background of this paper is a review of the existing relevant literature on corporate governance in
SMEs in general and the particular case of Kenya. This research has established that SMEs should embrace and
practice "corporate governance" to reduce the risk and consequences of business failure.
Key words: Corporate Governance, SMEs, MSME, Economic Development.
I. INTRODUCTION
The need to ensure that the economic entities and other forms of businesses such as small and medium sized
enterprises (SMEs) are well governed and managed has been recognized by many researchers in the past (Strenger,
2003). Corporate Governance is concerned with holding the balance between economic and social goals and between
individual and communal goals. The corporate governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as
possible the interests of individuals, corporations and society" (Cadbury, 2000). By and large, the concept of
"corporate governance" is more familiar to large private corporations, publicly-listed companies and public
organizations. But many researchers have satiated that the concept is equally relevant for SMEs (Armstrong, 2005).
Indeed, most SMEs as well as their representatives such as industry and employers’ associations assume corporate
governance to be not really relevant to them. Similarly, banks and financial institutions and development agencies try
to play down the need for any initiatives in this respect. Last but not least, most academic experts concentrate on large
joint-stock companies and do not touch the topic of SMEs or even consider it pernicious or irrelevant. Nevertheless,
this situation needs further enlightening since the described aversion seems somewhat bizarre especially considering the
important role that SMEs play in economic development.
Good governance of SMEs has the effect stimulating economic development which manifests in many dimensions
including attracting investment, creating jobs and wealth especially in a developing countries like Kenya. In addition it
is essential in ensuring an SME’s long-term growth, competitiveness and meaningful sustainability of the business
enterprise. It has been recognized that small and medium enterprises (SMEs) play a vital role in economic development
and income growth in many countries including Kenya. They have been the primary source of job or employment
creation world-wide; not only in less developed countries (LDCs) but also in developed/industrialized countries.
II. SMEs IN KENYA
In Kenya, the definitions used to describe the SME sector are based on employment size which includes both paid and
unpaid workers. A micro-enterprise is defined as having no more than ten workers, a small enterprise with between
eleven and fifty employs while a medium enterprise with more than 50 employees (CBS, 1999). Farm enterprises are
excluded from the definition of SMEs, except those farm enterprises which undertake some sort of processing before
marketing. Thus the term ‘small-and-medium enterprises’ covers the range of establishments, including informal
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