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“The Importance of Developing Corporate Governance for SMEs” By Mr. Herbert Hui, JP, FHKIoD, LLB

“The Importance of Developing Corporate Governance for SMEs” By Mr. Herbert Hui, JP, FHKIoD, LLB Chairman, The Hong Kong Institute of Directors 10 May 2006. 1. Industry Background 2. Five Stages of SMEs 3. Why Corporate Governance is so important to SMEs?

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“The Importance of Developing Corporate Governance for SMEs” By Mr. Herbert Hui, JP, FHKIoD, LLB

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  1. “The Importance of Developing Corporate Governance for SMEs” ByMr. Herbert Hui, JP, FHKIoD, LLB Chairman, The Hong Kong Institute of Directors 10 May 2006

  2. 1. Industry Background 2. Five Stages of SMEs 3. Why Corporate Governance is so important to SMEs? 4. Importance of a Board for SMEs 5. Corporate Governance Guidelines for SMEs (6 Steps) 6. Conclusion Content

  3. Industry Background Definitions of SMEs: • Employ fewer than 100 people in manufacturing and fewer than 50 in non-manufacturing activity. • There are about more than 300,000 of them representing 98% of total business establishment in Hong Kong. • In Hong Kong, nearly 60% of the working population in private sector are being employed by SMEs. Sources from the Trade and Industry Department , HKSAR

  4. Five Stages of SMEs

  5. Why Corporate Governance is so important to SMEs? • Private SMEs do not have regulatory oversight, like the SFC or Stock Exchange, to enforce conformance to market and ethical principles. • This leads to a higher propensity for corruption and commercial crimes. • Developing and embracing a set of Corporate Governance Guidelines will help set a clean and dedicated environment for the private SME and to foster an ethical culture.

  6. “The HKIoD seeks to develop and promote corporate governance by making the case to the Board room that it is in their own interests to build a solid and practical corporate governance structure to better identify and deal effectively with the many different risks associated with doing business in the modern day environment.” Importance of a Board for SMEs

  7. Corporate Governance Guidelines for SMEs 1. Planning 2. Key Performance Indicators (KPIs) 6. Controlling Corporate Governance Practice Guidelines 3. Operations/ Implementation 5. Leading 4. Organizing Sources from “Guidelines on Corporate Governance for SMEs in Hong Kong”, published by HKIoD

  8. 1. Planning • Each SEM has to determine its own business strategy objectives • The business objectives need to be revised and approved by the Board each year • Strategic planning can be used to focus the Company towards ethical development objectives.

  9. 2. Key Performance Indicators • Each area of the business planning will vary from business to business, depending on the type of business and its development stage. • Identify areas of strategic importance and subsequently translated those to KPIs. • KPIs are guidelines and measurements to the effectiveness of business performance, which are predictable, achievable and measurable.

  10. 3. Operation and Implementation • Set up a Board:- The composition of a Board includes a Chairman, Executive Directors, Non-executive Directors (NEDs) and Independent Non-executive Directors (INEDs) • Key functions of a Board :- • Keeps the management team in place through accountability; • Monitors the way in which the management operates the Company’s business • Approves the direction in which management proposes to take the company

  11. 4. Organizing • The Board of Directors sit at the top of the company’s decision making hierarchy and the way it deals with making decisions and managing risks is how a company is principally judged on its governance standards by stakeholders. • In this situation, external experiences of Independent Non-executive Directors add a lot of value to the Board in a decision making process.

  12. Leadership involves an awareness of social responsibility and good corporate governance. Leadership style may need to change as the business develops. The board sets the corporate culture for the entire company, including its tolerance level towards bad behavior. 5. Leading

  13. 6. Controlling • Corporate Governance is about exercising effective control. • Control involves effective management systems, such as: • Regular board and management meetings • A company corporate governance culture • Internal control system • Risk management system • Human resources training • Key Performance Indictors (KPI)

  14. Conclusion • As mentioned earlier, just having the hardware (CG Guidelines) is not enough. A lot of commercial crimes occur even when the Company has all the basis of a good Corporate Governance structure. • More importantly, one needs to reach out to the MINDSET of the owner and management to apply Corporate Governance concepts diligently. • Only then, can you have a healthy CORRUPTION-FREE environment for that particular business.

  15. Thank You

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