Improving corporate governance of SMEs in emerging economies: a Malaysian experience

Abstract

Purpose

SMEs are essential to economic growth in Malaysia and many emerging economies as they are a major source of employment and contribute towards the gross domestic product. It is therefore imperative that the corporate governance practices of SMEs are enhanced by assurance that appropriate monitoring occurs and procedures are in place. This study aims to address this issue.

Design/methodology/approach

The concentration of ownership in Malaysian companies results in less protection for minority shareholders. This is because the laws protecting minority shareholders mainly focus on director/shareholder conflicts and are not suited to companies with concentrated shareholdings, especially where the conflict is commonly seen between the majority and minority shareholders. Furthermore, owing to the levels of power distance, collectivism and assertiveness in Malaysia, shareholders are unlikely to litigate. The research was carried out through case analysis and analysis of extant literature and existing laws in Malaysia, to illustrate that the minority shareholders in the concentrated shareholding SMEs are not well protected.

Findings

The paper finds that current prohibitive models of law are not desirable as they have promoted compliance with the letter but not the spirit of the law.

Research limitations/implications

The study focuses only on SMEs that have been incorporated.

Practical implications

The study enables minority shareholders to reduce fraud and self‐dealing by the majority through more direct participation in corporations, reliance on procedural protections to balance business flexibility and application of brightline rules which stand a better chance of compliance by those who understand them.

Originality/value

The self‐enforcing model is a non‐adjudicative mechanism of enforcement which requires substantial compliance with procedural requirements and aims for voluntary compliance. It proposes that minority shareholders and independent directors hold veto powers, thus reducing fraud and self‐dealing.

Citation

Rachagan, S. and Satkunasingam, E. (2009), "Improving corporate governance of SMEs in emerging economies: a Malaysian experience", Journal of Enterprise Information Management, Vol. 22 No. 4, pp. 468-484. https://doi.org/10.1108/17410390910975068