For hybrid governance to work, SME’s need governance mindset – Diplomatic Courier

The Critical Role of SME Governance in Achieving Sustainable Development Goals

Introduction: A Governance Disparity Undermining Global Goals

An analysis of current governance trends reveals a significant disparity between large corporations and Small and Mid-Sized Enterprises (SMEs). While the evolution of governance, incorporating new stakeholders, is often viewed positively, its inconsistent application within SMEs—which constitute the majority of the global economy—poses a substantial threat to sustainable development. This gap directly impacts the achievement of several Sustainable Development Goals (SDGs), particularly those related to economic growth, institutional integrity, and resilient industry.

Systemic Failures and their Contradiction to SDG 8 and SDG 16

The persistence of governance failures within SMEs highlights a critical challenge to fostering SDG 8 (Decent Work and Economic Growth) and SDG 16 (Peace, Justice and Strong Institutions). Evidence of misconduct remains constant, indicating that a focus on governance has not permeated the SME sector effectively.

• United Kingdom: The number of company directors disqualified for misconduct, predominantly from SMEs, has not decreased over the past two decades, suggesting a static level of malfeasance despite increased discourse on governance.
• Germany: The collapse of Wirecard exemplifies a catastrophic failure resulting from systematic fraud and weak regulatory oversight, undermining economic stability.
• United States: The case of the company Frank, which collapsed after its founder was charged with data fabrication and misuse of funds, illustrates the severe consequences of absent ethical leadership.

These incidents demonstrate how poor governance in SMEs can lead to economic instability, job losses, and a weakening of the effective, accountable institutions called for in SDG 16.

Barriers to Effective Governance in the SME Sector

Several factors contribute to the governance deficit in SMEs, hindering progress towards building resilient and responsible economic structures as envisioned in SDG 9 (Industry, Innovation, and Infrastructure).

• Perception of Complexity: Many SME founders perceive good governance as an overly bureaucratic burden applicable only to large institutions, rather than a fundamental mindset of responsibility and integrity.
• Regulatory Loopholes: The ease with which companies can be established, as seen in the UK, creates a vibrant economy but also exposes the system to abuse. The practice of “phoenixing”—where directors of failed companies repeatedly launch new entities—is a prevalent issue in the UK, Europe, and the U.S., representing a significant regulatory gap that undermines the rule of law central to SDG 16.
• Lack of Accountability: The UK Insolvency Service reports tens of thousands of companies being struck off annually for non-compliance, with minimal consequences for the directors involved. This lack of accountability erodes trust in business institutions.

A Framework for Integrating Governance and Sustainability

Recommendations for Strengthening Institutions and Fostering Sustainable Growth

To align the SME sector with the 2030 Agenda for Sustainable Development, governance must be embedded from the outset as a core operational principle. This requires a multi-faceted approach that strengthens regulatory frameworks and promotes a culture of integrity, directly supporting SDG 8, SDG 9, and SDG 16.

1. Enhance Regulatory Oversight: Implement more stringent requirements for company formation to prevent abuse and ensure founders meet basic standards of conduct, thereby strengthening institutional integrity (SDG 16).
2. Increase Enforcement and Accountability: Close regulatory loopholes that permit practices like “phoenixing” and enforce stricter penalties for director misconduct. This is essential for building effective and accountable institutions.
3. Integrate Governance into Investment Criteria: Good governance must be treated as a non-negotiable condition for investment. This incentivizes SMEs to adopt responsible practices early, fostering sustainable economic growth (SDG 8).
4. Develop Accessible Governance Frameworks: Create and promote practical, scalable, and enforceable governance frameworks tailored to the needs of SMEs. This will help build resilient infrastructure and promote inclusive and sustainable industrialization (SDG 9).

By embedding governance across the entire economic base, not just at the top, nations can ensure that SMEs contribute positively and robustly to a more sustainable and equitable global economy.

SDGs Addressed in the Article

SDG 16: Peace, Justice and Strong Institutions

The article’s central theme is the failure of governance and oversight within Small and Mid-sized Enterprises (SMEs). It directly addresses the need for effective, accountable institutions (both corporate and regulatory) and the reduction of corruption and illicit financial flows. The text highlights “systematic fraud, regulatory evasion, and weak oversight,” which are core concerns of SDG 16.

SDG 8: Decent Work and Economic Growth

The article emphasizes that SMEs “form the majority of the economy” and that their poor governance creates “dangers in a global economy.” This connects to SDG 8 by highlighting how unethical practices and institutional weaknesses can undermine sustainable economic growth. The discussion on creating a “vibrant SME economy” while preventing abuse relates to policies that support the sustainable growth of small enterprises.

SDG 17: Partnerships for the Goals

The article begins by mentioning “private–public partnerships” and the evolution of governance. It concludes by proposing that governance be a “condition of investment” and supported by “frameworks that are practical and enforceable.” This points to the need for multi-stakeholder partnerships (investors, governments, civil society, and businesses) to establish and enforce standards, which is the essence of SDG 17.

Identified Targets

1. SDG 16: Peace, Justice and Strong Institutions

   • Target 16.5: Substantially reduce corruption and bribery in all their forms.
     
     The article provides clear examples of corruption and fraudulent activities, such as the “systematic fraud” at Wirecard and the Frank founder “fabricating data and using company funds for personal costs.” The mention of director “misconduct” also falls under this target.
   • Target 16.6: Develop effective, accountable and transparent institutions at all levels.
     
     The article critiques the lack of accountability in SMEs where governance is “inconsistent or absent.” It points to “weak oversight” and a “regulatory gap” that allows for practices like “phoenixing” (directors of failed companies repeatedly launching new entities). The call for governance to be “embedded from the outset” is a direct call for building more accountable corporate institutions.

2. SDG 8: Decent Work and Economic Growth

   • Target 8.3: Promote development-oriented policies that support productive activities… and encourage the formalization and growth of micro-, small- and medium-sized enterprises.
     
     The article focuses on the challenges within the SME sector, which is vital for economic growth. It discusses the tension between creating a “vibrant SME economy” through easy company setup and the “abuse” this enables. The proposed solution of embedding governance as a “condition of investment” is a policy-oriented approach to ensure the sustainable and responsible growth of SMEs.

3. SDG 17: Partnerships for the Goals

   • Target 17.17: Encourage and promote effective public, public-private and civil society partnerships.
     
     The article explicitly mentions “private–public partnerships” in its opening sentence. The proposed solution involving a “mixture” of regulation, limitations, and enforcement, with governance treated as a “condition of investment,” implies a partnership between public bodies (regulators like the UK’s Insolvency Service) and private entities (investors) to enforce better standards across the SME sector.

Implied Indicators for Measurement

1. Indicators for SDG 16

   • Indicator for Target 16.5: The article directly provides a measurable indicator: “the number of directors disqualified from leadership due to misconduct.” It notes this number has remained constant in the UK over 20 years, suggesting a lack of progress. The incidence of major corporate collapses due to fraud (e.g., Wirecard, Frank) also serves as a qualitative indicator.
   • Indicator for Target 16.6: A clear indicator mentioned is the number of “companies struck off annually… for non–compliance,” which the UK Insolvency Service reports as “tens of thousands.” The prevalence of “phoenixing” is another, though harder to quantify, indicator of regulatory and institutional failure.

2. Indicators for SDG 8

   • Indicator for Target 8.3: While the article celebrates a “vibrant SME economy,” the high rate of companies being “struck off” for non-compliance acts as a negative indicator for the *sustainable* growth of SMEs. A positive indicator would be a decrease in the number of SMEs failing due to governance issues and non-compliance.

3. Indicators for SDG 17

   • Indicator for Target 17.17: The article does not provide a quantitative indicator but implies one. Progress could be measured by the number of investment funds or public-private initiatives that adopt and enforce mandatory governance frameworks for SMEs as a “condition of investment.”

SDGs, Targets, and Indicators Analysis

Source: diplomaticourier.com