(Biekpe J. A., 2007) (Biekpe J. A.

, 2007)CHAPTER TWO

LITERATURE REVIEW
2.0 Introduction
Corporate governance is a key component of organizational management. This review evaluates
the corporate governance practices of SMEs in Accra, Ghana, with a focus on the impact of
theoretical frameworks, Corporate Governance Principles, corporate governance and firm
performance, regulatory framework, Corporate Governance, and financial performance, it also
highlights challenges associated with implementing sound corporate governance practices.

2.1 Definitions of Corporate Governance

It is challenging to define corporate governance in a universally applicable way. Different definitions
from different authors have been given to it. In a market economy, it regulates the interaction between
corporate managers and entrepreneurs, or those who invest in corporations. According to (Oman, 2001) it
encompasses both public and private establishments, as well as rules, legislation, and customary business
practices. Corporate governance is also defined by the (OECD, 2004) as a system of interactions among a
company's board, shareholders, and other stakeholders. According to the (OECD, 2004) it also provides
the framework for establishing the company's goals, as well as the means of accomplishing them and
monitoring performance.
According to (Cadbury, 2002), corporate governance is an umbrella term that includes specific issues
arising from interactions among senior management, shareholders, boards of directors, and other
corporate stakeholders. Another definition of corporate governance is the entire system of controls, both
financial and otherwise, by which a company is directed and controlled. Amy J. Hillman (2015), defined
corporate governance as how businesses that provide financing to corporations and believe their
investment will provide a profit.

Drawing from the definitions provided above, it is clear that corporate governance includes the systems,
processes, practices, rules, and regulations that oversee establishments; how these laws are
implemented and adhered to; the connections that these regulations build or preserve; and the
characteristics and outcomes of those connections.

To ensure that individuals or groups connected to the business do not adversely affect the business and its
operations, or that profits or resources are not distributed to a small group at the expense of the broader
public, corporate governance is crucial for well-managed businesses (Talamo, 2003). That being said,
several factors affect strong corporate governance, chief among them being the structure of the
institutional and legal framework that governments have put in place to support this kind of governance.
Good corporate governance will be aided by national establishments that allow business owners to invest
money and create wealth that is divided among shareholders, managers, and staff. There will be some
impact of these returns, or created value, on the state of the national economy. More precisely, a system of
strong corporate governance and the institutions that support it have an impact on the individuals who
make investment decisions in organizations, the types of investments they make, and the distribution of
investment returns. It is feasible to enumerate Ghanaian laws such as the Companies Code and
institutions such as the GIPC, SEC, and GBSSI (Addo, 2021).

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2.1.1 Models of Corporate Governance
Different corporate governance models have emerged as a result of variations in market structure,
legal systems, customs, history, and cultural and societal values. These systems can vary over time
within the same business, across national borders, and among industries. Nonetheless, whether a
company is privately held, publicly traded, or state-owned, its flexibility, effectiveness, and
profitability are all impacted by its corporate governance structure (Chamlou, 2000). We'll address the
UK model, the US model, and the OECD principle as the three primary models in this context.

 UK Model
Independent committees that have issued several documents outlining best practices have been
leading the way in the development of corporate governance in the UK. Given that many of
these practices have been adopted, these publications have had a significant impact on how
corporate governance has developed in other countries. Notably, the Cadbury Report is one
document that is widely regarded as having influenced contemporary corporate governance
practices.
 The Cadbury reports.
The Report's recommendations were released in 1992. had a significant impact on the
evolution of corporate governance both in the UK and around the world. The report
included several suggestions, which were categorized as follows:
1. Businesses should create important board committees to guarantee good
governance. The nomination committee is one of these committees, and it is
responsible for managing the official and open process of selecting new members
for the board. Apart from that, there is the audit committee, which is likewise
composed of non-executive directors and reports to the board, and the
remuneration committee, which is accountable to the board.
2. A minimum of three independent non-executive directors should be present on
the board.
3. The board should consist of both executive and non-executive directors to
prevent any individual from dominating decision-making.
4. It is critical to distinguish clearly between the chairman's position, which
involves leading the board, and the CEO's role, which involves leading the
company.
To establish the best corporate governance procedures, several reports were released following the
Cadbury Report, including the Smith Report, the Hampel Report, the Greenbury Report, the Higgs
Report, and the Higgs Report (1995).
 USA Model
In response to the Enron scandal, the US introduced the Sarbanes-Oxley Act in 2002. The act
tightened rules on several accounting matters, like off-balance sheet financing, and formed a new
oversight body. It is now mandatory for companies to establish an audit committee before being
listed. The actual operations and governance methods are becoming more and more similar.
notwithstanding variations in corporate governance structures. Organizations like the OECD are
at the forefront of the fast-expanding trend of standardization in legislation and agreement on
fundamental concepts.
 The OECD Principles.

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 The OECD's corporate governance components, which were first published in 1999 and updated
in 2004, incorporate suggestions from numerous nations.
Establishing a corporate governance framework that is consistent with society's values is the main
goal of regulation, according to the OECD. This environment should allow for competition and
market forces to function effectively, thus enabling corporations to generate long-term economic
gains. It's important to note that specific governance structures or practices may not be suitable
for all companies at all times. The OECD identifies several crucial elements of good corporate
governance, including:
TABLE 1: Basic Principles of Corporate Governance.
principles Description

comprises the timely and accurate

Protection of stakeholders’ rights release of information that is
comparable, clear, and consistent
whether in good and poor times.

involves safeguarding investor

confidence and protecting
shareholders at all times in order to
Equitable treatment of shareholders
guarantee the steady inflow of
necessary money.

requires that all equity investors,

Accurate disclosure of information including minority stockholders, be
treated fairly.

It involves offering clear, consistent,

and comparable information in both
good and poor times in a fast and
Diligent exercise of board accurate manner.
responsibilities
involves carefully weighing and
balancing the interests of all parties
protection of shareholders’ rights involved, including partners,
consumers, staff, and the local
community.
Source: Organization for Economic Corporation and Development (OECD, 2004)

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Four fundamental concepts serve as the foundation for the aforementioned premise. It starts with
compliance and corporate ethics. The sufficiency of the company's decision-making mechanism is the
second area of emphasis. Thirdly, it stresses appropriate openness and disclosure. The fourth point
emphasizes financial accounting and control, including record-keeping. According to Randall Morck
(2004), these concepts are so effective that they are even being adopted and used by non-OECD countries.
argues that the widespread acceptance of these ideas has demonstrated their viability.
The preceding three corporate governance principles when combined yield some basic instruments of
good corporate governance: the CEO and upper management's qualifications and independence, the
Board of Directors' makeup, size, and independence of board members, Board Committees, and the
Board Chairman/CEO duality. Accordingly, the degree to which an organization organizes its activities
through the use of these instruments determines its practice of good corporate governance (Adjasi, 2014).
The relationships between different corporate governance theories, the principles of corporate
governance, and some of the aforementioned instruments of corporate governance are covered in more
detail in the following section.
2.1.2 Ghana’s Corporate Governance Framework
The Ghana Stock Exchange (GSE) regulations, the Securities Industry Law of 1993, and the Companies
Code 1963 (Act 179) serve as the primary statutory sources for corporate governance practices in Ghana.
The Companies Code 1963 (Act 179) is the one that applies to small and medium-sized enterprises
(SMEs) in Ghana the most out of the three. The World Bank rated the Companies Code as "fairly strong,"
even though it hasn't had a significant review since it was passed. Adherence to the precise guidelines
outlined in this code will guarantee a certain degree of adherence to corporate governance principles for
various stakeholder types. The following guidelines comprise (but are not restricted to)
- Rights and responsibilities of shareholders and stakeholders
- The responsibility of the board
- The role of the board chairman
- Directors' responsibility
- Auditor-appointment procedure and role
- Disclosure and transparency.
- Equitable treatment of shareholders
All companies that are registered under the Companies Code 1963 (Act 179), whether they are SMEs or
not, are automatically obligated to follow the rules included in the code. However, without proper
monitoring and enforcement of compliance, even the basic corporate governance provisions may not be
adhered to.

2.2 Theoretical framework

 According to (Wartick, 1998) the phrase corporate governance is a catch-all for a wide range of ideas,
beliefs, and practices about boards of directors and their executive and non-executive members. This
chapter examines the various theories, models, ideas, and procedures that support corporate
governance. The hypothesis for this study is derived from a discussion of the main facets of corporate

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 governance among SMEs using the agency theory, stewardship theory, stakeholder theory, and
Resource Dependency theory.
.

2.2.1Theories of Corporate Governance

 Agency theory
proponents contend that corporate governance developed from the necessity to defend the
corporation's external financiers against those in positions of control. They contend that the need
for shareholders' interests and the business's management was not always in sync. (Dzigba,
2015). The agency dilemma is the term used to describe this conflict of interest between the
owners and the managers of the company. (Michael C. Jensen, October, 1976). Corporate
governance is examined by the agency theory from the shareholder's point of view. According to
this viewpoint, corporations are characterized as organizations whose interests come second to
those of their shareholders. (Gedajlovic, 1993) Corporate boards serve as internal tools to bring
managers' and shareholders' interests into alignment because managers, who are viewed as
fiduciaries, may not necessarily have the same interests.
The main idea of agency theory is that, since ownership and management or control of a
company are distinct, governance frameworks are necessary to protect owners' interests. It was
not always possible to rely on management to make decisions that would benefit the company
and its owners. The issue that arises from this is how to persuade management to behave in the
owners' best interests. To solve the agency problem, corporate boards must be established to
close the gap between owners and managers. (Biekpe, 2009)
One important field of study that helps to alleviate and explain issues with the relationships between
shareholders, management, and other stakeholders in a firm is agency theory. Despite its enormous
influence, there are a lot of complaints. First, agency theory's fundamental tenet is that business
Organizations have inadequate management (Moran, 1996). In the SME sector, this isn't always the case.
because business owners often see their company's success or failure as a reflection of their own. As a
result, people are unable to bear the expense of mismanaging businesses that, in certain cases, hold their
whole life savings. Furthermore, agency theory rests on the presumption that humans are inherently
greedy, which may not always be the case (Moran, 1996).
Again, because management and ownership are not kept separate in SMEs, opportunistic behavior and
greed are less common. A further factor that reduces concerns regarding CEO duality and longevity is the
distinct ownership structure of SMEs. Popular forms of ownership arrangements in SMEs include
partnerships, joint ventures, and employee-owned businesses. (Ansong, 2015).
Businesses with these kinds of ownership structures might have especially engaged boards, although the
partners are typically the ones on the board. It is important to recognize that these kinds of structures do
have unique governance procedures and practices (Goodall & Warner, 2002). As a result, it is necessary to
investigate how the stewardship idea is used in the context of SMEs.
 Stakeholder theory.

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 Stakeholder theory is a significant theoretical framework that emphasizes the decisions that
businesses have to make when dealing with a variety of stakeholders, each of whom has distinct and
frequently competing interests. Every board has to make a strategic decision from a range of urgent
requests. When deciding on a long-term strategy, businesses must take into account a wide range of
stakeholders. Stakeholders in a business could include the government, the media, employees,
customers, shareholders, and managers. These groups have distinct interests, and it is important to
take each group's interests into account.
The tenets of a shareholder position on corporate governance are not shared by the stakeholder
perspective. According to this perspective, companies are superordinate organizations in which
numerous individuals have genuine vested interests. As a result, this viewpoint acknowledges the
need to safeguard the interests of stakeholders besides shareholders. (Maassen, 2002)

As an outcome, the stakeholder theory contradicts financial theories that maintain that businesses
should exclusively focus on generating and enhancing the financial interests of shareholders, and
the company's remaining owners (Schulder, 2002).
Shareholders are just one of these parties with claims. Thus, the necessity to weigh the rights of
shareholders against those of other stakeholders is addressed by the stakeholder theory. (Pau,
2001)
According to financial theories, (L’Huillier, 2016) acknowledges that an organization's goal is to
generate wealth and distribute it to its investors. He does, however, broaden the definition of
investors to include other groups that contribute to organizations in the form of infrastructure,
information, and skills, such as workers, the government, and society. Stakeholders are defined
(Pau, 2001) as people and groups that deliberately or involuntarily contribute to a firm's ability to
create wealth. Its actions, and as such, they may be its beneficiaries or carriers of risk. In addition
to more evident contributions like money, labor, and revenue, stakeholders often offer more
subtle resources like social acceptance (Nguyen, 2000). According to (Sri Utami Abu, 2023),
there is a roughly ten-fold difference between these resources and the financial investments made
by shareholders.
In addition to financial risk, other risks that different stakeholders may face include those related
to employment and career opportunities (for employees), the quality of goods and services (for
customers and consumers), and the impact on the environment (for the government and society)
(Pau, 2001). Employees who lose their jobs due to company bankruptcy also frequently forfeit
their health benefits and retirement package. (Ansong, 2015).
By the idea of the contribution of justice, stakeholders' contributions and the risks they face
should be taken into account when determining how the firm's earnings should be distributed
among those who assume risk, in whatever capacity (Nguyen, 2000). Thus, the theory
encompasses all processes and structures (e.g., active boards, competent management, effective
risk management procedures, etc.) that guarantee the ongoing survival of a profitable company
and the just distribution of any profits among different stakeholders. The importance of
stakeholder participation and corporate social responsibility is emphasized in particular.
The other important way to ensure that businesses become successful in catering to the
expectations of various stakeholders is through the acquisition and management of resources.

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 Stewardship theory
An alternate theory to the agency idea is the stewardship theory. Whereas agency theory is based
on the assumption that managers may act selfishly to achieve their financial goals, stewardship
theory is based on the belief that individuals are naturally altruistic. Stewardship theory
recognizes a variety of non-financial motivators, including the need for authority, achievement,
and recognition. Moreover, accountability and obtaining fulfillment from carrying out tasks
(James, 1991).
According to (James, 1991), managers don't act opportunistically; instead, they want to do a
good job, which means they reject the agency theory's argument that there should be a lack of
trust between managers and shareholders. Since owners typically oversee SMEs, it would make
sense to infer that the stewardship theory's argument applies more to this type of business than
agency theories.
Based on, this (Kyereboah-Coleman, 2007), the stewardship theory takes into account the
reduction of bureaucracy and acceleration of decision-making as the ideal for effective
governance, among other things. This involves concentrating the functions of a CEO and board
chair in one person. SMEs can benefit from this advice. Stakeholder theory leaves much firm
governance to owner-managers, who must create the necessary structures to make this happen.
To be able to perform this function, individuals must first hone their own managerial and
strategic competencies. These competencies are important organizational resources for attaining
competitive advantage and good financial results. (Ansong, 2015)
Secondly, they require the appropriate team to support them in areas where they are short on resources
and expertise. Therefore, SMEs need boards more for their strategic, advising, and resource acquisition
functions than for their monitoring roles, aside from statutory requirements. (Ansong, 2015). Lastly,
managers are required by corporate governance principles to make sure that all businesses operate
honorably, offer decent working conditions to their staff, promote diversity in the workforce, take good
care of the environment, and actively seek to improve both the local communities in which their
businesses operate and society at large (Kyereboah-Coleman, 2007).

To summarize, the stewardship theory regards the following as necessary to guarantee efficient
corporate governance inside any organization:
Board of Directors: Since executive directors are fully aware of the firm's operations, their participation is
crucial to improving the efficacy of the board's efforts. This is thought to improve decision-making and
guarantee the company's sustainability;
Leadership: In contrast to the agency theory, the stewardship theory states that the CEO and board chair
roles should not be held by the same person. This is because it allows the CEO to act swiftly and
independently of excessive bureaucracy when making decisions.

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 Resource Dependency Theory
According to resource dependency theory, a company's ability to connect with its external
environment is critical to its long-term survival and success (Pedersen, 2007).
The theory's central claim is that businesses must continually engage with their surroundings, whether
it be to acquire resources or distribute final goods. To reduce the consequences of environmental
uncertainty and establish more predictable resource flows, businesses should thus aim to exert control
over their surroundings (Pedersen, 2007).
Even though agency theory is the main theory employed in the studies on boards of directors
(Bhattacharya, 2015), this is the field where resource dependency theory has had the most research
impact.

According to (Pedersen, 2007) boards help businesses increase resources or reduce reliance. Previous
analyses of the literature on boards of directors have found that agency theory and other board
perspectives such as those presented by (Amy J. Hillman, 2015) and (Bhattacharya, 2015) are less
frequently endorsed than resource dependency theory. Therefore, even though agency theory is used
for boards more frequently than resource dependency theory, empirical research to date indicates that
the latter is a more effective lens for comprehending boards.
Previous research on boards utilizing resource dependency theory (Pedersen, 2007) focused on the
size and makeup of the board as a measure of the board's capacity to supply essential resources to the
company. The relationship between board size and business performance as a sign of a successful
resource-reliance strategy is also examined in several research. These are compiled by (Alan E.
Ellstrand, 2004), who discovered a favorable correlation between board size and company financial
performance. According to (Amy J. Hillman, 2015), directors assist organizations in four ways:
1. by providing information in the form of counsel and advice.
2. having access to informational pathways connecting the company with environmental
emergencies.
3. preferential access to resources.
4. preferential access legitimacy.
Studies of boards based on resource dependency theory represent a robust research field. However, the
application of agency theory has impeded its progress, as mentioned earlier. (Ansong, 2015) Nevertheless,
the growing empirical evidence that supports the relationship between resource dependency and boards is
promising for the future of this research stream. Studies of boards based on resource dependency theory
represent a robust research field. However, the application of agency theory has impeded its progress, as
mentioned earlier. Nevertheless, the growing empirical evidence that supports the relationship between
resource dependency and boards is promising for the future of this research stream. (Ansong, 2015). All
the theories taken together, though, can effectively prescribe (CG) in the developing world.

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Figure 1.

Source: (Matei, 2016)

2.3 Corporate Governance Principles

Corporate governance is a combination of laws, regulations, and private sector practices that help a
company attract financial and human capital, operate efficiently, and generate long-term economic value
for shareholders while respecting the interests of stakeholders and society as a whole. The key
characteristics of effective corporate governance include transparency, protection of the rights of
shareholders, and having independent directors who can make strategic decisions, hire and monitor
management, and replace them when necessary. This description provides a general overview of the
components of an effective corporate governance framework.

The Cadbury Committee's 1992 report on the financial side of corporate governance had a significant
impact on the development of good corporate governance as it is currently understood. Proposals in the
report and the code of best practices stressed the need for independent non-executive directors, support
for the audit committee, division of the chief executive role from the board chairmanship, and so forth. As
previously mentioned in this study's second chapter, more pertinent reports have since surfaced, and taken
as a whole, they embody the UK model of corporate governance. Organization for Economic
Cooperation and Development (OECD) has done an excellent job of distilling from different national
practices a set of corporate governance principles that deal largely with internal mechanisms for directing

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the relationships between managers, directors, shareholders, and other stakeholders (Ahmed Agyapong,
2020).

The principles advocated by the OECD, the World Bank, and the Cadbury Committee, as well as the
existing literature on corporate governance, all highlight the essential elements required for the success of
a company. These include:
1) well-informed shareholders who can appoint members to the board of directors;

2) a separate board of directors with the authority to make independent appointments; and

3) a competent management team that operates with integrity and transparency to implement the
company's strategies and regulations, thereby ensuring the company's long-term existence.
According to Pound (1992), the board, management, and shareholders as the three essential parts. Pound
encourages directors and shareholders to participate actively in the decision-making process. He suggests
a type of corporate governance called a governed corporation, in which management, the board and
shareholders collaborate. Pound highlights in this model that the board should be made up of specialists
and that discussions and procedures should be on discussing novel ideas and approaches rather than
merely summarizing previous results. Directors also require improved access to data on goods, clients,
etc. It should also be mandatory for directors to commit a large amount of their working hours to the
company. Finally, payment for the services performed by board members is required. Service providers
should feel that their success is tied to the value they create for their customers (pound, The Promise of
the Governed Corporation, 2000).

It can be said that Any structure for corporate governance that effectively coordinates The vows of three
key groups, namely shareholders, management, and the board of directors, can be successful regardless of
the size of the company, be it a large-scale corporation or a small and medium-sized enterprise (SME).
This can be achieved through various measures such as ensuring suitable Board membership
independence, size, and makeup, separating the roles of board chairman and CEO, creating board
committees, and appointing competent and independent CEOs and top management. Although SMEs
might benefit from the application of corporate governance rules like Cadbury, OECD, and Sarbanes-
Oxley, they were initially designed with larger firms in mind.

The scope of corporate governance practices among SMEs is examined in this study by looking at
variables including CEO duality, board size, composition, and management skill level.
2.3.1 Board Composition
Boards of directors play a crucial role in corporate governance. They serve as the formal connection
between business owners and the managers who run the day-to-day operations of the company. Many
experts believe that corporate boards are vital for ensuring accountability and compliance with modern
ethical and economic standards (Maassen, 2002). According to (SPIRA, 1996) the ability of boards of
directors to combine leadership with control and effectiveness with accountability will primarily
determine how well companies meet society's expectations of them.

(SPIRA, 1996) suggest that having strong and effective boards is an important asset for corporations. This,
in their opinion, can lessen the need for government involvement in business decision-making and
enhance the perception of corporate accountability. The authors also point out that creating a board
that can offer the best recommendations based on knowledgeable and impartial insights is a goal that

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management and directors have in common. It is therefore impossible to overestimate the significance
of boards for SMEs. However, in most cases, SMEs are closely held and owner-managed, and the owners
usually have better insights into the internal processes of the firm (Cowling, 2003). As a result, for most
SMEs, boards exist only on paper, and their control function is non-existent.
There are cases where small and medium-sized enterprises (SMEs) have a board of directors that includes
members from outside the company. In these cases, the board is used as a tool for developing the
company's strategy. Outside members of the board tend to see their role as clearly different and
complementary to that of the management team, while insiders may view the board work as an extension
of their managerial duties. Because outside board members are not involved in the day-to-day activities of
the SME, they are likely to have a more independent and open-minded perspective when it comes to
considering strategic alternatives for the company. There is a debate about whether SMEs should have
more outside directors or more inside directors on the board. Some argue that boards of directors are seen
as more independent when they have a higher proportion of non-executive directors. Research has shown
that firms are rewarded by the market for appointing non-executive directors. This means that an SME
with more outside directors will generally be viewed more favorably by the market and financial
institutions than SMEs with more inside directors.
2.3.2 Board Size
Small and medium-sized businesses (SMEs), as was previously mentioned, typically have lower board
sizes. Large boards, according to (Maassen, 2002) simpler for CEOs to manipulate and less effective. An
excessively large board can be challenging to manage and frequently leads to issues. Smaller boards also
make individual directors more accountable and less likely to engage in free riding. SMEs should
nonetheless strongly consider expanding their board membership beyond the customary two to four
members, even in light of these arguments (Ansong, 2015). The most significant adjustment a small and
medium-sized enterprise (SME) can make is to become a larger board firm instead of one owner-manager.
The decisions that the company must make can be developed and defined more precisely when a team
approach is used. Additionally, it strengthens the emergence of an internal human relations framework
that is less restrictive and more transparent. Increased board size and better performance of SMEs are
strongly correlated by several types of research, particularly when there are more non-executive directors.
Consequently, corporate governance conditions are more likely to be better for SMEs with larger boards
than for those with smaller boards (Anthony Kyereboah-Coleman, 2007).
2.3.3 CEO Duality
There are two types of board structures/systems in the literature. The first system is where the CEO also
acts as the chairman of the board, while the second system is where the positions of CEO and chairman
are occupied by two different individuals. Research has shown that in a system where the CEO also acts
as board chairman, there is a higher likelihood of leadership facing conflicts of interest and greater agency
problems (Bhattacharya, 2015).
There is a preference for having separate roles for the CEO and board chairman, as it has been argued that
firms are more valuable when the positions are not held by the same person. Empirical studies have
shown a positive relationship between firm performance and the separation of these roles. However, some
studies have found no relationship or shown that CEO duality is not associated with inferior performance.
Despite this, (Cadbury, 2002) strongly recommends separating the CEO and Chairman of the Board roles.
Therefore, SMEs with their CEO doubling as Chairman may be perceived as weaker in terms of corporate
governance practice than those with separate roles.

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2.3.4 Board Committees

The Cadbury Committee made an important proposal that businesses create important board
committees that oversee auditing, remuneration, nomination, and finance. These committees are
responsible for various aspects of corporate governance and are composed of non-executive directors who
report to the board. Although some SMEs have argued that it is costly to create board committees, the
main issue is the size, independence, and expertise of the board members. If the board does not have
experts, it cannot have a committee of experts. Therefore, boards must prioritize the appointment of
qualified members to ensure effective governance.

2.4 corporate governance and firm performance

It's fascinating to see how much research has been conducted on the topic of corporate governance
and its impact on a company's performance. Many studies, such as those conducted by (Anthony
Kyereboah-Coleman, 2007), (Wai, 2021) and (Ansong, 2015) have shown that effective corporate
governance can indeed boost a company's performance. However, some studies have reported a
negative relationship between corporate governance and firm performance (Kushani Panditharathna1,
2017), while others have found no relationship at all (Sharma, 2016)

The inconsistencies in these findings have led experts to explore the reasons behind them. Some
suggest that the problem may lie in the limited use of publicly available or survey data. Others have
pointed out that corporate governance practices can differ significantly across companies and
industries, making it difficult to draw definitive conclusions about the relationship between corporate
governance and firm performance. Regardless, it's clear that the topic of corporate governance
warrants further exploration, and I'm excited to see what future research may uncover. It is widely
claimed that good corporate governance enhances a firm’s performance (Fernando, 2020). Despite the
generally accepted notion that effective corporate governance enhances firm performance, other
studies have reported a negative relationship between corporate governance and firm performance
(Bhattacharya, 2015) found that there is no relationship between corporate governance and firm
performance (Shukla, 2003) The reasons for such inconsistencies are several and varying. Some have
argued that the restrictive use of either publicly available data or survey data could be part of the
problem. It has been argued that inconsistent results can arise from the use of limited measures of
corporate performance, such as return on assets (ROA), return on equity (ROE), return on capital
employed (ROCE), or market value of equities. This limitation also exists in the literature on
corporate governance, which typically examines the relationship between corporate performance and
board structure or ownership separately rather than considering both factors together. To address these
issues, the present study uses both market-based and accounting-based performance measures,
namely return on assets and Tobin's Q, to examine the relationship between corporate governance and
firm performance. The study considers board characteristics, board activity intensity, audit committee
practices, and characteristics, as well as survey and publicly available governance data to reduce the
degree of bias.

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Figure 2: Conceptual Model of Corporate Governance on Organizational Performance

Source: (Matei, 2016)

2.5 Regulatory framework

2.5.1 Small and Medium Scale Enterprises (SMEs)
It is interesting to note that the definition of Small and Medium-sized Enterprises (SMEs) varies
across different countries. The size of an enterprise is usually determined by factors such as turnover,
fixed investment, number of employees, sales volume, and worth of assets. In Ghana, small
enterprises employ less than ten people, while medium and large-scale enterprises employ more than
ten. Typically, small enterprises in Ghana have up to 29 employees and fixed assets of up to
US$100,000, while medium-sized firms employ between 30 and 100 employees. It is fascinating to
see the diverse and unique characteristics of SMEs in different parts of the world.
Small and Medium-Scale Enterprises (SMEs) hold significant importance in the economic activity of
any country. They are not only instrumental in nation-building but also play a critical role in driving
economic growth. SMEs are known for creating job opportunities, and they are a major tool for
tackling poverty and promoting economic development (Alex Antwi-Adjei, 2020).
In Ghana, small enterprises are a characteristic feature of the production landscape, providing about
85% of manufacturing employment (Ahmed Agyapong, 2020) SMEs account for about 92% of
businesses in the country and are believed to contribute about 70% to Ghana's GDP (Ahmed

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 Agyapong, 2020) Given their economic weight in African countries, SMEs have a crucial role to play
in stimulating growth, generating employment, and contributing to poverty alleviation. SMEs form a
significant portion of businesses in both the formal and informal sectors (Ahmed Agyapong, 2020)
It's exciting to see the positive impact of SMEs in Ghana's economic development. As SMEs continue
to grow, they will create more employment opportunities and contribute to poverty reduction
(Ansong, 2015).

2.5.2 Corporate Governance for SMEs

Corporate governance has always been connected to bigger businesses and the agency problem.
Because of the relationships between management and stockholders, agency problems can occur.
Conflicts of interest arise when employees of an organization have interests that contradict the
company. This is mostly because ownership and control of the company are distinct.
Since agency issues are less common in SMEs, it is easy to assume that corporate governance does
not apply to them. SMEs are frequently composed of the owner alone, who serves as both the
management and the single proprietor (Hart, 1995). In general, SMEs and larger companies tend to
have a less obvious division of ownership and management.
Some contend that because SMEs employ few people, most of whom are the owner's relatives and so no
requirement for corporate governance in their business operations due to the separation of ownership and
control. Furthermore, there is no issue regarding SMEs' public accountability. because they are not reliant
on government funding. Most firms, particularly sole proprietorships, are exempt from the requirement to
make any disclosures. The members' shared objectives are to maximize profit, increase net market value,
and minimize costs because there isn't an agency problem. Members also don't consider the results of
organizational actions that will lead to conflict. They obtain immediate rewards; therefore they don't
need incentives to be driven. Consequently, there is no need for corporate governance to settle disputes
because none exist.

Despite these defenses, the application of corporate governance to small and medium-sized
enterprises (SMEs) is a global concern. There is a common argument that comparable rules that
govern public firms ought to apply to SMEs as well (Jensen, 2003) provides an illustration of
things to consider while attempting to enhance a governance framework. Six essential
components make up efficient systems. Characteristics of effective governance systems include:
1. top-level limited partnership agreements that forbid headquarters from using funds from
one division to cross-subsidize another;
2. high-equity ownership held by board members and managers;
3. board members who, collectively, personally possess a sizable portion of each subsidiary
company's stock owners;
4. tiny boards of directors (of the operational firms), usually made up of no more than eight
members;
5. Usually, the only insiders on the board are the CEOs; and
6. CEOs who are not often the board chairman.
A corporation that uses the stakeholder model has obligations to its stakeholders as well as its
shareholders. This method views companies as socially conscious entities and highlights the long-term
contributions provided by stakeholders. As a result, in addition to a company's financial performance, one

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should consider its employment policies, market share, and expansion of its trading ties with clients and
suppliers. There have been some justifications offered for involving stakeholders, such as small and
medium-sized businesses (SMEs), in the corporate entities' governance processes (Adjasi, 2014).

2.5.3 Benefits of corporate governance to SMEs

Some believe that small and medium-sized enterprises (SMEs), particularly those that are growing and
entrepreneurial, should adopt corporate governance practices to benefit from the advantages that come
with it. This section delves into these benefits, discussing them and highlighting how they apply to SMEs
in Ghana. Growing entrepreneurial firms are those that have the drive and ambition to expand beyond
mere survival and achieve sustainable growth. Although the benefits of corporate governance are usually
associated with larger companies, they can also be applied to SMEs. By implementing corporate
governance practices, SMEs can also experience rapid growth and reap the benefits that come with it.
SMEs require resources to grow and operate their business effectively. These resources include
knowledge of best practices in their industry, good business strategies, and guidance on business
operations. External board members or non-executive directors can provide these resources, just like they
do for listed firms. Studies on listed firms have shown that corporate performance is influenced by the
strategies they adopt (PORTER, 1997), and external board members can challenge these strategies
proposed by management. This could lead to better management decisions and help SMEs attract better
resources. Access to finance is a significant obstacle to the growth and performance of the SME sector in
Ghana. Incorporating corporate governance into the sector could help reduce this constraint. The
involvement of external board members is crucial, as they have a high incentive to introduce ways of
attracting finance. Additionally, non-executive directors can introduce creativity and innovation by
providing opinions and suggestions during the decision-making process. SMEs with very high growth
rates in the Japan Small Enterprise Agency use non-executive directors more actively than larger firms.
As entrepreneurial firms expand, the need for professional managerial practices and governance arises.
This marks the beginning of a separation between owners and management. However, issues of agency
can persist between non-family professional managers and owners. It is important to note that these non-
family professionals require motivation and incentives to benefit from their expertise. Additionally, for
optimal performance from managers, the governance of business units must be clear and distinct.
Accounting controls and internal audits must be implemented to ensure proper management.
In Ghana, many small and medium-sized enterprises (SMEs) are run by less competent managerial staff,
such as sole proprietors and family members. To address this issue, corporate governance can be
implemented to create a board of external directors who can introduce independent best practices and
stricter internal control measures to the business. However, this may also lead to tension between the
owner and the board of directors, especially in sole proprietorships. Despite this, SMEs with a corporate
governance structure can overcome problems arising from poor managerial competencies and benefit
from the expertise of board members, resulting in increased profits. By separating the management from
the control of the board, the owner-operator can be freed from operational duties and disputes can be
prevented. This division mimics the separation between the manager and the owner. Large listed entities
face a similar challenge when it comes to ensuring that managers are accountable to the owners.
Misunderstandings between managers and owners or a failure to separate the two functions often lead to
conflicts in closely held companies (Adjasi, 2014). For firms, corporate governance is essential, for new
funds, as it prepares them for possible future growth or a sale. However, it takes time to be fully listed,

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and during this period, corporate governance becomes especially important. Gaining the trust of the
market requires a continuous record of effective governance. If SMEs infuse corporate governance
structures at an early stage, they will gain experience and instill discipline in the management of the firm.
This is important because external parties ensure sound management practices.

Corporate governance allows firms to prepare for their pending initial public offering (IPO) (Kyereboah-
Coleman, 2007). Early introduction of corporate governance will prepare an SME well enough even
before it gets listed under the provisional listing regime. Effective corporate governance strategies help
small and medium-sized enterprises (SMEs) increase their chances of getting funding from investors and
financial institutions. This is precisely the result of following correct bookkeeping, accounting, and
information disclosure procedures, which boost investors' trust in the company (Adjasi, 2014).

However, there are also disadvantages of corporate governance. The introduction of corporate governance
will mean additional roles in audit, remuneration, and nomination committees, and new and more
directors will have to be hired. The non-executive directors will also have to be paid higher remuneration
because of the active roles they will play. Thus, the introduction of corporate governance into SME
activities will increase operational costs in the form of higher start-up costs, which could deter many from
starting a business. The government can resolve this problem through the introduction of subsidies for
SMEs (Ahmed Agyapong, 2020).

It is important to draw attention to the issue of stakeholder theory on corporate governance. Corporate
governance mechanisms must incorporate all stakeholders, including shareholders, to attain the prime
objective of its principal, and fulfill a contractual obligation. The incorporation of these groups of
stakeholders on the board of firms will induce rapid growth strategies in the SME for rapid profits, which
will at a point require the firm to go public for larger finances (Amy J. Hillman, 2015).Thus the transition
from a small to a medium and finally large company will be smoothly aided by an effective corporate
control system (Adjasi, 2014). Corporate governance reduces the problems associated with information
asymmetry and makes the SME less risky to invest in (Adjasi, 2014). To promote corporate governance, it
is important to include previously excluded groups in the decision-making process. However, it is
important to note that this approach can lead to sub-optimal outcomes for SMEs. Although all
stakeholders have a common interest in the success of the business, their interests may not always align.
Some stakeholders may "free-ride" or shirk their responsibilities, which can hinder the achievement of
common goals. Furthermore, in countries like Ghana, stakeholders may demand unrealistic wage
increases, which can negatively impact not only SMEs but the entire economy (Adjasi, 2014). Therefore,
it is important to exercise caution when including stakeholders on boards, as it can result in ill-informed
individuals holding firms to ransom and making it difficult for boards to take action.

2.6 Empirical Review

Numerous studies have been conducted on the importance of corporate governance practices to
corporations in Ghana and other parts of the world. These studies have primarily focused on SMEs

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Several of these studies on public and listed firms have examined the effect of corporate governance on
various firm outcomes, such as solid value, athletic performance, earnings management, and disclosures,
among others. Examples of such studies include (Addo, 2021), (Hamdan, 2021) , and (Thomas Bilaliib,
2019).
The literature lacks a connection between the corporate governance practices of small and medium-sized
enterprises (SMEs) and their impact on business outcomes. In Ghana, SMEs make up the largest number of
private sector entities and are responsible for creating most of the jobs in this sector. However, the lack of
access to finance has been a significant challenge for these businesses, attributed to weak governance
structures and practices. This issue has been identified in previous studies by (Peter Quartey, 2017) and
(Adjasi, 2014).

Studies have shown that adopting good corporate governance practices can lead to several benefits for
companies. Firstly, it can help in improving the internal operations of a firm, including strategic direction,
financial expectations, transparency, and shareholder activism. Secondly, it can enable the firm to attract
capital to expand its operations. Good corporate governance practices have been found to positively impact the
financial outcome of small and medium-sized enterprises (SMEs), as reported by public entities.

Corporate governance studies have received diverse opinions concerning the appropriate governance structures
and practices that can influence firm outcomes (Khoury, 2022). The literature has focused on several corporate
governance practices, including the size of the board, board independence, CEO duality, and tenure. Other
studies have recommended the inclusion of variables such as board managerial competence, financial
disclosures, and transparency as part of corporate governance practices (Addo, 2021); (Ansong, 2015);
(Dzigba, 2015). The impact of these variables on the financial performance of SMEs differs from one study to
another, possibly due to the variations in SMEs' characteristics and corporate governance regulations.

In a Ghanaian context, (Biekpe J. A., 2007) conducted a theoretical study on the corporate governance of
SMEs and argued that adopting good governance practices would boost SMEs' financial performance, increase
their access to capital, and enhance the level of managerial competence. However, their study did not analyze
these factors empirically, which is what this current study aims to do. (Mahzana, 2013), the study found that
SMEs have very weak corporate governance practices, but if given adequate attention, it has the potential to
enhance their financial performance. So far, there is little evidence on how corporate governance practices
affect SMEs' financial performance, which justifies the necessity of the present study.

2.6 Corporate Governance and Financial Performance

(Qianhua Lei, 2006) , Demonstrated that corporate governance can improve the performance of firms by
reducing both the waste of capital and the cost of capital. (Ahmed Agyapong, 2020), defined value-
decreasing activities as managers' perquisites consumption, stealing of corporate resources, and inefficient
investment. Corporate governance plays a crucial role in enhancing firm value by reducing such activities
(Qianhua Lei, 2006). Adjasi (2014), showed that effective corporate governance reduces the optimal
level of perks, making managers more willing to invest in risky but profitable projects. (Milosevic, 2015)
argued that good corporate governance also reduces the resources under managers’ control, resulting in
less free cash flow problems. The reduction of free cash flow can be viewed as a positive outcome as it
can prevent managers from making poor investment decisions.
Indirectly reducing the waste of capital, managers now have limited discretionary resources to
appropriate, according to (Qianhua Lei, 2006). According to Adjasi, (2014) has also argued that good

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corporate governance practices improve the prospects of small and medium-sized enterprises (SMEs) in
acquiring capital from financial institutions and investors. This is a direct result of accurate bookkeeping,
accounting procedures, and information transparency, all of which boost investors' trust in the company.

Small and medium-sized enterprises (SMEs) can benefit from having external supervisory parties, as it
can lead to healthier growth and a stronger commitment to business efficiency. Good corporate
governance practices can help to reduce non-productive activities such as shirking, excessive executive
remuneration, asset-stripping, and related-party transactions (Dzigba, 2015). This leads to lower agency
costs, better shareholder protection, and a greater willingness to accept lower returns on investment. As a
result, SMEs can enjoy higher profits and lower costs of capital, making them more attractive to external
financiers. Additionally, managers are less likely to make risky investment decisions and can focus on
maximizing value in a way that facilitates organizational efficiency. Overall, the benefits of good
corporate governance include higher cash flows and superior performance for SMEs.

The connection between firm performance and corporate governance is a topic that has been studied
extensively. However, the empirical findings on this relationship have been mixed. While some studies
have found that there is no positive relationship between corporate governance and firm performance,
others have affirmed such a relationship. For example, some studies have shown that better-governed
firms have higher market value, higher profitability, higher dividend payments, and higher return on
assets (ROA) (Anthony Kyereboah-Coleman, 2007).
Recent evidence suggests that the correlation between good governance and abnormal returns has
disappeared. This is because most market participants have learned to incorporate good governance
indices in their decision-making, which means that effective governance does not offer a significant
competitive advantage. However, these indices continue to offer a potentially effective tool for
researchers and market participants to evaluate firm value and operating performance (Ahmed Agyapong,
2020).
Most of the empirical studies on corporate governance and firm performance have been conducted in the
large company sector. Only a few studies have been conducted in the SME sector, and none have
investigated the phenomena based on corporate governance variables applicable to this sector. In the next
section, we will discuss the relationship between the independent, control, and mediating variables, and
the dependent variable (financial performance) (Alex Antwi-Adjei, 2020).
Conclusion
After conducting an extensive analysis of various scholarly works, valuable insights have been gained
into the challenges, opportunities, and factors that affect corporate governance within this specific
context. The literature review has emphasized the significance of effective governance mechanisms in
improving the performance, sustainability, and competitiveness of SMEs that operate in Accra's dynamic
business environment. Additionally, it has identified important elements of corporate governance
frameworks, such as board composition, ownership structure, disclosure practices, and regulatory
compliance, that are essential for SMEs in Accra to navigate successfully.
Furthermore, the review has highlighted the significant role played by cultural, institutional, and
contextual factors in shaping corporate governance practices within the SME sector in Accra.
Understanding these contextual nuances is necessary for developing tailored and effective governance
strategies that align with the specific needs and dynamics of SMEs in the region. The insights gleaned
from this literature review will inform the subsequent chapters of the research, guiding the development
of research hypotheses, methodology, and data collection instruments. By building upon the existing body

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of knowledge, the study aims to contribute to the advancement of corporate governance theory and
practice, particularly within the context of SMEs in Accra.
Ultimately, this chapter underscores the importance of addressing governance challenges facing SMEs
and emphasizes the potential for enhancing their sustainability and growth through effective governance
mechanisms.

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