Should small company governance be different?

The question is part of the green paper that the European Commission issues a few months back as part of its general review of corporate governance arrangements in the European Union. The EU has previously shied away from going into the governance business, after member states asserted the priority of national law. But after the financial crisis, the status quo no longer sufficed, so the green paper was a first step towards some sort of new regulatory drive. Its wide-ranging questions started, though, with that particularly problematic one. Does size matter? Although its question concerned only companies with equity trading on public markets, the commission's question raises the spectre that corporate governance regimes and perhaps even law might extend obligations currently faced by large listed enterprises to private companies and even micro-businesses. Yes, size matters and there an end to it! Perhaps.

The green paper consultation was drawing to a close when a group of Canadian academics and practitioners weighed in. Writing to the commission on all the points raised, they started with this one. It's worth reading at some length:

Inevitably, good governance will look somewhat different depending on a company’s scale and dimensions. But, a diminutive corporate size, we maintain, is not a suitable reason to relax or diminish the principles of good governance. There is a compelling business case to be made for smaller companies to adopt good governance principles and to adhere to – or aspire to – lofty governance standards as a goal. The need to create standards and behaviours that add value by adopting good governance principles is as important for small and medium-sized enterprises (SMEs), we argue, as for larger enterprises.

… although overshadowed in the business press and in the public consciousness by larger market-cap companies, are in many ways the lifeblood of most economies and markets in Europe, in North America and elsewhere. To state the obvious, SMEs are, in many cases, the next generation of large market-cap enterprises. As larger enterprises, these companies and their governance practices will increasingly come under the microscope and be subjected to the heightened scrutiny by shareholder activists. If SMEs had not begun with a proper corporate governance culture, it becomes more difficult to overcome this as they grow.

So, size matters not as much as culture, and you need to get the culture right from the outset. Perhaps. The emphasis in this submission is on culture, not architecture, not the superstructure of committee and board balance and measurements of independence and all the trapping of best practice. Culture is a state of mind, in directing an enterprise of whatever size.

Source document: The submission by Canadian academics and practitioners to the EU consultation is a 53-page pdf file.