International Journal of Economy, Management and Social Sciences, 2(8) August 2013, Pages: 616-619

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

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Corporate Governance Perspectives for Zimbabwean SMEs

Gibbet Murambiwa Magaisa *1, Satinder Duggal 2, Rafael Muhwandavaka 3
1

Christ University India, Christ College an Affiliate of Great Zimbabwe University: Zimbabwe- Australian Institute of Business Facilitator Australia.
Christ University India.
3
Christ College an Affiliate of the Great Zimbabwe State University - Zimbabwe.
2

AR TIC LE INF O

AB STR AC T

Keywords:

This paper is designed to unlock the importance of Corporate Governance in the Manufacturing
Small and Medium Enterprises (SMEs) in Zimbabwe. Corporates and their Executives need to
account for their actions and activities. SMEs and their Executives are not exceptional to the rule.
The sample size of this research paper consisted of 1 000 SMEs located in 5 out of a total of 10
Zimbabwean Provinces, namely Bulawayo Metropolitan, Harare Metropolitan, Matabeleland
North, Matabeleland South and Midlands. The research instrument used was the self-administered
questionnaire. Data collected was analyzed using both inferential and descriptive statistical tools.
Results obtained from the study revealed that corporate governance is not applied in SME
Organisations. The paper recommended the application of corporate governance in SME
Organisations to separate the owners from the organisations.

Corporate Governance
Shareholders
Stakeholders
Strategic Management
Strategies

2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

Hunger & Wheelen (2002:26) define a corporation as a mechanism established to enable different parties to contribute capital, expertise,
and labor for their mutual benefit. The investors or shareholders participate in the profits of the enterprise without being responsible for the
operations of the enterprise. To facilitate this to happen, laws have been passed enabling the shareholders to have limited liability and
limited involvement in the corporations activities. The shareholders have a right to elect directors who have a legal duty to represent the
shareholders and protect their interest. Directors being the representatives of the shareholders; have both the authority and the responsibility
to establish basic corporate policies and to ensure that they are followed (Monks and Minow, 2004).

2.

Literature review

Wheelen & Hunger (2003) allude that the board of directors has, therefore an obligation to approve all decisions that might affect the longrun performance of the organization. This means that the board of directors supervises the top management with the concurrence of the
shareholders. The term corporate governance refers to the relationship that exists among the shareholders, board of directors and top
management.
According to Thompson and Strickland (2003:23) the responsibility for crafting and executing strategy falls to top management, the role of
the board of directors is to exercise oversight and see to it that the strategic management concepts are being applied in such a manner that
benefits the shareholders. It is standard procedure for executives to brief board members on important strategic moves and to submit the
companys strategic plans to the board for official approval. Directors rarely can or should play direct hands on role in formulating or
implementing a strategy.
The immediate role of the board of directors is to be supportive, criticize the strategies and be able to come up with their own independent
opinions on whether proposals have been adequately analyzed and whether proposed strategic actions appear to have greater promise than
available alternatives.
2.1 Responsibilities of the Board
Wheelen & Hunger (2003:27) point out that the major responsibilities of the board of directors are, setting corporate strategy, overall
direction, mission or vision. Hiring and firing the Chief Executive Officer and the top management; they also assume the function of
controlling, monitoring, or supervising the top management; reviewing and approval of use of resources as well as caring and protecting the
shareholders interests. The board is required to direct the affairs of the corporation but not to manage them, in a legal sense the role of the
board of directors according to Wheelen & Hunger (2003) are to monitor the progress of the strategic management plans through its
committees and bring to the attention of management developments they might have overlooked. A board can evaluate and influence
proposals made by management, decisions and actions, agree or disagree with them, give advice and offer suggestions to management. The
board can initiate and determine a corporations mission and specify strategic options to its management.
* Corresponding author.
Email address: mgibbet@yahoo.com

Corporate Governance Perspectives for Zimbabwean SMEs

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(8) Au gust 2013

2.2 Trends in Corporate Governance

The role of the board of directors in corporate strategic management according to Wheelen and Hunger (2003) is likely to be much more
effective in the near future. Cadbury Report (1992) states that these boards are getting much more involved; not only in reviewing and
evaluating company strategy, but also shaping it.
2.3 Principal Agent Theory
The agency theory is often traced back to (Berle & Means, 1932) some authors suggest that this can be traced back to Adam Smith in 1776
and his renowned book, The Wealth of Nations. Letza Sun & Kirkbride (2004) point out that the agency problem was effectively
identified by Adam Smith when he argued that company directors were not likely to be careful with other peoples money as they would
with their own.
This has eventually led to subsequent review of a set of contradicting relationships among individuals. The most important among these
was the agency relationship, defined as a contract under which one or more persons (the Principal(s) engage another person the (agent) to
perform some service on their behalf that involve delegating some decision making authority to the agents (Jensen & Meekling, 1976:308)
the agency relationship can be a problem because the agent may not always act in the best interest of the principal(s). Agency costs are then
incurred by the principal, which include monitoring costs incurred by the principal.
Bonding costs incurred by the agent and reduction in welfare resulting from decisions taken by the agent which are not consistent with the
maximization of the principals welfare moreover, Jenson & Meekling were fully aware that it was costly, if not possible, to write up
contracts which would clearly define the rights of principles for all possible contingencies.
Shleifer & Vishny (1997) argue that the agency problem is an important element of the contractual view of the firm. The analysis then
focuses on the impossibility of writing complete contracts, and the complexities arising from incomplete contracts. Hart (1995) gives three
reasons why principals and agents tend to write incomplete contracts. Firstly, it is impossible for people to think ahead and plan for all
possible contingencies, secondly, it is hard for the contracting parties to negotiate effectively, especially where prior experience may not be
helpful guide. Thirdly, it is difficult for plans to be written down in such a way than an outside authority such as a court of law will be able
to interpret and enforce the contract. Aghion & Bolton (1992) argue that as a result of contractual incompleteness and wealth constraints it
is impossible to resolve all potential conflicts between the agent and principal.
2.4 Stakeholder Theory
Some argue that the principal agent model appears to focus exclusively on the interests of the shareholders. It may happen that managers
are over concerned with shareholders who are interested only in short term profits and consequently managers neglect the long term.
Blair (1995:13) refers to this situation as market myopia. Short run gains are made at the expense of long term performance. One
solution to this problem would be to encourage long term shareholding. A more fundamental concern is that, what is optional for
shareholders often is not optional for the rest of society. That is the corporate policies that generate the most wealth for shareholders may
not be the policies that generate the greatest total social wealth. The stakeholder theory stands in in direct contrast to the principal agent
theory. Principal agent theory has an underlying assumption that profit maximization is the main motivation for a companys strategy and
tactics, stakeholder theory instead stresses the importance of all parties who are affected, either directly or indirectly, by a firms operations.
Stakeholder refers to any party that has a stake in the company, while this obviously includes the shareholders and directors {principal and
agent in agency theory}, other parties such as employees, bankers, customers, suppliers and the like can also be stakeholders (Wearing,
2005). Boards must understand that they are representatives of all important stakeholders in the firm. This includes all those whose
investments in physical or human capital are at risk. Thus individuals who explicitly represent critical stakeholders should be put on boards,
as an assurance that their interests would be taken into account (Blair, 326).

3.

Research methodology

The research design applied was motivated by the exploratory nature of the research. The SMEs in the 5 Provinces out of a total of 10
Provinces of Zimbabwe were chosen through the stratified random sampling technique as follows:

Harare Metropolitan 400

Bulawayo Metropolitan 300
Bulawayo North 100
Bulawayo South 100
Midlands 100

A total of 1 000 self administered questionnaires were sent to owner/managers and their employees who validated their responses. The
response rate of 100% was achieved due to constant follow ups made by the researcher. The research instrument was validated by 5 Experts
in the area of study and their comments were incorporated on the research instrument. Reliability of the research instrument was tested on
the Cronbachs Alpha and the results obtained are as below:Case Processing Summary

Cases

Valid
Excluded
Total

N
1000
0
1000

%
100.0
.0
100.0

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Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sc iences , 2(8) Au gust 2013

Reliability Statistics

Cronbach's Alpha
.864

N of Items
51

The Cronbachs Alpha value of 7 and above is considered good and according to the above test results a value of 9 is considered good and
reliable. The checks and balances in this regard are appropriate to produce results that are valid reliable and generalizable.

4.

Results and discussion of findings

Inferential and descriptive statistical tools of analysis were applied in this paper to analyze data collected from the field. Of the 1 000
respondents 52% are male and 48% are women. The respondents who are in the 20- 29 years age group constitute 16%, 30-39 years are
50%, whereas those in the 40-49 years age group constitute 32% and those who are 50 years and above constitute only 2%. Marital status
of the respondents is that 72% are married, 22% are single and 6% are widowed. The sample indicated a relatively well educated sample of
respondents with 64% having done O Levels, 30% A Levels; 4% First Degrees and 2% Masters and above. SMEs that had operated for
a period of 1-5 years were 84%; whilst those in the 6-10 years were 2% and those in the 11 years and above were 14%. The SMEs that had
1-5 employees constituted 88%; whilst those with 6-10 employees were 4% and those with 11 employees and above were 8%.
The respondents were asked whether they applied corporate governance in their organizations and only 2% of the respondents applied
corporate governance.
One Way Anova Statistics Results

Parameter
Corporate Governance

Sum of squares
2.674

df
1:998

Mean Square
2.674

F
8.239

Sig
.004

The above statistical results indicate how important stakeholder concerns are. The Sum of Squares = 2.674, df = 1:998, Mean Square =
2.674, F Value = 8.239, Significance Level = 0.004. The results obtained from the study indicated that 52% of the respondents were
neutral, 44% disagreed, 2% strongly disagreed whilst only 2% agreed. The results in terms of application of corporate governance in SMEs
are not pleasing.

Figure 1

Corporate Governance Perspectives for Zimbabwean SMEs

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(8) Au gust 2013

5.

Conclusion

The trend that is usually found in the SMEs set up where the owner/manager eventually does everything makes it difficult for the
organizations to have board members who are separate from the stakeholders and who are capable to run and account for the running of the
organizations. Failures by many SME Organizations are attributed to the way these organizations are run. Boards of Directors are
specifically designed to bring in new ideas, facilitate in the formulation and implementation of strategies and account for the way the
corporations are run. This is what lacks in the SME set up. This paper therefore recommends the use of corporate governance in SME
Institutions for the provision of ideas that might lead to the growth of these organizations and make them accountable to the stakeholders.

References
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