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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

It is recorded that 99 per cent of the business bodies in Nigeria are MSMEs which has been an instrumental component in GDP and hub for work opportunities. Even so the identification of the important roles SMEs plays in Nigeria, their evolution is mostly bounded by a number of elements, such as the existence of laws, ordinances, and rules that frustrate the growth of the sector. The vast majority of firms globally is SMEs, and they play a significant role in the economy (Brush & Vanderwerf, 1992; Lumpkin & Dess, 1996; Wiklund & Shepherd, 2005). This means SME serves as an initial source of motivation for economic power. The situation is no difference in Nigeria. In Europe for example, this assertion is clearly demonstrated by the fact that the backbone of the European economy is SMEs which is about 98 per cent of the enterprises in the EU. In 2012, SMEs employ 67 per cent of the European workforce and generate 58 per cent of the revenue. The formal SME sector contributes 33 per cent to gross domestic product (GDP) and accounts for about 45 per cent of total employment in developing countries (IFC, 2010). SMIs in the quarrying and mining, manufacturing, energy, gas and water sectors are of particular importance in the SME sector (Wymenga, Spanikova, Barker, Konings, & Canton, 2012). SMEs contributes about 45 per cent of manufacturing employment and 29 per cent of manufacturing GDP in developing countries, in contrast to 67 per cent and 49 per cent in developed countries, respectively (IFC, 2010). This shows that the SMEs in developed countries have a higher success rate than developing countries.

Small is profitable in Nigeria. The performance and importance of SMEs going forward are bound to be even bigger and more immanent with a detectable impact on the rising world commercialism order. SMEs have to recognize what their resources are and they need to know how to utilize them, flex them into an advantage for their business. However, in the figure of the general economy, SMEs cannot compete with merely view at the cost and by simply cutting it; they need to compete on the basis of cognition and the value added (Sevrani & Bahiti, 2008). Therefore, the development of sound good government policy for SMEs is an indispensable component of the growth strategy of most economies and holds particular significance. Beck, Demirgüç-Kunt, and Maksimovic (2005) provided evidence on the importance of the financial system and legal enforcement on firm growth. From the point of persuasion of the growth of local and state economic systems, SME holds an important position. However, activity mix in the sector is also quite limited-dominated by import dependent processes and factors. For the purpose to get enough financial gain to assist reduce the prevalence of high-level economic condition in most developing economies, international funding bodies and economic process analysts have prompt to policymakers in developing economies to create larger efforts at promoting non-public sector development with SMEs being the vanguard (Snodgrass & Winkler, 2004).

Generally, the constituent and instrument of governance are the policies, rules, processes, practices, programs and institutions used in administering, directing and controlling the operations and affairs of an organization. Therefore, the elaborateness, clarity, formality and the degree of compliance with these elements and plans reflect the extent to which an organization is likely to experience good governance. Governance hinges on a clear-cut process of directing and controlling the whole essence of companies or business corporations based on the principles of integrity, honesty, transparency and accountability in order to satisfy the interests of all stakeholders.

Governance is a way of life and not a set of rules. It is more of way of life that necessitates taking interest in every business decision. A key element of good governance is transparency in projects through a code of good governance which incorporates a system of checks and balances between key players- board of management, auditors and shareholders (Jayashree, 2006). As a matter of fact, governance in Nigeria and many African countries is still at lower ebb or at a rudimentary stage as espoused by Wilson (2006). The scholar submits that governance in Nigeria is at a rudimentary stage and only 40% of companies (banks inclusive) quoted on the Nigerian Stock Exchange have recognized codes of governance in place and poor governance was one of the major factors in virtually all known instances of distress experienced by the country’s financial institutions. A common thread that ran through these monumental corporate failures was the poor governance culture, to wit, poor management, poor regulation and poor supervision (Wilson 2006).

It is therefore highly essential to give a clear picture of what governance is all about for better understanding and adherence to its basic principles by all players involved. In Nigeria, effective governance is considered as ensuring corporate accountability, enhancing the reliability and quality of financial information. It is imperative to understand that the proper implementation of good governance does not necessarily guarantee success of the organization. The reality today is that, SMEs may appear small in size but likely many of them have potentials for growth and become big entities in future. The Code of Best Practices for Governance in Nigeria was adopted only in 2002, and revised in 2009 (Olajide, 2010). While this may partly explain the relative infancy of governance entrenchment in Nigerian firms, it however sharpens the need to examine the extent to which the adoption of governance codes contributes to Small and Medium Sized Enterprises (SMEs). SMEs in Nigeria form large segment of business activities. Generally, they take the form of private companies owned by small number of shareholders. Often have less than 100 employees. Such companies are usually family-owned run by family members where the authorities and powers are generally held by an individual normally the major shareholder. For that reason, the owners commonly consider them as running their personal properties. This paper therefore is poised to examine how governance in small scale enterprises would influence the operational management. The foregoing therefore necessitates the assessment of governance and strategies for sustainability in small scale enterprises in Nigeria.

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