Sme Governance The Hidden Weakness In Our Backbone Economy

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WHEN Malaysians hear the phrase ‘corporate governance’, many immediately picture the boardrooms of listed companies on Bursa Malaysia. We imagine annual general meetings, audit committees and glossy reports.

Yet, the truth is that the real governance crisis is happening elsewhere. It is taking place quietly, but with serious consequences, in the small and medium-sized enterprises (SMEs) that make up the fabric of our economy.
These businesses, spread across kitchens, workshops and small factories, account for 97% of Malaysia’s enterprises. They contribute close to 38% of national GDP and provide employment for nearly half of the country’s workforce.
They are the backbone of our economy, yet their governance structures remain alarmingly fragile. If SMEs are the backbone, then corporate governance is the skeleton that holds that backbone upright. Without it, the entire system weakens.
Critical governance issues in SMEs
At the core of the problem are three governance failures that continue to undermine accountability, transparency and long-term sustainability of SMEs.
One pressing weakness is the concentration of power and weak accountability. Most SMEs are family-owned, and in many cases, founders or majority shareholders hold absolute control.
This allows decisions to be made rather quickly. However, it leaves little room for transparency or oversight. Without checks and balances, mistakes go unchallenged and succession disputes often erupt when leadership transitions are needed.
Equally damaging is poor record-keeping and lack of transparency. Many SMEs operate informally, keeping incomplete or inaccurate financial statements.
This weakens their credibility with banks and investors, shutting them out of loans, financing and even government assistance schemes. A business without reliable records is effectively invisible to the financial system, hence limiting its ability to grow.
Adding to these challenges is the low awareness and limited governance capacity among entrepreneurs. Too many dismiss governance as something only large corporations can afford. Training and advisory support remain scarce.
As a result, many SMEs do not know how or where to start. This mindset traps them in informality and leaving them unprepared for the demands of modern business.
The cost of ignoring governance
(Image: Bernama)Weak governance in SMEs is not a minor flaw but an economy-wide risk. When financial records are unreliable, SMEs are locked out of financing, leaving them exposed during downturns.
When they fail to meet global supply chain standards, they are excluded from export opportunities. When transparency is lacking, they lose the trust of increasingly vigilant consumers.
The risks go beyond the business itself. Leadership concentrated in a single individual makes firms dangerously fragile. A personal crisis, poor judgment or financial shock can trigger collapse, wiping out jobs and livelihoods.
Neglecting governance in SMEs therefore does not only weaken individual companies. It undermines the resilience of Malaysia’s entire economy and threatens national competitiveness in a global environment that demands accountability and transparency.

Closing the governance gap
Malaysia cannot afford to ignore the governance gap in SMEs any longer. Policymakers, universities and financial institutions must work together to redefine governance in ways that are practical for SMEs.
The first step is a tailored SME Corporate Governance Code that is simple, practical and scalable. Digital tools such as mobile-based accounting apps, e-invoicing and QR Pay should be promoted to make record-keeping affordable and efficient.
Training and advisory programs must be expanded, with universities, business associations and accounting schools playing leading roles in building SME governance literacy.

Financial institutions must also do their part by creating incentive-based financing schemes where banks reward SMEs that adopt good governance practices with better loan terms and faster approval processes.
These measures would transform governance from a regulatory burden into a strategic advantage. They would help SMEs access capital, scale operations and build resilience.
Governance is the passport to SME survival
SMEs are the lifeblood of Malaysia’s economy. Their sustainability is directly linked to household incomes, employment and national competitiveness. Yet their survival is threatened by weak governance.

Without reform they will remain excluded from financing, shut out of international markets and distrusted by consumers.
Corporate governance is not only for big corporations. For SMEs, it is the passport to survival. It is the tool that allows them to endure challenges, grow sustainably and secure their place in Malaysia’s economic future.
If we want the backbone of our economy to remain strong, governance reform cannot be delayed. The time for improvement is now.
Dr Dalilawati Zainal is a senior lecturer at the Department of Accounting, Faculty of Business and Economics, Universiti Malaya.

The views expressed are solely of the author and do not necessarily reflect those of  MMKtT.
- Focus Malaysia.

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