Corporate Governance and Succession in SMEs

A Debate

Outline

Governance Succession SME’s in Latin America: Mexico

Case Study: Cineapolis SME’s in Africa SME’s in Asia Conclusion

Governance

• Structures put in place to discuss and decide the right issues at the right time by the right people in the right place.

• A way to integrate ownership, business and family subsystems while maintaining the necessary boundaries.

Succession

Alternative to sale or closure.

Ownership succession: the complete and irreversible transfer of ownership from one group to another.

Managerial or leadership succession: ultimate transfer of management duties and responsibility from one C.E.O to another

Barriers to Succession

FAMILY BUSINESS

Owner holds all the cards

Poor business performance

No natural or trained successors /gender issue

Unwillingness of CEO to let go

Conflict within family

NON FAMILY BUSINESS

• Owner holds all the cards

• Poor business performance

• No natural or trained successors/gender issue

• Unwillingness of CEO to let go

Overcoming these Barriers

• Plan, Plan and Plan—a process, not an event

• Reduce lifestyle issues

• Have an organization

• Develop talent—a marathon, not a sprint

• Strategic planning to determine needs of business going forward

• Implement appropriate governance

SME’s in Mexico: An Overview

5,144,059 companies 99.8% are SME’s 52% of GDP 72% of Employment Regulated by SPyME Life period: 3-5 years

Sales

ServicesComercial ManufacturingOthers

SOCIEDAD ANONIMA

Fixed or variable capital

-Shareholder’s liability

-Directors liability

A disinterested third party

Minority rights

Accounting methods

Sucession and merger

Limited Liability

Fixed or variable capital

Shareholder’s liability is

limited to their stock interest

No third party

Sucession must be

stablished sin ce the

beggining

Why SME’s collapse

Absence of planning and forward thinking

Inadequate leadership and management skills

Lack of future business plans and problems with cash flows

Inability to innovate Inadequate access to technical

assistance

Case in Mexico

Mexican Founded in 1947

Small company Family business

Cine Morelos

Cine “La raza”

Cinepolis

Structure of Cinepolis

Sons

Father

CHAIRMAN OF THE BOARD

Director Director

PROBLEM : family matters have repercussion on the business

After the Succession: Structure of Cinepolis

Family membe

rs

Son CEO

Director

Director

TODAY

Biggest cineplex chain in Mexico with 205 theaters in 65 cities

Largest chain in Latin America 230 theaters 2,160 screens 13,000 employees throughout Mexico,

Guatemala, El Salvador, Costa Rica, Panama, Colombia, Brazil, Peru and India.

SME’s in Africa: An Overview

North Africa, Mauritius, and South Africa South Africa: 55% of all jobs, 22% of GDP Nigeria: 95% of all formal manufacturing

activity Senegal and Kenya: conducive for SME’s

as well

Incentives are being given by Institutions African Development Bank, UK

Commission for Africa, International Finance Corporation, UN

Problems

Political and economic instability

Informality Limitations

brought about by the market

Lack of regulations and policies

Undeveloped regional integration

Poor access to formal financing

Management Infrastructure Unavailability of

certain raw materials

NO SUCCESSION PLANS

Possible solutions?

More Initiatives

Communication

More rigid policies

More diverse sources of financing

Succession Plan

The Asian Perspective

China is regarded as having the most competitive SMEs.

Followed by North Asian markets Japan, Hongkong, Korea and Singapore

Private-owned enterprises have chosen the highly centralized family style to be their ownership capital structure.

The Asian Perspective

Change in ownership is a dynamic evolution, which, however, is restrained by external institutional environment to appear to be ultra-stable. The changes in the corporate governance system are often more slow than necessary and, in some cases, are not even made at all. This mismatch, even if transitory, could stop the growth of family firms

Recommendation

Combining the modern market rules and the traditional Chinese culture. Admission of the difference in knowledge and

capability among people. Ownership and property rights should be

unambiguous Improvement of internal management and

training of talents to increase competitiveness.

Rely NOT on the network-based but the rule-based development.

Conclusion

There is a growing need for greater transparency and corporate governance among SME’s.

SME’s are facing the same problems all over the world.

SME’s aren’t the only ones experiencing problems in corporate governance and succession. Apple and Steve Jobs