Introduction
On May 30, 2024, the Financial Reporting Council of Nigeria (FRCN), issued the SME Corporate Governance Guidelines 2024 (SME CGG or the Guidelines). This initiative, drawing on the principles of the Nigerian Code of Corporate Governance (2018) and global best practices, is tailored to the unique needs of micro, small, and medium enterprises. The Guidelines aim to improve Nigeria’s business environment, enhance transparency, accountability and performance among Micro, Small and Medium-sized Enterprises (MSMEs), increase their capacity to strengthen governance practices, foster stakeholder trust, and facilitate access to finance for sustainable economic growth.
SMEs make up approximately 96% of Nigerian businesses, generate nearly 84% of private sector employment, and contribute roughly 48% to the national GDP. Yet, poor governance remains a key impediment to their growth, access to capital, and resilience. The Guidelines consists of six (6) sections and eleven (11) principles together with practices recommended by the Guidelines for the implementation of each principle and apply to all MSMEs operating in Nigeria as at the effective date decided by Council.
The Guidelines, though voluntary, create a foundation for ethical, transparent, resilient, and socially responsible enterprise governance.
Scope and Applicability
According to the National Policy on SMEs issued by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), an SME is defined by the following characteristics:
• Micro enterprise: Employs less than 10 employees with assets less than ₦5M
• Small enterprise: Employs between 10–49 employees, with assets ₦5M and above but less than ₦50M
• Medium enterprise: Employs between 50–199 employees, with assets above ₦50M but less than ₦500M
The Guidelines is structured around six focus areas covering eleven principles, each illustrated by practical steps SMEs can take. These focus areas are:
1. Corporate Governance Policies and Procedures
2. Board of Directors
3. Control Environment (Internal Controls, Audit, Risk Management)
4. Stakeholder Relations
5. Family Governance
6. Environmental, Social, Governance (ESG) Considerations
1. Governance Policies and Procedures
The Guidelines recommend that SMEs document and formalize a governance framework that clarifies roles, responsibilities, and authority lines. The framework should also include delegation of authority which should be explicit, ensuring decision-making is transparent. A formal succession plan should also be implemented which helps manage leadership transitions, whether planned or unexpected, supported by skills matrices and staff development initiatives.
2. Board Oversight
While micro and small entities can rely on advisory boards, the Guidelines recommend establishing a formal Board of Directors as businesses scale. Medium-scale enterprises should introduce independent non-executive directors and ideally separate the roles of CEO and Chairperson.
3. Control Environment and Risk Management
Accurate financial record-keeping is mandatory, following FRCN frameworks. Medium-sized enterprises should undergo audits and evaluate auditors’ independence and effectiveness. Internal control frameworks, periodic risk assessments, internal audit functions, and IT governance are all advocated.
4. Stakeholder Relations
SMEs must acknowledge the interests of shareholders, employees, suppliers, customers, creditors, regulators, and their local communities. The Guidelines recommend developing stakeholder communication policies to foster trust and transparency.
5. Family Governance
Acknowledging that many Nigerian SMEs are family-owned, the Guidelines propose a family constitution or governance framework. This should articulate family values, define the intersection between ownership and management, and provide structured rules on governance roles and succession.
6. ESG Considerations
SMEs are urged to adopt environmentally sustainable practices and align to international ESG reporting standards. This ensures they remain attractive to investors and comply with evolving disclosure requirements.
Benefits: Why SMEs Should Adopt the Guidelines
Although the adoption of the Guidelines remains voluntary, it offers numerous strategic and operational advantages for SMEs which include:
• Access to Finance: Demonstrable governance practices strengthen the case with banks and investors when bidding for credit facilities
• Operational Efficiency: Defined roles and oversight improve decision-making and risk oversight.
• Sustainability & Growth: Succession planning and formal structures position SMEs for long-term success.
• Stakeholder Trust: Transparent operations foster positive relationships with customers, regulators, and communities.
• Preparedness for Reporting Requirements: As ESG disclosures become mandatory, early adopters gain a competitive edge.
Practical Roadmap for SME Compliance
Implementing the Guidelines requires a staged, realistic strategy:
1. Self assessment: Evaluate current governance against the 11 principles to identify gaps.
2. Prioritize quick wins: Draft governance frameworks, establish advisory boards, and update accounting practices.
3. Capacity building: Train staff on financial controls, risk management, and board responsibilities.
4. Stakeholder communication: Initiate transparent reporting and feedback processes.
5. Monitoring and review: Conduct periodic governance audits and update policies accordingly.
6. Pursue external support: Seek guidance from consultants, advisors, and other experts.
Legal Implications for SME Stakeholders
For lawyers and compliance officers, these Guidelines present unique opportunities:
• Drafting documentation: SMEs would require lawyers and other compliance officers to prepare governance frameworks, charters, and family business constitutions.
• Advising on fiduciary duties: The need to clarify roles and responsibilities of board members, including independent non-executives as well as advise on fiduciary obligations also arises.
• Drafting financial policies: SMEs would also require expertise to implement control mechanisms aligned with the FRCN framework and audit standards.
• ESG compliance: Lawyers and compliance officers can also assist SMEs integrate relevant ESG terms into contracts and internal policies.
• M&A and restructuring: Use governance maturity as a metric in due diligence and deal negotiations.
Challenges and Considerations
The adoption of these guidelines by SMEs are not without challenges, which include:
• Resourcing constraints: SMEs may lack funds or personnel for board structures or audits.
• Cultural dynamics: Resistance may emerge in tightly-run family businesses over formal structures.
• Capacity limitations: Understanding governance principles and ESG drivers requires training.
• Regulatory framework gaps: Absence of penalties could weaken compliance incentives.
The Way Forward: From Optional to Valuable
Although voluntary, the Guidelines set a foundation for scalable, sustainable business growth. Looking ahead:
• FRCN may evolve the Guidelines into mandatory requirements, aligning with global environmental and governance frameworks.
• Integration with AfCFTA compliance and regional uniformity offers Nigerian SMEs global competitiveness.
• Formal certification or official recognition schemes could further incentivize governance adoption.
Conclusion
The FRCN’s SME Corporate Governance Guidelines are a landmark intervention in Nigeria’s economic landscape. By adapting high-level corporate governance principles to the realities of smaller businesses, the FRCN bridges a critical gap thus providing a practical roadmap to transparency, accountability, and growth. For legal advisors, governance professionals, and SME owners, these Guidelines present both a challenge and an opportunity: to professionalize governance, bolster stakeholder trust, and secure the financial resilience required for post-pandemic and global market complexities.
Ultimately, this initiative is more than a regulatory document it is a strategic catalyst. By adopting these practices now, Nigerian SMEs stand to become more bankable, sustainable, and ethically grounded, paving the way for broader economic development and prosperity.
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