The Role of Governance in Sustainability of SMEs in Ghana: A Critical Analysis of Practical Issues

Background

Governance plays a direct role in whether a small or medium scale business survives beyond its founder, uses resources efficiently, attracts finance and responds successfully to changes in the market. In Ghana this issue is particularly important because the business sector is dominated by small enterprises and a large proportion operate informally. The 2024 Integrated Business Establishment Survey covers businesses operating from fixed premises, open spaces and mobile locations, showing the breadth and diversity of Ghana's enterprise sector.

The World Bank's 2023 Enterprise Survey for Ghana interviewed 713 formal firms between February 2023 and February 2024. Of these, 52.5% were small firms employing 5 to 19 workers, 37.7% were medium sized firms employing 20 to 99 workers, and only 9.8% were large businesses. Governance problems in small businesses are often different from those found in large corporations. Small firms may not need elaborate boards or large compliance departments, but they still need clear responsibility, financial controls, reliable information and rules for major decisions.

Governance in an SME should therefore not be understood narrowly as having a board of directors. In practical terms it concerns who controls money, who makes decisions, how those decisions are checked, how employees are supervised, how conflicts are resolved, how the business complies with regulations, how risks are managed and what happens when the owner is absent.

The central argument is that governance contributes to SME sustainability when it reduces excessive dependence on individuals and replaces informal habits with systems appropriate to the size of the business. Governance can also become costly and bureaucratic if structures designed for large corporations are imposed mechanically on very small firms. The issue is therefore not simply whether SMEs have governance structures, but whether those structures solve the actual problems affecting their survival and growth.

1. Governance reduces excessive dependence on the owner

One of the most common practical governance problems in Ghanaian SMEs is the concentration of ownership, management and control in one person. The founder may approve purchases, negotiate with suppliers, receive payments, control the bank account, recruit employees and decide salaries. In many cases even experienced employees cannot make routine decisions without consulting the owner.

Consider a small furniture manufacturer employing 15 workers. If only the owner can purchase timber, approve customer credit, sign cheques and negotiate major orders, production slows whenever the owner travels or becomes unavailable. The problem is not a shortage of employees; it is a governance problem caused by excessive concentration of authority.

• Purchases below GH¢2,000 may be approved by an operations manager.
• Purchases between GH¢2,000 and GH¢10,000 may require the owner and manager.
• Purchases above GH¢10,000 may require documented quotations and additional review.

Such controls provide both speed and accountability. Delegation should not mean loss of control: good governance creates controlled delegation. Without delegation the business cannot scale; without controls, delegation may expose the firm to fraud or poor decisions.

2. Financial governance is closely connected to survival

In many owner managed businesses the distinction between the owner's money and the firm's money is weak. Revenue from customers may be used directly for household expenses, school fees, funerals or rent before business costs are settled. The business may report high sales but gradually lose the working capital required to replace stock.

Assume a retailer begins the month with stock worth GH¢80,000 and generates sales of GH¢120,000. If replacing the stock costs GH¢75,000 and operating expenses amount to GH¢25,000, only GH¢20,000 remains before taxes, debt obligations and owner compensation. If the owner removes GH¢40,000 for personal expenses, the business has consumed part of its working capital.

This is a governance failure because there is no clear rule regulating the owner's access to company funds. Good financial governance would require the owner to receive a predetermined salary or drawing while retained earnings remain within the business. The practical relationship can be expressed as: weak records lead to limited financial transparency, greater lender uncertainty, more difficult financing and restricted investment and growth. Governance does not automatically provide cheap credit, but it can make a credible business more bankable.

3. Governance determines whether a business survives its founder

Many businesses are built around the personality, reputation and contacts of the founder. Customers know the founder, suppliers negotiate directly with the founder, and bank accounts may depend almost entirely on the founder's authority. This creates founder dependency, and the danger becomes obvious when the owner dies, becomes ill or wishes to retire.

Consider a transport company with 8 vehicles. The founder knows which vehicles have loans, which drivers owe money, which customers receive credit and which suppliers provide spare parts. If these arrangements exist mainly in the founder's memory, a sudden absence creates confusion even though the company still owns valuable assets. Family members may then dispute ownership, withdrawal authority, succession to managing director, and entitlement to profits. The physical assets may remain intact while poor governance destroys the enterprise.

• Documented ownership and shareholding
• An updated will where appropriate
• Nominated successors for key roles
• Clear bank account signatories
• Records of important contracts and liabilities

Succession planning is sometimes misunderstood as planning for death. It is better understood as reducing key person risk.

4. Family involvement can provide trust but also create governance problems

Relatives may provide initial capital, inexpensive labour, trusted management and support during difficult periods. However, family relationships can conflict with commercial decisions. A founder may retain a relative who lacks the required competence because dismissal could create family conflict. Children may expect management positions because of inheritance rather than capability.

A practical example is a bakery where the owner's brother manages procurement but repeatedly purchases flour above competing prices. Because confronting him may affect the family relationship, the owner tolerates the inefficiency and the business carries the financial cost. Good governance does not require eliminating family members; it requires separating three roles — family member, owner and employee. Salary should relate to work performed, while dividends should relate to ownership.

5. Governance improves accountability and reduces fraud

Small firms are particularly vulnerable to internal financial leakage because duties are often not separated. One employee may receive customer payments, record those payments, deposit the money and reconcile the bank statement, controlling the entire transaction chain. If GH¢500 is removed from daily cash receipts, the same employee may also alter the records.

• One person receives cash; another records sales.
• A supervisor performs reconciliation and the owner reviews exceptions.
• Regular stock counts and numbered receipts
• Bank and mobile money reconciliation
• Defined spending limits

The fundamental principle is simple: the same person should not initiate, approve and verify an important financial transaction whenever reasonable separation is possible.

6. Good governance supports better access to finance

High interest rates, collateral requirements and cautious lending certainly matter, but governance problems on the borrower side also contribute. Financial institutions need to answer basic questions: what are annual sales and actual profit, how much debt already exists, what assets belong to the business, what are monthly cash flows, who has authority to borrow, and can the business continue operating if the founder is absent? Businesses without reliable records cannot answer these convincingly.

A financially disciplined SME reduces information asymmetry with lenders. An SME seeking GH¢500,000 for equipment is in a stronger position if it can present three years of financial statements, tax records, current customer contracts, cash flow forecasts and evidence of governance responsibilities. This does not guarantee approval, but it changes the quality of the financing discussion.

7. Governance improves strategic decision making

Consider a restaurant owner who wants to open a second branch because the first appears crowded every evening. A governance oriented approach would ask what percentage of sales represents profit, whether the branch operates at full capacity throughout the week or only at peak periods, how much working capital the second outlet needs, whether existing managers can supervise two locations, and whether the business can survive if the new branch makes losses for six months. Without such questions, growth itself can threaten sustainability.

An advisory board can be useful at this stage. The World Bank's SME Governance Guidebook recognises that SMEs require governance arrangements adapted to their stage of development and available resources rather than copying structures used by large companies. A three person advisory group consisting of an accountant, an experienced entrepreneur and an industry specialist may offer greater value than an elaborate formal board created only to satisfy appearances.

8. Governance influences employee performance

In poorly structured SMEs employees may receive instructions from several family members. A production worker may report to the factory manager, the owner, the owner's spouse and sometimes the owner's children. Conflicting authority creates confusion and reduces accountability, because poor performance can be justified by pointing to different instructions.

• Who supervises the role
• What results are expected
• What decisions the person can make
• How performance will be assessed

An owner can personally supervise five employees. Personally supervising 50 employees is much less realistic. Growth therefore requires a shift from personal supervision to managerial systems.

9. Governance affects procurement and supplier management

Small businesses frequently purchase from suppliers based on friendship or long standing relationships without periodically comparing prices and quality. Assume a food processor purchases packaging materials worth GH¢30,000 each month and a competing supplier offers equivalent packaging 8% cheaper. The monthly saving is GH¢2,400 and the annual saving GH¢28,800. A simple governance practice requiring at least two quotations for significant recurring purchases could protect almost GH¢29,000 annually.

Procurement governance matters even more where employees receive unofficial benefits from suppliers. Businesses should maintain approved supplier lists, compare quotations and periodically review supplier performance.

10. Governance strengthens inventory management

A supermarket may report good customer traffic but continually experience stock shortages because goods leave the shop without corresponding sales records, and manufacturers may lose raw materials through wastage or theft. Suppose a retailer purchases GH¢500,000 worth of inventory annually. A leakage rate of 3% represents GH¢15,000; at 5% the loss rises to GH¢25,000. For a small company this may represent a significant portion of annual profit. Governance therefore needs to reach the warehouse and shop floor, not remain in policy documents.

11. Formalisation and regulatory governance affect growth opportunities

The Ghana Statistical Service's 2024 business census explicitly includes formal and informal establishments, open space businesses and mobile operators, reflecting how large and diverse the informal business economy is. Remaining informal can reduce administrative burdens in the short term, but it can restrict growth. A business seeking to supply a large supermarket, government agency or multinational company may be asked for business registration, tax documentation, bank information, quality certification, audited accounts and insurance.

A micro business selling directly to individual customers may initially need only basic records, while a medium sized manufacturer seeking institutional contracts requires stronger accounting, legal, tax and operational systems. Formalisation is most effective when businesses see a clear commercial return rather than viewing it solely as government compliance.

12. Governance affects how firms respond to economic shocks

Recent Bank of Ghana data show that private sector credit and economic activity improved into 2026, with the real Composite Index of Economic Activity growing by 8.4% year on year in January 2026, while overall GDP grew by 6.0% in 2025. Improved conditions do not eliminate business risk: a poorly governed SME may increase borrowing rapidly during a recovery and become overleveraged.

• How much debt can current cash flow support?
• What happens if sales fall by 20%?
• What proportion of inputs depends on imported materials?
• How many months of operating costs are held as reserves?

Businesses that answer such questions before a crisis are more resilient. Governance converts risk management from reaction into preparation.

13. Technology adoption also requires governance

A business may receive payments through mobile money, bank transfers, point of sale terminals and cash. If these channels are not reconciled, financial leakages become difficult to detect. Passwords may be shared among employees, former staff may retain access to company email or social media accounts, and customer data may be stored on employees' personal phones.

• Who controls passwords
• Who can approve electronic payments
• How customer information is stored
• When former employees lose access
• How digital sales are reconciled

Technology improves governance only when controls accompany adoption.

14. Governance creates credibility with customers, investors and partners

Large customers are often reluctant to depend on a supplier whose operations appear completely dependent on one person. An investor considering a partnership wants assurance that money will not disappear into undocumented personal expenditure, and suppliers offering credit need confidence that payment obligations will be honoured.

15. Governance must remain proportional to the size of the business

Excessive bureaucracy is itself a governance failure. Where routine decisions take too long, the business becomes less responsive and the cost of control exceeds its benefit. The strongest approach is progressive governance, where systems become more structured as the enterprise grows in employees, capital, borrowing, ownership complexity and market reach.

Governance issues, challenges and sustainability consequences

A suggested practical governance structure for Ghanaian SMEs

A small or medium scale enterprise does not need to become a miniature public company. A workable governance model can remain simple.

• The owner or shareholders determine long term direction and major capital decisions.
• A manager controls daily operations within defined limits.
• An accountant or bookkeeper maintains financial records and prepares periodic reports.
• An independent accountant periodically reviews financial information.
• An advisory board or small formal board reviews major investments, borrowing and strategic risks.
• Employees operate under clear reporting lines.
• Major transactions leave documentary evidence.
• Business and personal funds remain separate.
• Key responsibilities are documented so the firm can continue operating when the owner is absent.

Conclusion

Governance plays a central role in the sustainability of small and medium scale businesses in Ghana because it determines how businesses make decisions, control resources, manage people, respond to risk and continue beyond their founders. In the World Bank's 2023 Ghana Enterprise Survey small firms accounted for 52.5% of surveyed enterprises and medium firms for another 37.7%, together representing about 90.2% of the surveyed formal firms. Governance should therefore not be treated as an abstract corporate concept reserved for listed companies.

For a Ghanaian SME, governance appears in ordinary decisions: whether the owner withdraws business money without recording it, whether stock is counted, whether relatives are accountable for performance, whether an employee can approve his or her own expenditure, whether important contracts are documented, whether the business can operate in the founder's absence, and whether major investments are examined before money is committed.

Ultimately, sustainable SMEs are businesses that gradually move from being controlled through the memory, presence and personal authority of the entrepreneur to being operated through reliable systems. The founder may remain central to leadership, but the business should eventually be capable of functioning without depending on the founder for every transaction and every decision. That transition from personal control to institutional capability is one of the most practical contributions governance can make to SME sustainability in Ghana.