A Theory of SME Governance Regulation

Small and medium enterprises (SMEs) are very important to any economy. They are great job creators, helping to reduce poverty and achieve higher levels of development in all economic sectors. However, SMEs are susceptible to inadequate law and regulation, mainly in countries implementing policies that are hostile toward private enterprise. SMEs, the vast majority of which are private companies, must deal with issues not common to public corporations, and, they should be regulated accordingly. Hurdles that are too difficult to overcome will reduce the rate of firms entering the market. Having an adequate regulatory environment, with low hurdles for company formation and maintenance means that appropriate rules should be in place. Such rules should adequately regulate certain other aspects to foster investments, such as fiduciary duties, property rights and contractual relationships. This paper proposes to establish an analytical framework to be used as a background and a foundation for the promulgation of rules regulating SMEs. We will demonstrate that regulations should be issued only in accordance with technical justifications; otherwise, they will not offer proper guidance.