Corporate governance in SMEs: a systematic literature review and future research

Small and medium enterprises (SMEs) incorporate nonsubsidiary, independent organizations that engage limited employees, production technologies and capital base, with the number vastly differing across regions. According to the World Bank (2021), SMEs play a significant role in many economies, especially in developing nations, as they account for most of the businesses globally and are critical contributors to job opportunities/creation and global economic growth. As of 2021, SMEs represented approximately 90% of companies and contributed to about 50% of all job opportunities globally (World Bank, 2021). Furthermore, SMEs create seven out of ten formal jobs in emerging markets. Corporate governance (CG) is critical to their success via their significant contribution to the economies. Its effectiveness can help governments and economies cover the more than 600 million jobs needed by 2030. According to Bhagat and Bolton (2019), effective CG incorporates a system of rules, processes and practices through which management and leadership direct and control the entrepreneurial firm. It essentially includes balancing the interest of the organization’s diverse stakeholders, such as government, society, shareholders, senior management, customers and financiers.

Financial reporting and CG requirements in SMEs are often lower than in larger organizations. This is because the enforcement of CG practices in SMEs is relatively recent in many countries, leading to a lack of research in this area. The limited scientific production on this topic highlights the significance and importance of conducting a review on the subject. Despite the limitations, the study on financial reporting and CG in SMEs remains a relevant and pressing issue, given the increasing recognition of their role in promoting economic growth and stability.

Given the critical importance of CG within SMEs and their importance in the global economy, this article will examine the role of CG in fostering success within unlisted SMEs and satisfying diverse stakeholders. The report will discuss the critical importance of CG in SMEs for promoting sustainability in our highly dynamic world. The article comprises various sections, including one on CG (1), to illustrate the development of CG and its different elements. Another Section (2) regards the paper’s methodology used to demonstrate how we identified various studies, to allow other researchers to replicate the current research and thus boost the understanding of the importance of CG in SMEs. Then, the following Section (3) incorporate the findings and discussion to illustrate what we identified within these articles. The last Section (4) includes the conclusions and recommendations for future research.

The concept of CG refers to a set of processes, principles and values that guide the behavior and decision-making of organizations. It serves as a framework for ensuring accountability and aligning the objectives of the corporation with those of its stakeholders. Effective CG practices are widely recognized as being critical to building investor confidence and enhancing the overall value of the firm. While there are established metrics for evaluating the governance practices of listed firms, the same cannot be said for SMEs, which often lack universally accepted governance metrics (Singh and Pillai, 2022). In recent years, CG has become a widely discussed topic within the fields of business and finance (Keasey et al., 2015). The topic of CG is divergent and enjoys an extended and rich history. According to both Drew et al. (2006) and Turnbull (1997), the term CG involves managerial accountability, board structure and other stakeholders’ rights. Cheffins (2011) argued that currently there is a lack of a definitive historical treatment of CG primarily because of the vastness of the subject. In line with Drew et al. (2006) and Cheffins (2011), the term CG has existed since the use of the corporate form developed the probability of conflict between management and stakeholders, including investors. Wells (2010) indicated that despite the vagueness around the onset of CG, the concept started at the start of company establishment within the East India Company, the Hudson Bay Company, the Levant Company and other essential chartered organizations in the 16th and 17th centuries. Cheffins (2011) stated that while CG has existed for many centuries, the term was coined in the 1970s and was only used in the USA.

In the post-World War II period, the USA experienced robust economic growth, which had a comprehensive impact on CG (Cheffins, 2011). Subsequently, corporations started thriving and developing rapidly, including their employee and capital base. However, the management solely made decisions with the directors, and shareholders had to comply with the decisions (Cheffins, 2011). According to Price (2018) and Ferraro (2019), such an approach to operations presented an exciting dichotomy, since the management was comprehensively involved in selecting the board of directors. Furthermore, unless issues involved division or stock worth, the major investors (shareholders) steered off the governance matters (Price, 2018). However, in the 1970s, elements involving CG started to further evolve when the Security and Exchange Commission introduced the features of CG (Cheffins, 2011; Price, 2018). Therefore, by 1976, CG first appeared within the federal register, which prompted the New York Stock Exchange to require that each listed company to have an audit committee composed of independent directors.

Although the aspect has faced many hindrances, including the politically motivated right-wing views of the 1980s and the financial crisis of 2008–2009, CG has grown to incorporate diverse principles (Cheffins, 2011; Ferraro, 2019; Price, 2018). According to Price (2018) and Drew et al. (2006), CG deals with policies for hiring and firing senior management. It also oversees business activities to ensure law and ethics compliance, thus fostering transparency for the shareholders and other stakeholders and formulating the corporate strategy, risk management and compensation schemes. However, to ensure this, the aspect of CG is guided by various principles, including accountability, transparency, fairness and responsibility, as found in the literature review (Cheffins, 2011; Ferraro, 2019; Price, 2018).

Since its formalization, and from the perspective of SMEs, ‌El-Fotouh (2009) indicated that although CG can have many descriptions, the most applicable one is a set of rules and regulations aiming to attain optimal performance through executing the appropriate effective technique to achieve corporate objectives. Therefore, considering its evolution since the 1970s, CG has allowed SMEs to formulate internal procedures and systems that govern the relationship between essential players/stakeholders and entities, which is instrumental in organizational performance. Therefore, besides reviewing the fundamental principles and elements covered by CG, this study will examine how CG can help SMEs formulate the correct systems to enhance growth.

Good CG is important for SMEs, as it helps to ensure that the company is run efficiently, ethically and in a way that adds value for all stakeholders. According to Napitupulu (2020), CG refers to the system of rules, practices and processes by which a company is directed and controlled. It involves the balancing of the interests of a company’s multiple stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the wider community. Effective CG is important because it helps to align the interests of multiple stakeholders, improves investor confidence and reduces the cost of capital.

According to Singh and Pillai (2022), an independent board with diverse expertise and skills can improve the credibility and professionalism of the board in small and medium-sized enterprises (SMEs). Good CG practices can help board members engage more effectively with the company regarding operational, financial and strategic matters. However, the link between CG and outcomes, such as investment decisions and firm performance, is not yet well understood in the context of SMEs. Factors such as board size and independence can play a role in the relationship between ownership structure and performance. Implementing CG in SMEs can be difficult due to the lack of standardization in business structures, board composition and strategic planning. Policy interventions may be needed to facilitate strategic changes in SME businesses.

From the above discussion, CG has grown extensively on the domains of research, politics and application in diverse businesses, particularly in the context of SMEs that highly depend on their growth and capital for survival. According to the World Bank (2021), SMEs are less likely to get a considerable bank loan, which means that they largely depend on internal funding to run their enterprises, which makes their success a critically important issue. Therefore, this study will examine CG from the perspective of unlisted SMEs and how its various provisions can assist SMEs in meeting their objectives, thereby satisfying the needs of the diverse stakeholders. Also, the article will examine the role of CG principles in formulating the correct lead for SMEs. This systemic review article will draw from diverse primary and secondary research on CG elements and their role in fostering success in firms around our highly dynamic world.

The primary source includes the Scopus and Web of Science (WoS) databases. Furthermore, for any relevant statistical references, the authors will use various websites, including Statista, World Bank and Organization for Economic Cooperation and Development. The authors will not restrict the articles’ publication to any given period. The primary theory for the current study is transactional. Sidhu (2018) described the company as having several contracts within its internal mechanisms or with the market in which it boosts value for the organization. Given this, we will primarily focus on how SMEs develop their value to satisfy the needs of their multiple stakeholders. Since the study is a systemic literature review, we will not draw the articles from any specific geographical regions; the recommendations will not focus on SMEs of a particular area, thus making the proposals generically applicable to any firm worldwide.

To observe CG in SMEs, we established the following research questions:

Source: Elaborated by authors

These research questions will be the focus of our study’s response to the characteristics of CG in SMEs.

According to Li et al. (2020), to comprehensively review the existing literature and present an evidence-based systemic review, it is critical to use a tool or use a proven literature review methodology that is often used by other researchers (Elmagrhi et al., 2017; Ibrahim et al., 2022; Nguyen et al., 2020). While several authors (Capolupo et al., 2022; Cillo et al., 2019; Li et al., 2020; Natalicchio et al., 2014; Savino et al., 2018; Urbinati et al., 2023) used the methodology by Tranfield et al. (2003), this study will use preferred reporting items for systematic reviews and meta-analyses (PRISMA). According to Page et al. (2021), PRISMA was first published in 2009 and was designed to assist the qualitative systemic reviewers in transparently indicating why reviews were done, what the authors did and their findings. However, for the current study, we will use PRISMA 2020 guidelines, which are an update from the 2009 framework that includes an updated approach that reflects on the improvement of the methodology to identify, select, assess and synthesize studies (Alhossini et al., 2021; Page et al., 2021; Rethlefsen et al., 2021; Urbinati et al., 2023). Therefore, to determine the papers used in the current article, we will use the checklist provided by the PRISMA 2020 framework. The purpose of the use of this framework is to comprehend the impact of which CG characteristics and/or dimensions that are more relevant regarding the unlisted SMEs and how they affect these companies.

To reach this, we formulated a list of keywords to assist in searching the databases of Scopus and WoS. The keywords included “small and medium enterprises*,” “corporate governance*,” “govern*,” “director*” and “board*.” In line with the PRISMA provisions, all the identified articles had to meet the checklist and contain at least one of the keywords developed by the researcher. According to Page et al. (2021), the use of PRISMA would allow us to ensure that the systemic review is valuable to the users and the authors, since it would not only enable them to prepare a transparent, comprehensive and accurate account of the papers, but would also allow it to serve the multiple essential roles. Therefore, the PRISMA would assist the authors in enhancing the reporting of systemic reviews and critical appraisal (Swartz, 2011). Furthermore, using the PRISMA tool can provide extensive guidance on reporting diverse literature search components of the systemic review (Urbinati et al., 2023). According to Page et al. (2021), the PRISMA tool would allow the author to use a reproducible checklist by authors and other peer reviewers, thus facilitating the verification of each component.

We will only use 23 of the 27 items prescribed by the PRISMA 2020 framework (Table 1), as they fit the current study. Upon identifying the items, we developed a PRISMA flowchart that illustrates how the authors identified the studies. However, according to Li et al. (2020), it is critical to identify all the themes used in other studies for coherence’s sake while developing the flowchart for any survey. In their study, Li et al. (2020) discovered seven themes that are critically important in developing a credible systemic literature review. They included the following: identifying the journal outlets, research methods, theories, data geography, modeling, research questions and the concepts under investigation.

Furthermore, for an effective PRISMA flowchart, it is crucial to adopt the abovementioned themes in addition to the two-step coding. First, we identified outcome frequency, publication years, research question (to determine whether they were aligned with the current objectives) and methodology (Li et al., 2020). Second, the authors will provide an in-depth analysis by exploring the theories, the models and the concepts.

All the papers included in the current study had to describe the significance of CG in unlisted SMEs. As mentioned above, we used various themes to determine a study’s eligibility, including the journal and internet outlets, research method, year of publication and the concept under investigation. Any article that failed to fit the category was excluded, as discussed below.

For this study, we use the Scopus and WoS databases, as they represent two of the most relevant databases in the management research field. This study used a search approach that identified and assessed essential scientific papers, explained the keywords, classified all the necessary materials, analyzed the identified records and addressed any potential bias. One of the critical steps was to develop and identify the keywords. All the articles from the journal and internet outlets were classified as academic journals and websites.

In this study, the research methods incorporate the strategies and techniques used in data collection to uncover new information to better understand the research problem under analysis. To overcome the data availability barrier, Lu et al. (2022), suggest using various research methods, particularly qualitative research techniques, mainly for research in underdeveloped countries. For the current study, all the identified articles had to be either qualitative, quantitative or mixed methods. We identified the qualitative researcher by reviewing whether the technique gathered and interpreted nonnumerical data. We examined the report for the primary articles, including whether they used preliminary data from interviews, focus groups, personal accounts and observations. For the secondary themes, we examined the papers to assess whether they were systemic reviews from documents and quantitative research. The quantitative analysis included all the articles with numerical data to assess the causal relationships within the variables. Moreover, the papers had to have used at least one of the data collection methods under the quantitative method, including experiments, questionnaires, surveys and any database report. For the mixed research, the papers had to have used two of the abovementioned methods: qualitative and quantitative.

The concept under investigation had to be the benefits of CG in SMEs, including how it assists them in satisfying the diverse stakeholders’ needs, mainly through the various CG principles.

After ensuring the abovementioned themes, we developed inclusion/exclusion criteria, as shown above in Table 2.

Before creating the PRISMA flowchart, we formulated a search strategy comprised of various steps. These included choosing the databases for the search, developing and fine-tuning the search, conducting and recording the investigation and maintaining the search results. In deciding where to search, we understood that it was crucial to create a thorough list of sources to avoid overlooking anything potentially pertinent. Depending on the topic of the review, it could also be suitable to search in databases that cover specific geographic areas or subject-specific domains, such as business, management or governance. For the current article, we did not limit our search to any specific location of the subject.

The article database comprises all studies published in peer-reviewed journals in English up to December 2022, using the Scopus and WoS databases. These studies must contain relevant search terms in their title, abstract or keywords, and must fall within the fields of business, accounting, finance, management or economics. Additionally, any material related to CG in general – which may not be mentioned in their title, abstract or keywords but examines the CG characteristics – is also included in the article database.

We excluded studies from our analysis that did not use qualitative, quantitative or mixed surveys. Furthermore, articles that focus on CG in listed companies are also excluded, as well as studies that do not specifically refer to unlisted SMEs. Finally, articles that were not peer-reviewed were not considered for this study because their reliability and authenticity could not be thoroughly ascertained, for it could lead to inaccuracies in the deductions made from that information.

We looked through these databases and the gray literature (essentially, research not published in journals). This option was due to the possibility that necessary information may not be found in bibliographical databases if it is a component of, for instance, an abstract for a conference, a thesis or dissertation, ongoing research or a trials register. Additionally, relying too much on published statistics might induce bias in favor of positive outcomes (publication bias). Studies that provide encouraging findings are more likely to be submitted to or published in journals and, therefore, indexed in databases. This is publication bias, and systematic reviews look for gray literature to lessen its impact.

The second step consisted in writing and fine-tuning the search. In this step, we considered that the essential ideas of the review questions and the inclusion and exclusion standards put forth in the protocol or study plan served as the basis for the search keywords. For the keywords, we searched the titles or abstracts in the database entries. To accommodate spelling variations and plurals, we also used wildcards. The databases used for this study only used asterisks and quotation marks, although the symbols used to accomplish truncation and wildcard searches differed.

The third step included running and recording the search. A distinct search technique was required for each database due to variations in their organization and indexation methods. The techniques that make part of the evaluation should provide a report on the search that adheres to the PRISMA standards discussed below. Therefore, some authors use accurate keywords, such as “corporate governance” or “board of directors” (Gonzales-Bustos and Hernández-Lara, 2016; Rasel and Win, 2020); we used broad keyword search terms, including “board,” “govern” and “director,” according to Li et al. (2020). Although this method returns a greater number of results, it allows for compiling a more comprehensive list of articles, thus avoiding the exclusion of some articles that could be relevant to our study. To identify the documents, we ran our search using the Scopus and WoS databases, given that they are two of the largest and most reliable databases of scientific citation, providing a comprehensive list of published articles from different areas, including relevant information for quality assessment (Cruz-González et al., 2021; Linnenluecke et al., 2020).

The fourth step included managing the search results. In December 31, 2022, our search returned 83 documents (49 papers from Scopus and 34 articles from WoS). After removing article duplication (a total of 24 documents) and articles with missing data, we reduced our sample to 59 documents, which were then subjected to a thorough assessment. Then, we excluded papers that either did not explicitly address CG aspects (two papers) or did not investigate the context of unlisted SMEs (57 papers). This process resulted in 19 articles, which were then subjected to quality assessment, as indicated by the PRISMA flowchart (Figure 1).

A bias in scientific research is a systematic or methodological mistake that results in an inaccurate depiction of the study’s findings. Serious repercussions can result from the potential for unfair or deceptive interpretation of evidence findings in systematic literature reviews (SLRs), particularly in areas like risk management or when suggesting critical recommendations (Lee et al., 2013). A bias can be introduced into a study at any point in the process, from developing the research question to deciding which primary studies should be included or excluded, from examining the available resources to selecting which results to publish (Lee et al., 2013). An SLR is characterized by a lower chance of bias; however, SLRs are not entirely immune to prejudice.

One of the biases that our study was exposed to is the study design. According to Lee et al. (2013), this sort of bias appears in the first stages of developing the review design and methodology. A lack of expertise in the study subject can induce bias in how the author defines the research question. For instance, if no previous research on SMEs had been done, the author may limit his study to exclusively large companies. A poor search approach might lead to more mistakes, for example, if the reviewers arbitrarily chose search limiters, such as geographic areas or year of publication. Such restrictions lead to a biased sample set since they omit all relevant data (Lee et al., 2013). Therefore, the bias happened because we restricted our study to a few databases, publication types and restricted keywords.

Another identified bias was the selection bias. According to Haffar et al. (2019), this type of bias is introduced when gathering the study’s primary sources. The findings may be overestimated or underestimated if the gathering of material is not thorough. Gray literature must be included in the collection of material for a SLR, along with all other sources. The reviewers in charge of choosing the primary research can add potential personal bias (Haffar et al., 2019). Key ideas underlying the study’s eligibility criteria that are either included or excluded in the evaluation must be explicitly expressed to avoid this form of bias. The most widely known flaws in SLRs derive from the selection and publication stages. Since the reviewers were limited in number, we might have been exposed to this type of bias.

A known threat to the validity of meta-analysis is publication bias, which occurs when statistically significant studies are more likely to be published than nonsignificant studies or which contain unfavorable results (Ahmed et al., 2012). Furthermore, Ahmed et al. (2012) indicated that the author or publisher could not publish research with negative or insignificant findings. However, although the results may not be necessary to the publisher, they can have significant consequences. Therefore, our study was exposed to publication bias since, even after considering incorporating gray literature, we only used the published journals from the two databases mentioned in the above section.

A review of the two databases produced 83 articles that would address the critical questions put forth by the authors. However, after applying the inclusion/exclusion criteria to the items identified within the databases, 57 articles were deemed to contain essential information to address the research problem. Using the PRISMA framework and checklist, we subsequently reduced this number to 19 articles (Figure 1). After collecting these articles, and according to the main topic of each study, we grouped and classified them into six different indicators: performance, board, profitability, innovation, internationalization and audit. We related these indicators with the characteristics of CG (grouped by firm age, board characteristics, ownership details, CEO characteristics and audit independence), and then we analyzed the impact of each factor (Table 4). We identified six authors with more than one publication (Abor J.; Arosa B.; Biekpe N.; Iturralde T.; Maseda A. and Minguez-Vera A) and five journals with more than one publication (Corporate Governance – The International Journal of Business in Society; International Entrepreneurship and Management Journal; Journal of Small Business and Enterprise Development; Journal of Small Business Management; and Small Business Economics), which reveals the upward interest in this research area (Tables 3 and 4).

In terms of ownership and governance from the owners, we found that family ownership positively affected profitability (Abor and Biekpe, 2007; Gnan et al., 2015; Roffia et al., 2022). Concerning ownership concentration, La Rosa and Bernini (2018) indicated that few studies have looked at how ownership concentration affects the financial performance of private companies. In contrast to common law nations, private enterprises in most EU countries governed by civil law, particularly in Italy, are characterized by very high ownership concentration, the existence of family ownership and inferior shareholder protection. Accordingly, minority shareholders are more likely to be expropriated, which results in more considerable private control advantages for majority shareholders (La Rosa and Bernini, 2018), which supports the idea that there is a negative correlation between ownership concentration and nonlisted businesses’ profitability. Furthermore, regarding family-owned firms, La Rosa and Bernini (2018) concluded that family ownership and financial performance are negatively correlated.

According to Abor and Biekpe (2006), SMEs with a high percentage of inside shareholding generally present better performance, as is verified in SMEs where an individual combines the roles of both CEO and board chairman in comparison with SMEs featuring two individuals to perform such roles. This suggests that the owners’ good knowledge of their firm’s operations translates into proficient and improved performance. SME ownership by top-management team (TMT) members has a positive impact on the development of knowledge-based resources, as ownership often motivates SMEs managers to invest in their firm’s human and intellectual resources (Zahra et al., 2007). These authors concluded that ownership by the firms’ TMT emerges as an important variable in the context of SMEs’ internationalization.

La Rosa and Bernini (2018) investigated the dual influence of family on business and examined the threats to governance by family-controlled corporate groupings. They concluded that firm ownership must be diffused to include external owners since, through such incorporation, the board of directors can be more neutral, thus leading to more effective CG. Gnan et al. (2015) revealed that “family councils do exist in family SMEs and they partly substitute CG mechanisms, and particularly the shareholders’ meeting and the BOD.” Good family governance makes good owners and directors, and CG keeps the family satisfied with their business and committed as their owners.

Another essential aspect of ownership identified is individual ownership and its role in facilitating a more autonomous CG. In the context of a small business, the owner is the primary source of human capital and the driving force behind all administration procedures. Not to mention the expenses of setting up a formal governance framework because entrepreneurial skills and diligence are essential factors in determining the level of governance in a small business. The importance of an entrepreneur’s skills and diligence cannot be overstated, given that the government of SMEs aims to mainstream the informal sector, improve both the quality of its products and its access to credit, resources and national and international value chains for sustainable competitiveness (La Rosa and Bernini, 2018). For the individually owned firms, these latter researchers indicated that for their transition to larger firms, they must start by embracing the role of external shareholders and the board of directors, as they will foster effective CG. Closely held firms present less strategic changes than other SMEs, but it is possible to facilitate strategic change by introducing governance mechanisms that increase the firm’s strategic capacity and competence (Brunninge et al., 2007).

According to Karoui et al. (2017), “depending on the level of differentiation or integration between the threesome power and control functions (ownership, directorship and management), the board may specialize or diversify its task portfolio and perform only part, most, or all of the entire set of tasks traditionally attributed to the board.” So, the board’s portfolio of tasks will be more diverse, thus giving rise to a greater separation between these power/control functions.

Ownership is also related to failure risk. Süsi and Lukason (2019) found that a high overlapping between managers and owners reduces failure risk in the case of SMEs, given that ownership concentration is an insignificant determinant of failure risk and the managerial ownership variable is considerable. Using the agency theory, these authors found that the existence of separate nonowner managers creates a potential divergence of interests between owners and hired managers, which makes the decision process slower and increases the failure risk. This effect decreases when the firms get older and more established. While ownership concentration is an insignificant determinant of failure risk, the managerial ownership variable is significant, meaning that a high overlapping between managers and owners reduces failure risk in the case of SMEs. Having separate nonowner managers might create a potential divergence of interests between owners and hired managers, which, in turn, makes the decision process slower and thus increases the failure risk. When SMEs get older and more established, the negative effect of having nonowner managers decreases. As concluded by Abor and Biekpe (2006), the existence of nonexecutive directors could lead to better management decisions and help SMEs in attracting better resources.

Therefore, the board can improve good governance in the context of SMEs, and outside board members can improve good governance as well, since owner-managers often do not consider, and thus fail to use, the board as a relevant resource. Several owner-managers do not realize the need to have a board. This could be a cause for the low standard of CG in the context of SMEs, which can have serious consequences on the development of innovation and growth of SMEs (Van den Berghe et al., 2011). According to Shapiro et al. (2015), “an increase in ownership concentration has a positive impact on innovation, but the positive impact of additional concentration becomes smaller when concentration reaches a high level.”

In addition, the above assertion aligns with the observation that future business success is most consistently and favorably correlated with ownership, as observed by Abor and Biekpe (2007), Gnan et al. (2015) and Roffia et al. (2022). Both La Rosa and Bernini (2018) and Süsi and Lukason (2019) suggested that ownership is favorably correlated with future business performance, and negatively correlated with future risk. However, to study the relationship between CG and corporate performance from an econometric perspective, one would need to develop a system of simultaneous equations that specify the relationships among the mentioned variables, according to a review of the interactions between CG, corporate performance, corporate capital structure and compensation structure (La Rosa and Bernini, 2018).

The relevance of the theme of CG in companies, particularly in the context of SMEs, has been analyzed from multiple perspectives, with board size and board composition being two of the main characteristics that are most studied and analyzed by different researchers. Abor and Biekpe (2007) stated that as large boards have a better performance compared with small ones, they enjoy wide expertise and better conditions regarding the decision-making process. They also noted that the presence of nonexecutive board members is very relevant to explain a firm’s performance, since they verified a significantly positive relationship between board composition and firm profitability. In alignment with this conclusion, De Cleyn and Braet (2012) suggested an optimal size of 11 board members, which implies that companies have to resort to external directors as reserves, since “the impact of external directors is however not proven, but other studies (Hoskisson et al., 2002; Li and Simerly, 1998; Zahra, 1996) emphasize the importance of external directors in a company’s board.” Furthermore, Maseda et al. (2015) confirmed a relationship between the generation in control and the proportion of outsiders on the board of directors. According to their findings, in family firms, the composition and the roles of the board of directors differ from generation to generation, therefore, this need for outsider knowledge, networks, expertise, reputation and access to external resources decreases from the first to the second-generation family firms.

We found a significant number of authors that accept that corporate performance increases according to board size (Abor and Biekpe, 2007; La Rosa and Bernini, 2018; Roffia et al., 2022). The presence of outside directors on the board and increasing the number of other members than the CEO to the TMT enhance strategic changes (Brunninge et al., 2007). This finding is consistent with the idea that the board of directors monitors management’s potential for opportunistic conduct by directing management’s actions and providing management with strategic recommendations based on the board’s extensive experience.

We also found some authors that presented contradictory results, such as Süsi and Lukason (2019), who concluded that SMEs have higher/lower failure risk when their boards are larger/smaller or Arosa et al. (2013), who found that a “negative impact of the outside directors’ proportion and board size on firm performance.” This negative impact results from the reduction of flexibility, communication and coordination inside a board comprising a large number of members and seems to be more relevant than resorting to better manager control by the board of directors. The findings by Arosa et al. (2013) “contradict the widespread belief that smaller, independent, and proactive boards, as well as an effective separation of the figures of the chairperson of the board and the CEO, are always more effective.”

According to Zahra et al. (2007), having more outsiders on the board of SMEs can help align the interests of the various stakeholders with a focus on internationalization by building knowledge-based capabilities. However, some SMEs managers may be hesitant to appoint outsiders to the board due to a lack of understanding about the business or the strategic challenges the firm faces.

Abor and Biekpe (2006) found that there is a statistically significant and negative association between capital structure and board size in Ghanaian SMEs. These firms tend to pursue high debt policies with a larger board size. There were also significantly positive relationships found between debt ratio and board composition, board skill and CEO duality. The average board size was approximately four members, with nonexecutive directors making up about 50% of board membership. As expected, the results showed that the owner-manager often served as the chairman of the board. According to La Rosa and Bernini (2018), many SMEs are unwilling to appoint outside directors due to a perceived loss of control. However, expanding the number of board members could be a way to improve the economic performance of these firms. This outcome corroborates the upper-echelons theory because a bigger board equates to a more diverse board.

Some studies found that the presence of women on the boards of listed firms has a positive impact on performance (Shapiro et al., 2015), while others found no such effect or even a negative effect (Mínguez-Vera and Martin, 2011; Shehata et al., 2017; Süsi and Lukason, 2019). However, this relationship is not evident in the case of family-owned businesses, where the inclusion of women on the board does not have a statistically significant impact on firm performance (Martín-Ugedo and Minguez-Vera, 2014). On the other hand, when the main shareholder is a corporation, research shows that gender diversity on the board does have a positive and significant effect on firm performance. These findings are noteworthy because women are often appointed to the boards of family businesses due to family ties, while corporations tend to choose board members based predominantly on objective criteria, such as qualifications. The appointment of women as CEOs might enhance corporate performance, as they are perceived to be more risk-averse than males (Shapiro et al., 2015). However, CEO gender does not seem to impact firm performance. While certain demographic characteristics, such as CEO gender, do not affect CG effectiveness and firm performance according to the upper-echelon theory, a diverse group of individuals with a balanced gender composition can lead to enhanced overall performance (La Rosa and Bernini, 2018).

Contradicting these findings, other research has found no evidence that the inclusion of women in the boards of SMEs in Spain leads to improved performance (Mínguez-Vera and Martin, 2011). In fact, the greater decision-making power of women on SMEs’ boards may result in the adoption of less risky policies that negatively impact firm performance. Similarly, a study on UK SMEs found that gender diversity on the board of directors had a significant negative relationship with firm performance (Shehata et al., 2017). Our study also found that board members’ age was negatively related to firm performance, regardless of its gender composition. These results suggest that the inclusion of women on boards should be carefully considered and based on qualifications and experience to avoid negative impacts on financial performance.

Finally, Süsi and Lukason (2019) developed research on SMEs in Estonia and found that board gender diversity was not associated with an increased risk of failure for these businesses. This finding suggests that the different perspectives arising from having both genders represented on the board may be of lesser importance in the SME sector. Additionally, when controlling for firm size or age, the gender heterogeneity variable remained insignificant. While large and diverse boards may be able to make more balanced decisions, they may also be slower due to the need to harmonize different views. In the case of SMEs, the speed of decision-making resulting from smaller boards may be more important, regardless of its gender composition. It is important to include women on boards, but this inclusion must be based on economic rather than affective reasons.

CEO servant-leadership has been shown to positively impact the performance of SMEs. Research on the upper-echelon theory suggests that the demographics of top managers, including their gender, can affect their cognitive functions and ultimately the performance of the business (Arosa et al., 2013; Shapiro et al., 2015).

In addition, the presence of certain attributes can significantly affect SMEs’ ratio regarding the return on assets. These attributes include providing adequate and timely documentation, holding frequent meetings focused on risk analysis and management and offering performance-based remuneration to board members (Roffia et al., 2022). However, a negative relationship was found between financial performance and both the monitoring of conflicts of interest and the presence of committees or delegates within the board responsible for internal controls, executive appointments and remuneration. It is suggested that social control among board members and lean structures can be more effective than bureaucratic and costly structures in influencing the financial performance of SMEs. These findings highlight the importance of CEO and board characteristics, structure and processes in determining the performance of SMEs, as well as the validity of CG codes, company associations and professional recommendations.

According to Shapiro et al. (2015), having independent members on the board and an external CEO can enhance the number of patents obtained by a company. However, board size does not seem to have any significant impact. Overall, the findings suggest that CG and ownership can affect the long-term innovation abilities of small firms.

Maseda et al. (2015) research indicates that a moderate presence of outside directors can benefit family businesses. This is defined as having a ratio of outside directors to board members of less than 0.47 for first-generation family firms (roughly one outside director for every two board members), and less than 0.39 for second-generation family firms (about one outside director for every three board members). In contrast, no relationship was found between the proportion of outside directors on the board and firm performance in third and later-generation family firms.

According to Al-Najjar (2018), CG mechanisms play a significant role in determining audit fees. Board independence, audit meetings and board size were found to have a positive impact on audit fees, while audit independence had a negative relationship with audit fees, which supports the idea that audit fees are driven by supply. Additionally, governance factors were found to affect audit quality, with independent directors and audit diligence positively influencing the decision to hire Big 4 audit firms.

Firm age, or the length of time a company has been in existence, is an important factor in the study of CG and the role of the board of directors. Research has shown that the age of a firm can have a significant impact on the structure and practices of its CG, as well as on the effectiveness of its board of directors.

On the other hand, younger firms are more likely to have a higher proportion of outside ownership and more independent directors, leading to greater oversight and accountability. They also tend to have more formalized governance structures, such as codes of conduct and compliance policies.

The age of a firm also has a significant impact on the composition and effectiveness of its board of directors. Older firms tend to have more experienced and entrenched directors, who may be less willing to consider new ideas and more likely to prioritize the interests of insiders over those of outside shareholders.

The age of the company likely has a negative impact on financial performance. This could be because older SMEs tend to operate in mature industries with less profitability, their drive for innovation decreases over time or they become more risk-averse (Roffia et al., 2022).

Firm age is an important factor in the study of CG and the role of the board of directors. Older firms tend to have more entrenched governance structures and boards that are less diverse and independent, while younger firms tend to have more formalized governance structures and boards that are more diverse and independent.

SMEs play a critical role in fostering nations’ economic development, mainly through their using statistics and tax contributions to their national governments. However, due to their limited size, in the form of their financial base, they are often run by families, individual owners or as a company, lacking a board of directors (CG) or ineffectively applying it. With this in mind, we designed this study to investigate the role of CG in the sector of SMEs, including how the full incorporation of CG can foster success. We hypothesized that CG would enable the financial success of SMEs and instigate their growth to higher levels. In reviewing more than 19 articles identified through the PRISMA framework, we did not succeed in finding articles that addressed the benefits of CG in the context of SMEs. However, through our systemic review, we found other aspects that could address the issue from a different perspective, including examining ownership and board size concerning SMEs’ performance and the likelihood of incorporating CG. We found that family-owned businesses were unlikely to integrate CG into family succession interests, which leads to a negative relationship.

Furthermore, in the case of single ownership, researchers recommended that the owners identify other stakeholders and the board to grow to the next level. In terms of board size, we found that there was a positive relationship between board size and the firm’s performance, meaning that CG plays a central role in fostering growth. Therefore, the primary identified benefit of CG in the sector of SMEs is financial growth and profitability. We recommend more primary studies (qualitative and quantitative) on the “Benefits of Corporate Governance for SMEs.”

A research agenda is an action plan that lists the activities that the author must prioritize within a specific area of study or research and the respective methodology. Therefore, the research agenda for the current study consists in examining how CG can benefit SMEs, also by including a behavioral perspective. The critical activity of a systemic literature review consists in a search through the leading scientific and business journal databases to examine how diverse researchers have extrapolated the area under study. However, to achieve this goal, we developed a comprehensive introduction by focusing on SMEs and on the background of the research. Furthermore, we broadened the scope to streamline what would be covered in the scope of this study and its significance.

Future research on CG could include a cross-country study. To advance this research agenda, it would be beneficial to investigate the effectiveness of CG regulations (voluntary or mandatory) in improving management performance. Additionally, more empirical evidence is needed on the impact of CG on aspects such as internationalization or auditing, which are important components in the development and sustainability of companies. Furthermore, it would be interesting to explore how analysts and investors perceive and benefit from different CG characteristics. There is also a lack of literature on the disclosure of CG effectiveness, despite its significance. This research area could be extended to explore how CG could impact the quality of financial information provided to stakeholders. Moreover, it is essential to conduct further empirical investigations on the relationship between CG and extreme events, such as COVID-19, financial crises, war scenarios and inflation periods.

This study is limited to the context of unlisted SMEs and two databases (WoS and Scopus), and future research should aim to expand the sample to include other developing countries. The SLR conducted in this study is limited to English-language literature and does not include other language literature. Articles published in low-ranked journals were included in our database, as we aimed for a comprehensive analysis. While a review of the measurement techniques for disclosure quality and quantity could have been a valuable contribution, our study did not cover this aspect. We assigned equal weight to all articles in our analysis, regardless of the quality of the journals in which they were published.

Financial reporting and CG requirements for SMEs are commonly lower when compared to those for larger organizations. This is due to the recent enforcement of CG practices in the sector of SMEs in several countries, which has resulted in a dearth of academic research on the subject. This scarcity of literature reinforces the pertinence and relevance of conducting a comprehensive review of this matter. We developed a comprehensive framework of CG in unlisted SMEs, which would facilitate a systematic review of the existing literature and enhance our understanding of the key issues involved. Through an accurate SLR, we analyzed 19 relevant papers that significantly contribute to the theoretical debate on CG regarding unlisted SMEs and we offer valuable insights for future research. Our study sheds light on the determinants of CG across multiple indicators, including performance, board structure, profitability, innovation and internationalization, and highlights the complex interactions among various CG characteristics.

Despite these limitations, the investigation on financial reporting and CG in the context of SMEs remains a significant and pressing issue given the growing appreciation of their contribution to economic growth and stability.

Our SLR of 19 published studies on CG in the context of SME firms identified 14 journals and 40 authors. Most empirical research is based on evidence from European countries, while only a few papers study other countries, such as the USA, China and Ghana. Not only we found a direct relationship between CG mechanisms and the performance of SMEs but also regarding innovation, internationalization, auditing and risk of failure.

We classified CG characteristics into board, ownership, CEO, audit and age. Within the board concept, the literature studies size, diversity, independence, meetings, skills and presence of nonexecutive members. The ownership concept investigates family-ownership, concentration and foreign members. The most studied CEO characteristics are origin, age, duality and tenure. We also found that the audit verifies only the auditor’s independence; and finally, the age of the firm is one of the most studied characteristics.

Our SLR provides the basis for several proposed avenues of future research. It is recommended that future studies use a behavioral perspective to more fully comprehend the interplay between CG and the perceptions and behaviors of directors and entrepreneurs. A shift in focus away from the identification of those responsible for governance to the examination of governance processes (e.g. board roles, board meetings and informal mechanisms) is also advised, with a heightened emphasis on exploring the relationships among various stakeholders within the context of specific CG structures. Additionally, it is recommended that future studies make use of contingency perspectives rather than striving to determine a general optimal governance structure for SMEs.

Finally, the application of nonlinear models and structural equation modeling is suggested to effectively analyze the intricate and interrelated nature of the phenomena under study. These approaches should be based on well-established theoretical perspectives and the development of unambiguous hypotheses. Conversely, qualitative methods of inquiry are recommended for exploratory purposes, focusing on the discovery of new concepts and the generation of novel theories.

In conclusion, our present study sheds light on the state of CG in the context of SMEs and provides valuable information for governments, policymakers, academics and research organizations. Our results emphasize the need for revising current CG regulations and increasing disclosure and compliance levels. Additionally, our findings provide a deeper understanding of the challenges faced by SMEs in the realm of CG. It is evident that our study adds to the growing body of literature on this topic by filling a gap in the research on CG in the sector of SMEs. It is hoped that these results will inspire further research and lead to meaningful progress in the field.

It is with profound sorrow that the present authors offer acknowledgments to a deceased coauthor whose contributions remain immeasurable. Lúcia Lima Rodrigues, a distinguished researcher of exceptional ability, regrettably passed away before the completion of the joint project. In recognition of their tireless efforts and enduring legacy, the authors will continue the work she was so passionate about, recognizing the invaluable contribution that she made to the collaborative research. The work of the authors is supported by national funds through the FCT – Portuguese Foundation for Science and Technology under the project UIDB/04728/2020.

Since acceptance of this article, the following authors has updated their affiliations: Jaime Fernandes Teixeira is based at the Department of Financial Economics and Accounting, University of Vigo, Spain and CIICESI, ESTG, Porto Polytechnic, Portugal; Amélia Oliveira Carvalho is based at CIICESI, ESTG, Porto Polytechinc, Portugal.