Corporate Governance in SME’s
By Adri Jones and Kelvin Simango
Corporate governance principles have always been associated with large, listed and well established entities. With the phrase “corporate governance” referring to structures and processes for the direction and control of companies, mainly focusing on the relationships amongst the major role players like the management, board of directors, controlling shareholders, minority shareholders and other stakeholders.
The distinction, however between the abovementioned major players are not as evident in most small and medium enterprises (SME’s), which are usually unlisted. However with the introduction of the King III, South Africa’s recognised code of corporate governance and its recommendations, SME’s depending on whether owner managed or non-owner managed should also aspire to follow sound governance practices and principles so as to reap the long term benefits such as business sustainability and stakeholder confidence which will ultimately assist with the grown of the SME into larger well established organisation.
Therefore it is encouraged that SME’s consider the application of sound corporate governance to their business operations from the very on set and not only when they have grown into larger organisation or apply for listing. The discussion to follow will focus of some of the recommended principles in the King III that SME’s should apply. These principles includes amongst others ethical leadership and corporate citizenship of the SME’s, strategies taken by the SME’s, structures of the SME’s and responsibilities within the SME’s.
a) Ethical leadership and Corporate Citizenship
Governance within an organisations rests on effective leadership based on ethical foundation. This is evident through leadership adopting the four ethical principles, which are responsibility, accountability, fairness and transparency in their decisions. These fundamental principles and ethical values apply to all SME’s irrespective of nature and size. The ultimate accountability therefore rests with the owner or the board. Natural citizenship entails the state of being vested with the rights, privileges and duties. Therefore being a corporate citizen implies that the Board or in case of owner managed SME’s is not only responsible for the organisation’s financial bottom line, but also its impact on society and the environment in which it operate, since stakeholders are not only shareholders but also includes other groups affected by or affecting the organisation’s operations such as inter alia employees, suppliers, creditors and the community in which the organisation operates.
Strategic thinking relates to what the organisation wants to be and/or do/achieve and strategic planning relates to how the organisation is going to achieve the strategic vision. This would include considering and preparing the required business plan /action plan, structures and processes required. However in this is not the case in most owner managed SME’s, the visions and strategies of the organisation are entrenched only in the mind of the owner and in most cases such visions and strategies are not shared with other members of the organisation to evaluate. On the same note the business plan or action plan is not properly followed and this leads to impulsive decision making which can result in negative consequences on the origination and its corporate citizenship. Therefore strategy development processes should address the continuous changing business environment and market conditions that which the organisation operates within.
The structures of an organisation ensures its prosperity as there will be checks and balances in place to ensure that the not only the stakeholders of the organisation perform effectively. The King III recommends that the board should consist of a majority of non-executive directors and individuals with the appropriate skills, experience and knowledge to contribute to the board decisions. Owner Managed SME’s will very often not have the financial muscle to appoint non-executive directors. It is suggested that, when considering a major decision the owner invites or obtain outside objective inputs from knowledgeable people who are not involved in the day to day management of the business.
Furthermore King III recommends that that board of an organisation should also have its own support structures such as the audit committee, company secretary and the remuneration committee. The benefits of these board committees is that they reduce the work load on the board. SME’s whether owner managed or non-owner managed due to their size and nature may be able to handle the load of performing all functions without having to form separate committees. King III further stipulates that smaller companies need not establish formal committees to perform separate oversight functions but should ensure that these functions are appropriately addresses by the board. It should be kept in mind that some of the board committees are required by law to be setup within an entity. Some entities are exempted for setting up such committees even though they can opt voluntarily to have such committees as they grow.
d) Responsibilities with in SME’s
In most SME’s the same individual will fulfill multiple roles within the organisation. The individual is tasked with these difficult responsibilities , must ensure that he considers decisions and acts from the perspective of a specific role player at different times to avoid conflicts of interests and ensure independence which may prove to be difficult as the lines between different roles can become burry. Hence the best method to differentiate between the different roles is to have a document setting the roles, responsibilities and duties of each. For example the Companies Act list the duties of directors in section 76 therefor the same rules and duties should also apply to SME’s especially the general principles to act in the best interest of the organisation.
Owner managed SME’s need to balance their own interests versus organisational interests as in most times there is a lack of opposition and decision taken by such organisation will turn not be objective or rational. Amongst the responsibilities within an organisation is risk governance. Like any other organisation all SME’s need to identify the risks that the organisation could face and ensure that these are mitigated and early warning system are in place should the risk take eventuate or in the event that it is about to occur. In SME’s the owners or the board should do everything necessary to be satisfied that the organisational risk are identified, monitored and addressed.
In conclusion the challenges that SME’s faces are that the same individuals play both the director’s and management role which may create some conflicting scenarios within the organisation. However considering the recommendations in King III, SME’s are have the assistance to implement sound corporate governance at a principle level without attracting significant additional costs, eliminating the long perception that application of corporate governance in SME’s is costly. All the underlying principles found in the King III are applicable to SME’s, however to what degree the practices are implemented will depend on the size and complexity of the business. Every organisation needs strategy, business plan, performance management and risk governance for it to prosper.