A3_bThe opportunity to comment on the draft KING IV code lapsed in May this year. The draft code specifically provides supplements suggested to be implemented in different sectors. Small and medium enterprises (SME’s) have a specific supplement sector to be considered by SME stakeholders.

It is recommended that certain aspects of the code should be implemented and established by SME’s. It is furthermore recommended that a specific senior stakeholders be tasked to see to such implementation and governance.

SME’s have a growth cycles, beginning with founding members investing energy in building the business. Governance will play a more integral role as the business grows. The suggested principles in the King Report guides the SME stakeholders to secure corporate governance, and therefore implementation of the following principles should be considered:

Ethical culture

Principle 1.1 states that the board should set the tone and lead ethically and effectively.

Principle 1.2 states that the board should ensure that the ethics of the company is managed effectively.

Principle 1.3 states that the board should ensure that the company is a responsible corporate citizen.

SME’s play a critical role in the economy. The also form part of a supply chain of other companies, and should hold their suppliers responsible and accountable for corporate citizenship and ethical practices.

Performance and Reporting

Principle 2.1 states that the board should lead the value creation process by appreciating the strategy, risk and opportunity, as well as performance and sustainable development.

Principle 2.2 states that the board should ensure that reports and other disclosures enable stakeholders to make informed assessments of the performance of the company and its ability to create value in a sustainable manner.

The implementation of these two principles will vary from SME to SME, depending on size, resources and the complexity of the operations of the business.

Benefits that an SME can derive from implementing these two principles are”

  • Identifying and accessing opportunity and risks;
  • More informed decision-making within the business and among other stakeholders;
  • Improved management systems, internal processes and controls;
  • Improved reputation;
  • Improved transparency; and
  • Improved performance management.

Adequate and Effective Control

Principle 3.1 states that the board should serve as the focal point and custodian of corporate governance in the company.

Principle 3.2 states that the board should ensure that in its composition it comprises a balance of the skills, experience, diversity, independence and knowledge needed to dispose of its operational obligations.

Principle 3.3 states that the board should consider creating additional governing structures to assist with the balancing of power and effective discharge of responsibilities, but without abdicating responsibility.

Principle 3.4 states that the board should ensure that the appointment of, and delegation to, competent executive management contributes to an effective arrangement by which authority and responsibilities are exercised.

Principle 3.5 states that the board should ensure that the performance evaluations of the governing body, its structures, its chairs and members, the CEO and the company secretary or corporate governance professional result in continued improved performance and effectiveness.

It is recommended that, if the director is also a shareholder and manager, that formal processes be put in place to achieve separation when acting in different capacities. SME’s therefore have a great dependency on such key individuals. In such a way governance of independent judgement will be strengthened to the advantage of the company.

SME’s should therefore strongly consider appointing independent non-executive directors and if such a step is not practically possible, should consider employing a governance professional on an ad-hoc basis.

Adequate and Effective Control

Principle 4.1 states that the board should govern risk and opportunity in a way that supports the company in defining its core purpose and the company enables itself to reach these objectives.

Principle 4.2 states that the board should govern technology and information in a way that supports the company in defining its core purposes and the company enables itself to reach these objectives.

Principle 4.3 states that the board should govern compliance with laws and ensure consideration of adherence to non-binding rules, codes and standards.

Principle 4.4 states that the board should ensure that the company remunerates fairly, responsibly and transparently to promote the creation of value in a sustainable manner.

Principle 4.5 states that the board should ensure that assurance results in an adequate and effective control environment and integrity of reports for better decision-making.

Stakeholder Relationships

Principle 5.1 states that, as part of its decision-making in the best interests of the company, the board should ensure that a stakeholder-inclusive approach is adopted, which takes into account and balances their legitimate and reasonable needs, interests and expectations.

Principle 5.2 states that the board should ensure that the SME responsibly exercises its rights, obligations, legitimate and reasonable needs, interests and expectations of the holders of the stakeholders in the company.

Due to the natures of SME’s shareholders may be much more involved in the operations that the situation would have been with bigger companies. There are also usually close relationships, even of family level, between the shareholders and directors / management. It should therefore be considered to establish a forum for the shareholders where questions can be raised to the board.

It is also recommended that the shareholders of the SME, due to its nature, have an agreement with regards to transacting in shares and securities of the company as well as the method in determining the value thereof.

Where SME’s are not able to implement the above principles in full, for instance due to the nature of the SME, it is recommended that these principles be implemented on a proportional basis.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The influence of KING IV on SME’s