King IV for SME’s

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The argument that the Corporate Governance Principles as contained in the King IV Report are applicable to large public companies are also often raised, along with question on the benefits attached to the application of Corporate Governance Principles to small and medium enterprises (SME’s).  To answer these questions the King IV Report indicates that the application of the King IV Report’s principles can assist SME’s in getting financing, strengthening sustainability and contributing to sustainable development and economic growth in South Africa.  To further assist SME’s with the application of the principles contained in the King IV Report, the report includes a sector supplement to guide SME’s in the application of the principles.

Perhaps the best place to start is to define a SME in terms of the King IV Report.  The sector supplement on SMEs in the King IV Report, defines a SME as a private, for-profit company with a Public Interest Score (PI Score) of 350 or more as calculated based on regulation 26(2) of the Company’s Act 71 of 2008.  Although this supplement is specific in its definition of an SME, the sector supplement can also be utilized, along with the principles contained in King IV, by smaller entities as well.

Based on their size, smaller entities may decide to apply the principles of King on a proportional basis and as their resources allow. A large or medium entity may therefore have an audit and risk committee, but smaller entity may decide to dedicate a percentage of the time of the governing body to risk management and audit committee related duties, or to request one member of the governing body to take responsibility for these duties.  The sector supplement on SME’s also confirm this proportional application and suggests that if proportional application of the King IV Report is used, the board of the SME take responsibility to ensure that the board addresses all matters which would have been addressed by the committees.  To assist the board in this endeavor it may be good practice to include standing items such as audit, risk and ethics, on board agendas.

The boards of SME’s, furthermore, should ensure that they spend sufficient time on strategy development and implementation, organizational performance and business performance in order to identify possible areas for improvement within the SME, which includes corporate governance principles.  According to the King IV report the focus on the above mentioned areas should allow the board of directors to drive performance and innovation and assist the board of directors to make the connection between sustainability and the business of the SME.

Another of the focus areas for the board of directors of SME’s is the reporting of SME’s performance to stakeholders.  According to the King IV Report, SME’s should consider reporting to stakeholders such as shareholders, customers as well as possible and potential providers of financial capital in an integrated manner to demonstrate accountability.  The integration in the reports of aspects such as resources and relationships on which the SME relies, its activities, outputs and outcomes are an effective way to communicate to stakeholders on the performance of the SME.

The communication to stakeholders is one of the measures that the board of an SME can use to ensure a stakeholder inclusive approach in the company.  To broaden the concept of stakeholder inclusivity, the King IV Report suggests that the SME consider to establish a formal forum where stakeholders can raise questions.  Additionally, the board of the SME’s can also consider to implement policies for future equity ownership.  These measures for the increase of stakeholder inclusivity can also assist in the government’s drive for larger inclusion in economic activities of previously disadvantages individuals.

The issue of independence on the board of an SME often creates tension with SME’s.  Although it is advisable to have a board, which consist of a majority non-executive majority, of which the majority is independent, it is not always possible with SME’s.  Specifically where SME’s are family-run enterprises.  To address the tension, the King IV Report suggest that the board of such a company consider appointing a non-executive director, with the necessary skills and competence, to ensure the mix of executive and non-executive directors are appropriate.  If the appoint of such an individual is not financially viable, the King IV Report suggest that an individual who meets these criteria, be regularly consulted until such a time that the appointment of such an individual is feasible.  This will also ensure objective decision making while removing the occurrence of emotive decision-making.  Because SME’s often are family owned and managed, King IV further recommends that succession planning of the directors be one of the key focus areas of the board, to ensure that the company do not become too dependent on a few key individuals.

Applying the King IV Report, even proportionally, and placing focus on the basic principles such as ethical leadership, independence, performance management and succession planning, can therefore provide several benefits to an SME.  It may further enhance the contribution of the SME’s in South Africa to the economy.

The source for this article is the Sector Supplement for Non-Profit Organizations as contained in the King IV Report.

Dr Cornelie Crous CA(SA) is a senior lecturer in auditing at the School of Accountancy, University of the Free State