Essential Guide to Good Corporate Governance for SMEs in South Africa

SME Corporate Governance Best Practices: Introduction to corporate governance

Elevate your business with effective corporate governance practices. Discover the essentials of transparent structures, roles, and oversight mechanisms that empower your organisation to build trust and accountability. Learn how to instill a culture of ethical conduct, integrity, and responsible decision-making through the implementation of a robust code of ethics

Unlocking Corporate Governance: Why It's Essential for Business Excellence

Explore the pivotal role of corporate governance in fostering transparency, accountability, and sustainability within organizations. Understanding corporate governance is paramount as it defines the framework for decision-making, ensuring ethical practices, and safeguarding stakeholders' interests. By embracing effective governance structures, businesses can mitigate risks, enhance reputation, and drive long-term success. Discover the significance of corporate governance in navigating complex regulatory landscapes, attracting investors, and fostering a culture of integrity and responsibility. Elevate your business practices with a robust understanding of corporate governance principles and mechanisms, paving the way for sustainable growth and resilience in today's dynamic business environment.

Implementing Good Corporate Governance in South African SMEs

Introduction to corporate governance

Corporate Governance Image

Written by: Malose Makgeta

MBA with 20+ years experience in SME development and funding. LinkedIn Profile

Challenges and Solutions in South African SME Corporate Governance: McDonald's, Oakland A's and War Dogs


How to improve your corporate governance is about Identifying and mitigating numerous risks associated with a project.  Managers who anticipate and plan for common business risks are more likely to avoid pitfalls. This skills programme covers the King IV in the context of SMMEs, as well as how to improve corporate governance in terms of defining roles, reporting and disclosure, corporate social responsibility, and risk governance. This skills programme provides entrepreneurs and business managers with a platform and tools for identifying and managing business risks.

Key Lessons

Skills programme output


The Downfall of AEY: Corporate Governance in Crisis

In the tumultuous tale of War Dogs, the downfall of AEY is a stark example of corporate governance gone awry. The company, led by Ephraim Diveroli and David Packouz, failed to uphold the principles of good corporate governance, leading to a cascade of repercussions. From obscured financial practices to a lack of transparency, AEY's missteps became the building blocks of its eventual demise.

AEY's failure to maintain transparency played a pivotal role in their corporate governance debacle. The company engaged in questionable practices, including misrepresenting the origin of arms and inflating contract prices. This lack of honesty not only eroded trust with clients and partners but also invited legal scrutiny and government intervention. The impact of this transparency betrayal was felt not only in legal consequences but also in the irreparable damage to AEY's reputation.

Good corporate governance extends beyond legalities; it encompasses ethical conduct. AEY's corporate culture, influenced by a pursuit of profit at any cost, failed to prioritize ethical considerations. The impact of this ethical oversight manifested not only in legal repercussions but also in the erosion of employee morale and trust. A toxic corporate culture became a breeding ground for unethical behavior, further contributing to AEY's downfall.

The impact of AEY's failure in corporate governance was severe, ranging from legal consequences of reputational damage and the erosion of trust. This cautionary tale emphasises the critical importance of upholding principles of transparency, ethics, and accountability in corporate governance. Aspiring entrepreneurs and business leaders should heed AEY's mistakes, recognising that good corporate governance is not just a legal obligation but a fundamental pillar for sustained success.

Navigating SME Corporate Governance in South Africa

Corporate governance refers to the system of rules, practices, and processes through which a company is directed and controlled. It encompasses the relationships between various stakeholders, including shareholders, management, employees, customers, suppliers, and the broader community. The purpose of corporate governance is to ensure that the company operates in an ethical, transparent, and accountable manner.

What is Corporate Governance in South African Context

In South Africa, the need for good corporate governance has been highlighted by several significant events and developments in recent years. These include:

As a result of these factors, there is a growing recognition in South Africa of the importance of good corporate governance. Companies are actively working to implement the recommendations of the King Reports, comply with legal requirements, and adopt governance practices that build trust, enhance accountability, and ensure long-term sustainability.

The Principles of Corporate Governance

Although there are no restrictions on the number of guiding principles that can exist, some of the more well-known ones are as follows.

Application of the Code of Corporate Governance

King III, in contrast to King I and II, applies to all entities, regardless of how they were established or how they were incorporated, whether they were in the public, private, or non-profit sectors. We created the guidelines so that every organisation could use them to practice good governance.

All entities should adhere to the Code's guiding principles and take the Report's recommendations for best practices into account. All entities must explain how they have applied or not applied the principles, and they must do so in a positive way. Stakeholders will be able to comment on and challenge the board on the caliber of its governance thanks to this level of disclosure. Each entity's application will be different, and it is likely to change over time because the Code is meant to inspire entities to continuously enhance their governance procedures. It is crucial to realise that the "apply or explain" approach necessitates more thought, mental effort, and explanation of what has actually been done to implement the guidelines and recommendations for best practices of governance.

Every one of the principles is equally important and together they form a comprehensive approach to governance. Therefore, compliance is not achieved by "substantial" application of this Code and the Report. The Code is applicable to South African-incorporated and -resident entities. The Code should be applied by foreign subsidiaries of domestic companies to the extent specified by the holding company and subject to entity-specific foreign law.

Key traits of corporate governance:

The Link Between Governance Principles and Law

A connection exists between good governance and legal compliance. Good governance is inseparable from the law, and divorcing governance from the law is entirely inappropriate.

The starting point for any analysis on this topic is the duty of directors and officers to discharge their legal duties. These responsibilities are divided into two categories: the duty of care, skill, and diligence, and the fiduciary duties.

Corporate governance, concerning the body of legislation that applies to a company, primarily involves establishment of structures and processes, with appropriate checks and balances, enabling directors to discharge their legal responsibilities and oversee compliance with legislation.

In addition to legal compliance, the criteria of good governance, governance codes, and guidelines are relevant in determining what is considered an appropriate standard of conduct for directors. The more established certain governance practices become, the more likely it is that a court will view behavior conforming to these practices as meeting the required standard of care. Corporate governance practices, codes, and guidelines raise the bar for what are considered appropriate standards of conduct, and any failure to meet a recognised standard of governance, even if not legislated, may subject a board or individual director to legal liability.

Hybrid systems are being developed globally. In addition to a voluntary code of good governance practice, some principles of good governance are being legislated. Principles take precedence over specific recommended practices in an 'apply or explain' approach. However, some principles and recommended practices have been legislated, leaving no room for interpretation. What was once common law is now codified in statutes, with the incorporation of directors' common law duties into the Act being a significant global phenomenon.

In King III, issues that were recommendations in King II but are now matters of law are pointed out. Aside from the Act, other statutory provisions impose duties on directors, and some statutes are brought to directors' attention. The Act governs state-owned enterprises as defined by the Public Finance Management Act (PFMA), encompassing both national government business enterprises and national public entities.

A person with a beneficial interest in a company's shares has certain access rights to company information under the Act and the Promotion of Access to Information Act. All businesses must prepare annual financial statements, with a few exceptions to the statutory requirement that these statements be externally audited. A corporation may generally provide financial assistance for the purchase or subscription of its shares and make loans to directors, subject to conditions such as solvency and liquidity. The Act refers to common law principles to describe the standards of directors' duties. A new statutory defense has been created to protect directors accused of breaching their duty of care. This defense will be used by a director who claims to have had no financial conflict, was reasonably informed, and made a rational business decision in the circumstances.

Provisions are in place to relieve directors of liability in certain circumstances, either by the courts or, if permitted, by the company's memorandum of incorporation, but not for gross negligence, willful misconduct, or breach of trust. Every public company and state-owned enterprise must have a company secretary, assigned specific duties by the Act. Principle 2.21 of Chapter 2 deals with the company secretary. The designated auditor may not serve as such for more than five years in a row and, in general, may not perform any services involved in the conduct of the external audit or determined by the audit committee. Every public company and state-owned enterprise must appoint an audit committee, the responsibilities of which are outlined below.

Distinctions are made between statutory provisions, voluntary principles, and suggested practices. It is the board's responsibility to override a recommended practice if it believes it is in the best interests of the company. However, the board must then explain why the chosen practice was used and why the recommended practice was not used. The ultimate compliance officer is the company's stakeholders, who will communicate their acceptance of the deviation from a recommended practice and the reasons for doing so by continuing to support the company.

Art of Corporate Governance: Lessons from Moneyball

In the world of baseball and business, the Oakland Athletics, under the leadership of Billy Beane, rewrote the playbook on corporate governance. The A's challenged traditional norms by prioritising data-driven decision-making over conventional scouting methods. This strategic shift fundamentally altered the dynamics of corporate governance within the organisation. Rather than relying solely on the expertise of seasoned scouts, the A's embraced a more inclusive, data-centric approach that considered diverse perspectives and metrics.

The implementation of data-driven corporate governance had a profound impact on decision-making at every level. The A's, by valuing statistical analysis and embracing a collaborative approach, created a culture where insights from every team member, regardless of their traditional role, were valued. This not only streamlined decision-making processes but also fostered an environment of inclusivity and innovation. The impact reverberated from the boardroom to the baseball field, demonstrating that effective corporate governance is a team effort.

The A's unconventional approach to corporate governance offers valuable lessons for businesses navigating change. By embracing innovation and challenging established norms, organisations can adapt to the evolving landscape. In the corporate governance playbook, consider incorporating diverse perspectives and leveraging data to drive informed decision-making. The A's showed us that a dynamic, inclusive governance strategy can be a game-changer, both on and off the field.

Important Role of Directors in Corporate Governance

What is a Director

The term "director" is legally defined. A director is defined as "a member of the board of a company, or an alternate director of a company, and includes any person occupying the position of director or alternate director, by whatever name designated," according to the Companies Act of 2008.

The Act requires private companies and personal liability companies to appoint at least one director, whereas public companies, state owned companies and non-profit companies are required to appoint at least three directors. This number would be in addition to the number of directors required where an audit committee and/or social and ethics committee is required.

A de facto director is someone who acts in the capacity of a director. He is held out as a director by the company, and claims and purports to be one, despite never being actually or validly appointed as such. To establish that a person is a de facto director of a company, he must plead and prove that he performed functions related to the company that could properly be discharged only by a director.

The shareholders of the company entrust the ultimate responsibility for the company's operation to the directors. While some of the day-to-day operations of the company are generally delegated to some level of management, the directors bear responsibility for acts committed in the company's name.

The Act gives directors the authority to perform all of the company's functions and exercise all of its powers. It establishes the minimum standard of conduct and provides for personal liability if a director fails to meet that standard. The Act makes no specific reference to a director's legal status.

Different Types of Directors

There is no legal distinction between the various types of directors. As a result, for the purposes of the Act, all directors must follow the relevant provisions and maintain the required standard of conduct when performing their functions and duties.

However, it is common practice to categorise directors based on their various roles on the board. When determining the appropriate membership of specialist board committees and disclosing the directors' remuneration in the company's annual report, the classification of directors becomes especially important. Interestingly, King IV makes no distinction between executive, non-executive, and independent non-executive directors. We turn to King III and the JSE listing requirements to understand the distinction between these types of directors.

Responsibilities of Directors vs. the Board of Directors

In summary, the board of directors is the governing body responsible for the overall management and strategic direction of the company. Directors, as individuals, are appointed to the board to fulfill these responsibilities. The board collectively makes important decisions, and directors contribute to these decisions based on their expertise and experience. Directors are accountable to the shareholders and are expected to act with integrity and in the best interests of the company.

Executive Director

The director is defined as an executive if he or she is involved in the day-to-day management of the company or is employed full-time by the company (or its subsidiary), or both. Because of his or her privileged position, an executive director has intimate knowledge of the company's operations. As a result, there may be a disparity in the amount and quality of information about the company's affairs held by executive and non-executive directors.

Executive directors bear additional responsibilities. They are tasked with ensuring that the information presented to the board by management is an accurate reflection of their understanding of the company's affairs.

Non-Executive Director

The non-executive director is critical in providing objective judgment on issues confronting the company, independent of management. Non-executive directors are those who are not involved in the management of the company. Non-executive directors are free of management on all issues, including strategy, performance, sustainability, resources, transformation, diversity, employment equity, standards of conduct, and performance evaluation. Non-executive directors should meet without the executive directors on a regular basis to review executive management's performance and actions.

An individual in full-time employment with the holding company is also considered a non-executive director of a subsidiary company, unless the individual is involved in the day-to-day management of the subsidiary through conduct or executive authority.

Independent Director

The independence of directors should be determined holistically on a substance over form basis, according to the JSE Listings Requirements. Section 94(4) of the Companies Act and the King Code provide indicators. Furthermore, any director who participates in a share incentive/option scheme will not be considered independent. (It should be noted that, under section 94(4) of the Companies Act, shareholding is not in and of itself a disqualifier when determining independence.)

One of King IV's key principles is the establishment of a unitary board that reflects a balance of power. King IV proposes the appointment of independent non-executive directors to ensure that no single individual or group of individuals wields undue power on the board. The importance of having independent directors on a board is widely recognised and practiced, and it can bring a variety of benefits to board decision-making, including:

Independence Requirements: The Companies Act:

Personal Characteristics of an Effective Director

Some such characteristics may include:

Appointment of a Director

The company's first directors According to the Act, each incorporator of a company is also a first director of that company. This directorship will be temporary and will last until a sufficient number of directors have been appointed or elected in accordance with the Act's requirements.

The shareholders elect directors - While it is usually the directors who identify and nominate a new director to be elected to their ranks, it is the shareholders' responsibility to evaluate and legally appoint each new director.

The required number of directors - Private companies and personal liability companies must appoint at least one director, while public companies, state-owned companies, and nonprofit organisations must appoint at least three directors. This number of directors is in addition to those appointed to the audit committee and/or the social and ethics committee.

A record of its directors should comprise details of any person who has served as a director of the company, and include:

These records should be kept for a period of seven years after the person ceases to serve as a director.

Composition of the Board of Directors

It is now widely accepted that the board of directors in any corporation plays a crucial role in its governance, so care should be taken to avoid appointing undeserving, inexperienced individuals who are unable to manage challenging situations and develop workable solutions. It is crucial to have a diverse group of individuals in the group with a healthy mix of ethnicities and men and women so that every point of view is represented on the board. In addition to the board overseeing everything, it's critical that the corporate culture reflect the seriousness of the entire corporate governance business. It's not enough to comply merely on paper; compliance must also be evident, tangible, and result in some way. Appointments to the board should be made solely by vote, based on skills and experience, rather than on the influence or connections of one's family. As a result, the board will be made up of individuals who are committed to furthering the goals of the company and are not merely present for show.

The difficulty in putting together a well-functioning, effective board is finding the right balance. Each company faces different challenges, which will necessitate a distinct set of skills. Every board should think about whether its size, diversity, and demographics allow it to be effective. A variety of factors may be considered in this regard, including academic qualifications, technical expertise, relevant industry knowledge, experience, nationality, age, race, and gender. The collective knowledge, skills, experience, and resources required for the board's business should be considered when determining the number of directors to serve on the board.

Additionally, the performance of the board needs to be assessed. When evaluating the performance of directors, it is important to elaborate on both qualitative and quantitative aspects of how they accomplish goals and how they handle ethical dilemmas. These evaluations are typically required to be made public so that the directors can actually be affected by the findings. Such analyses, however, may become sensitive in nature, and full public disclosure might have a detrimental effect on the organisation.

Independent directors are charged with taking a complacent attitude toward the board's decisions. The law states that an independent director can be easily removed by promoters or majority shareholders, but in cases where these directors objected to promoter decisions, they were removed for disobeying the promoter. Independence is directly impacted by this underlying conflict. Therefore, a better evaluation system must be in place to support the removal and the majority decision must be taken into consideration in order to ensure that directors are not just arbitrarily removed from the board.

The Role of Corporate Governance in South African SME Growth

Corporate governance is crucial for businesses due to the following reasons:

In summary, corporate governance is essential for businesses as it protects stakeholder interests, enhances accountability and transparency, improves decision-making, attracts capital, manages risks, promotes long-term sustainability, and ensures compliance with legal and ethical standards.

Benefits of Corporate Governance

Relevance of Corporate Governance to Small Businesses

Corporate governance is equally relevant and beneficial for small businesses. Despite their size, small businesses can derive significant advantages from implementing good governance practices. Here are the reasons why corporate governance is relevant to small businesses:

Small businesses may have fewer resources and a leaner organisational structure, implementing corporate governance practices remains vital. It helps protect stakeholder interests, access capital, make informed decisions, manage risks, comply with legal requirements, build stakeholder confidence, and plan for long-term success.

Effective corporate governance is essential for the long-term success and sustainability of a business. It helps establish a framework for decision-making and ensures that the interests of shareholders and other stakeholders are protected. Key components of corporate governance include:

In summary, corporate governance sets the guidelines for how a company is managed and controlled, ensuring that it operates in a responsible and sustainable manner, while protecting the interests of its stakeholders.

McDonald's Corporate Governance Unveiled

Embarking on its journey to global dominance, McDonald's understood the pivotal role of corporate governance. The implementation was meticulous, mirroring the precision of their famous assembly lines. The company established a robust framework that ensured transparency, accountability, and ethical conduct at every level. It wasn't just about flipping burgers; it was about flipping the script on corporate governance, setting a new standard for the industry.

The impact of McDonald's commitment to corporate governance rippled through its entire ecosystem. Stakeholders gained confidence as transparency became the norm. Shareholders were reassured by a governance structure that prioritized their interests. Employees flourished in an environment where ethical standards were non-negotiable. The golden arches didn't just symbolize fast food; they became a beacon of corporate responsibility, influencing industry practices and societal expectations.

Let's dissect the secret sauce of McDonald's corporate governance. Firstly, a clear division of responsibilities ensured that decision-making processes were efficient and accountable. Secondly, regular audits and compliance checks acted as the quality control mechanism, ensuring adherence to ethical standards. Lastly, fostering a culture of openness encouraged communication channels from top to bottom. For entrepreneurs, McDonald's governance model serves as a playbook on how to cultivate a thriving business ecosystem.

As we wrap up our exploration of McDonald's corporate governance, it's evident that their commitment transcends the business realm. The impact is felt not just in profit margins but in societal expectations and industry benchmarks. McDonald's didn't just serve burgers; it served as a model for responsible and effective corporate governance, leaving a legacy that continues to influence businesses worldwide.

Implementing Good Corporate Governance in South African SMEs

Implementing corporate governance in a business involves several key steps:

  1. Evaluate and Understand: Assess the current governance practices and structures within the organisation. Understand the legal requirements, industry standards, and best practices related to corporate governance.
  2. Establish a Governance Framework: Define the governance framework specific to your business, considering its size, industry, and unique characteristics. This framework should outline the roles, responsibilities, and relationships among various stakeholders.
  3. Board Composition and Structure: Form a board of directors that is diverse, experienced, and capable of providing strategic guidance and oversight. Define the board's structure, including the roles of independent directors, board committees, and board leadership.
  4. Develop Policies and Procedures: Create policies and procedures that address key governance areas, such as board governance, executive compensation, risk management, internal controls, and ethical conduct. These policies should align with legal requirements and best practices.
  5. Transparency and Disclosure: Establish mechanisms for transparent reporting and disclosure of relevant information to shareholders and stakeholders. This includes financial reporting, performance metrics, and any material information that may impact the company's operations or stakeholders' interests.
  6. Accountability and Performance Evaluation: Implement processes to hold management and the board accountable for their actions and performance. Conduct regular performance evaluations, set performance goals, and align incentives with the long-term success of the company.
  7. Engage Stakeholders: Foster open communication and engagement with shareholders, employees, customers, suppliers, and the wider community. Seek input from stakeholders and consider their perspectives in decision-making processes.
  8. Continual Monitoring and Improvement: Regularly monitor the effectiveness of the governance framework and identify areas for improvement. Stay updated on evolving governance practices, regulatory changes, and emerging risks.

By following these steps, a business can effectively implement corporate governance practices that promote ethical conduct, transparency, accountability, and sustainable decision-making.

Contrasting Corporate Governance at McDonald's, Oakland A's, and War Dogs Inc.

McDonald's: The Golden Standard of Corporate Governance

McDonald's, with its roots in the fast-food industry, established a gold standard for corporate governance. The company's governance framework prioritises transparency, accountability, and ethical conduct. With a clear division of responsibilities, regular audits, and a culture of openness, McDonald's governance ensures efficient decision-making, quality control, and open communication. The impact goes beyond the boardroom, influencing societal expectations and industry practices.

Moneyball: Data-Driven Governance in the World of Baseball

In the realm of sports, Moneyball's approach to governance is a game-changer. Billy Beane and Peter Brand revolutionised baseball with a data-driven decision-making model. The governance here centers on leveraging analytics to make strategic choices in team-building. Collaboration and partnership play a crucial role, emphasising the importance of complementary skills. While not conventional in the corporate sense, Moneyball's governance showcases the power of innovation and adaptability in achieving success.

War Dogs Inc.: Navigating Ethical Quandaries in Arms Trading

War Dogs Inc. operates in the complex world of arms trading, where ethical considerations intertwine with governance. Ephraim Diveroli and David Packouz faced ethical dilemmas in their entrepreneurial journey. Governance, in this context, involves managing risks, making calculated decisions, and addressing the legal and ethical challenges unique to the arms industry. The story serves as a cautionary tale, highlighting the importance of ethical decision-making and risk management in unconventional business landscapes.

Effective Corporate Governance Strategies for South African SMEs

In summary, the exploration of corporate governance emphasises the pivotal role it plays in shaping the ethical framework and operational integrity of businesses. Firstly, the significance of a well-defined governance structure is underscored. Establishing clear lines of authority, delineating roles among stakeholders, and incorporating oversight mechanisms such as regular board meetings and independent audits contribute to a robust foundation for organisational management. This structural clarity not only enhances decision-making processes but also fosters accountability among key players, ultimately building a foundation for sustained success.

Secondly, the focus on ethical conduct within corporate governance is paramount. Embracing a comprehensive code of ethics guides decision-making at all levels of the organisation, ensuring that business practices align with principles of integrity. Transparent financial reporting, disclosure of potential conflicts of interest, and responsible resource management contribute to the establishment of a trustworthy and ethical corporate culture. This commitment to ethical behavior not only safeguards the reputation of the business but also cultivates a positive working environment that attracts and retains stakeholders who value integrity.

Lastly, effective communication emerges as a critical aspect of corporate governance. Open and transparent communication with shareholders and stakeholders is essential for maintaining trust and confidence. Regularly keeping these parties informed about the company's performance, strategies, and potential risks ensures alignment of expectations and reduces uncertainty. By mastering the principles outlined, businesses can autonomously strengthen their ethical foundation, foster trust, and position themselves for sustainable growth and resilience in the ever-evolving business landscape.

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