The SME sector - the lifeblood of our economy - has been taking a significant strain in the last couple of years. File Image: IOL

CAPE TOWN – President Ramaphosa’s State of the Nation speech for 2019 highlighted the key role that small businesses play in stimulating economic activity, and their impact on broad-based empowerment. 

A key element to building sustainable small and medium enterprises (SMEs) is to ensure their governance structures and processes grow alongside their financials, says Parmi Natesan, chief executive-elect of the Institute of Directors in Southern Africa (IoDSA).

“SMEs are drivers in an economy that is both inclusive and growing, but only if they can sustain their growth and provide stable livelihoods for more and more people. We thus need to pay equal attention to the post-incubation phase,” she argues. “Flexible and effective governance structures have a key role to play in the growth of an entrepreneurial start-up into a corporation.”

Recent research by the Small Business Project[1] shows that while SMEs make up 98.5 percent of the South African economy, they only provide 28 percent of jobs. One reason is that 3.3 million of the approximately 5.6 million SMEs are classified as “survivalist”. Such businesses often only employ the owner and seldom show growth.

By contrast, the research shows, in OECD countries, over 95 percent of enterprises are SMEs which provide up to 70 percent of all jobs and up to 60 percent of the gross domestic product.

“Good corporate governance can help an SME by making its leadership structures more effective and thus better able to support its strategic objectives,” she says.

Aside from the development of a more effective leadership structure, SMEs can derive other significant benefits from good corporate governance. 

These include:

  • Added credibility and enhanced reputation.
  • Access to capital and loans on better terms.
  • The ability to attract talent for employment.
  • Improved access to customers and market participants.
  • Better positioning to capture business opportunities.
  • Better fraud prevention due to improved controls.
  • Business continuity arrangements that permit the SME to operate under conditions of volatility, and to withstand and recover from acute shocks.
  • Leadership continuity through succession planning.
  • Better management of the risk of conflict in family businesses.
King IV has been intentionally structured to make these benefits more accessible to SMEs. It does so by not focusing prescriptively on what should be done or what roles or committees are called, but on what the desired outcomes are. 

Crucially, it introduces the key concept of proportionality, in terms of which organisations can scale the practices they adopt in accordance with their turnover and workforce size, their resources, and the extent and complexity of their activities. King IV also includes a supplement to provide SMEs with specific but flexible guidance for how to adapt the Code to their needs. 

King IV thus recognises that governance delivers very desirable outcomes, but that each organisation is unique and must be able to adapt its practices to achieve the principles set out in the Code.

“In the spirit of Thuma Mina (Send Me), the IoDSA is soon making an e-learning module on governance for SMEs available to them free,” concludes Natesan.  “By making e-learning on corporate governance available free for SMEs, the IoDSA recognises the financial pressures that they face. We hope this initiative will play a part to help this vital sector of the economy reach its potential, to everybody’s benefit.”