Foreign investors regard South African JSE-listed companies as among the best governed in the world’s emerging economies, which has been extremely beneficial to the country.
Non-listed SMMEs and family-run businesses benefit equally from the same sound governance practices and principles that foster stakeholder confidence, sustainability, and growth.
It’s all about leadership.
“Corporate governance is fundamentally about leadership,” says Parmi Nateson, Executive: Centre for Corporate Governance at the Institute of Directors South Africa (IoDSA). “It can be used to create processes, systems, and controls, as well as to direct appropriate behavior to ensure sustainability and continuity.” Applying sound corporate governance principles within a company, regardless of size, helps to ensure that decisions are made in the best interests of the company and its stakeholders. It also contributes to increased productivity, growth, and job creation.”
Tony Balshaw, Managing Partner at Mazars East London and partner in charge of the firm’s B-BBEE and Family Business divisions, emphasizes the distinction between SMMEs and family-run businesses. “Family businesses can be large corporations or small businesses.” The point is that family ownership is closely held, sometimes across generations.” He goes on to say that family businesses can devolve into emotional systems with role confusion, and that the onus is on treating all family members equally. The emphasis in a business system is task- and merit-based. When these two orientations coexist, they have the potential to create conflict and a lack of strategic intent within the organization, especially when combined with a lack of effective communication, management, and governance systems.
“The old adage ‘shirt sleeves to shirt sleeves in
three generations’ has proved to be true all too
often in family-run businesses,” laments Balshaw.
The reason? “Myopic focus and a lack of input from
outside influencers ultimately causes a knowledge
vacuum filled only with the perception of family
members – not a recipe for long-term success.” For
a longer-term orientation, Balshaw recommends
defining boundaries and recognising the need for
knowledge, experience and expertise from people
outside of the business to ensure it is run effectively.
Creating appropriate governance structures
Natesan explains that an important determinant for
creating an appropriate governance structure and
framework is whether an SMME is owner-managed or
non-owner managed. “As a company moves through
various stages, from start-up to growth, maturation
and reinvention, its reliance on other people will differ.
As reliance on others grows, the risk of misalignment
between shareholders and the Board or management,
could lead to decreased value.”
King III is the recognized code of governance in South Africa, consisting of various principles and recommendations.
The King III principles apply to all organizations, regardless of size or nature of business. However, the extent to which the practices apply to specific businesses varies depending on the entity.
King III is based on the ‘apply or explain’ model, which allows businesses to use their discretion when considering each governance principle in light of their specific circumstances and determining the best approach to achieve desired results. “This effectively means that the Board may decide to apply a certain principle differently than it appears in King III.”
Explaining how it was applied or why it was
not applied results in compliance,” says Natesan.
Balshaw has questioned King III’s ‘apply or explain’ model in the context of owner-managed family businesses, claiming that these businesses typically have other compensating roles and mechanisms that speak to King III compliance.
Another challenge that SMMEs and family businesses face (and that can be overcome by applying corporate governance principles) is strategy development. “One of the most significant benefits of corporate governance is improved leadership, decision-making, and vision,” Natesan says, adding that developing a viable strategic vision and plan, as well as identifying the organization’s core competencies, is the most fundamental step for a successful business. Strategic thinking is concerned with what the organization wishes to achieve, whereas strategic planning outlines how this strategic vision will be realized and aids in the development of the necessary business plans, structures, and processes. One of
the greatest reasons that businesses fail is due to a
lack of proper strategic thinking and planning from
the outset.
Balshaw agrees, adding that during the startup phase of a business, knowledge is likely to be centralized in one person. “This is why it’s critical to bring in outsiders and sound governance principles to ensure that knowledge is shared, systems are put in place, and the business is effectively managed.”
” He believes that a lack of
strategic vision in a family-run business can become
a source of conflict, resulting not only in an unhappy
family, but an unhappy and unsuccessful business
too. “Family members must understand boundaries,
and the different ‘hats’ they need to wear within their
roles. They should be educated in terms of moving
away from a process of centralised decision-making
and towards embracing a formalised, effective
governance structure, as well as working across
generations to ensure continuity and succession
planning. The business must be effectively managed
and an effective business system created, including a
Board of Directors,” he says.
A Board, according to King III, should include a majority of non-executive directors as well as individuals with the necessary skills, vision, and knowledge to contribute effectively to decision-making. The appointment of nonexecutive directors contributes to a balance of power, which is necessary for the Board to maintain objectivity and independence. Diverse perspectives are required for an organization’s governing body to function effectively. This is especially true in the case of family businesses or SMMEs, where roles frequently overlap and there is a greater need for objectivity because many of the organization’s decision-makers are too closely involved with the day-to-day operations.
In the end, greater objectivity leads to better decision-making, maintains Balshaw.
He encourages families to create a “creed” – not a legal document, but rather a blueprint outlining “myopic focus and a lack of input from outside influencers ultimately causes a knowledge vacuum filled only with family members’ perceptions – not a recipe for long-term success.”
the family’s guiding principles and practices for future ownership control, management, and governance plans for the family and business, as well as the roles and nuanced structures that must be in place
It is necessary to accept management control (including professional management) as distinct from ownership, which necessitates the establishment of effective governance structures.
As a family business grows in complexity, it necessitates the formalization of a wide range of practices, philosophies, guidelines, policies, and structures.
To that end, Balshaw proposes a framework consisting of four distinct structures that should be developed in the interest of good corporate governance.
Guidelines for family business structures
1. Family Shareholders Committee
This committee’s role is to manage the interaction and relationships between family owners and the essential business governance structures, forging the owners’ business goals, visions, and values. It establishes objectives for growth, risk, liquidity, and profitability, as well as plans for ownership continuity.
It is the appropriate forum for challenging the leadership and raising broad concerns about the board’s and management’s performance and plans.
The committee also allows the family to speak with one voice to management and the Board of Directors. It enables discussion of expectations and goals, as well as profitability and risk.
“Family members must
see the business as a separate entity to themselves.
It has a separate legal persona and needs to adopt
sound governance principles such as having an
effective Board,” Balshaw says.
He explains that the lines are frequently blurred when the family treats the business as the family piggy bank, failing to distinguish between what belongs to them personally as owners and what belongs to the business. “Defining roles and developing formal budgets are two of the best ways to ensure that there is no role confusion when it comes to taking money out of the business.” This should include market-related compensation for family members who work for the company, as well as anticipated distributable dividends to beneficial family owners.
- Board of Directors
The company must ensure that its practices and principles are relevant, and that sound corporate governance takes precedence over family needs and desires.
A Board of Directors is an essential component of a successful family business. Board members must be competent and experienced in order to provide strategic direction to family-controlled businesses. Balshaw adds that bringing in directors from outside the family is critical to the success of the board.
- Executive Committee or Management
Committee
This committee serves as a liaison between the company and the Board of Directors. It should meet monthly to review results, review, and direct the business’s actions.
- Family Council
The Family Council’s goal is to bring together all generations of the family to share goals and decisions, discuss common problems, learn about the business, and preserve family values and traditions.
Governance framework establishes relationships
According to Natesan, an effective governance framework establishes stable and effective relationships between shareholders, the Board of Directors, managers, and stakeholders – roles that are sometimes performed by the same person. Corporate governance structures must be flexible enough to adapt and evolve as the organization grows and changes. It is a matter of determining whether a particular principle is in the best interests of the organization at any given time.“An SMME should
voluntarily elect to apply governance best practice
as soon as practically possible, with a view to
gearing itself for growth,” Natesan advises.
Finally, good governance is about effective leadership founded on ethical principles. This is defined by values such as responsibility, accountability, fairness, and transparency.
According to Natesan, “responsible leaders direct strategies and operations with the goal of achieving sustainable economic, environmental, and social performance.” Furthermore, being a responsible corporate citizen implies that the Board is accountable not only for the business’s financial bottom line, but also for its impact on the environment and society in which it operates – the ‘triple bottom line.’
According to Balshaw, corporate governance enables businesses to be proactive in terms of doing what they can to create a harmonious and productive working environment for both the business and the people involved.