There’s been a widespread misconception that corporate governance is only for companies listed on the JSE. Speaking on the Werksmans Legal Review on the Classic Breakfast Show, Archie Aaron, director of corporate law firm Werksmans, said corporate governance applies to all types of businesses and entities.
“Certainly the impact of poor governance is magnified many times over in a large, listed company, but the shrieking headlines of corporate failure and mismanagement does not mean only they are affected,” he said.
The process of regulating corporate governance started in 1994 with the first King Report, followed by King Report II. Spelling it out for the novice, Aaron described corporate governance as “a bundle of laws, regulations and practices that articulate how a business should be governed”.
Governance applies every bit as much to the local school governing committee or charity, as it does to a JSE-listed company, and also as much to the smallest business where it potentially has more importance because a business owner’s personal money is under the control of employees.
Aaron warned that nobody involved in the governance of any such entity should be ignorant of what is involved in good corporate governance.
“There is an abundance of literature available on governance, and possibly the best place to start is a book published last year by South Africa’s own governance guru, Mervyn King (also author of the two King Reports), titled ‘The Corporate Citizen’,” said Aaron.
“Mervyn King has enormous experience in this field and his book is not only a comprehensive overview of all areas of corporate governance, but is easily readable.”
Corporate governance is simply the umbrella for a range of controls, and is not in itself the answer to all business ills. Risk management lies at the heart of governance. “But before any of these threats can affect a business, poor corporate governance created a favourable condition for fraud to be perpetrated,” said Aaron.
International research has revealed that companies that practice good corporate governance enjoy a valuation premium of about 22%, and also demonstrate consistently higher earnings. Although this research is in the listed company space, the principle applies as much to small businesses as large.
The Institute of Directors currently hosts 14 training sessions a year on governance and board responsibility, ranging from how to be a director through to corporate governance and King II, risk management, managing an audit committee, facing the media and learning from past corporate failures.
Aaron adds: “Business failures, mismanagement and fraud will never cease, but good corporate governance that inculcates a culture of risk management protects a company and senior management. The consequences of poor governance can be very severe, and we’ve all seen the big corporate failures.
Small business failures are even more endemic: it’s often been quoted that nine out of ten business start-ups fail within a few years, though recent research conducted by the Institute of Risk Management SA (IRMSA) suggests that six out of ten small business start-ups shut within three years, with the major causes of failure being lack of financial know-how and the oppressive weight of regulation.
The reason for the research, says IRMSA president Steve Winks, was to gauge the extent to which risk management can improve the survival potential of small, medium and micro-sized enterprises (SMMEs).
“Our research demonstrated a correlation between SMME failure and a lack of risk management. The problem is that risk management has always been perceived as a large business solution, and we have to design methodologies suited to small business.
“If you look at risk as uncertainty, then a plumber who is not educated on how to run a business, and the variables that affect it, is at considerable risk. If he’s highly geared, a change in the cost of money could sink him,” says Winks.
Small businesses are notoriously unwilling to pay for consulting. IRMSA is therefore looking at affordable off-the-shelf solutions. Some financial institutions are already requiring that borrowers make use of business support services before they will lend to start-ups, and Winks believes it is only a matter of time before risk management tools are added to the bundle of services that are a prerequisite to securing venture capital.
IRMSA proposes to work closely with organisations and development finance institutions that are already active in the field of SMME support, such as Eskom and the Development Bank of Southern Africa.
“We’re the custodians of risk management in SA, the reference body for the profession, and we see it as our vocation to spread the influence of risk management as widely as possible. We would ultimately like to have a bigger membership, with many SMMEs participating,” he says.
Take note of these important highlights:
- Applies to all companies, not only those listed on the JSE
- It is a bundle of laws, regulations and practices that articulate how a business should be governed
- Corporate governance is the umbrella for a range of controls, and is not in itself the answer to all business ills. Risk management lies at the heart of governance
- International research on listed companies reveals that companies which practice good corporate governance enjoy a valuation premium of about 22% and also demonstrate consistently higher earnings
- Good corporate governance protects a company and senior management
- The Institute of Directors hosts 14 training sessions a year on corporate governance. Call them on +27 11 643 8086
- Good reference literature is a book published last year by Mervyn King titled The Corporate Citizen