Despite the fact that SMEs make up approximately 50% of the gross domestic product in South Africa, have a higher production output than large companies, greater capacity to innovate, a more direct impact on cultural and social issues, and a greater role to play in the future growth of an economy, many of them also have a high rate of failure. Although figures available vary, it is commonly thought that 50% to 75% of SMEs fail after five years.
In a study conducted by Grofin founder and MD, Jurie Willemse, these high failure rates are due to a poor quality of management and decision-making, lack of access to finance, and inadequate planning.
Sirdar South Africa’s Carl Bates explains in his book, The Laws of Extreme Business Success, that SME business owners simply fail to treat their business as they would if it were a large corporate.
Perhaps the future improved success of the SME sector requires the application of the same governance principles that are the cornerstone of the corporate environment. A 2008 study by the Rotman School of Business indicated that governance practices in Canadian SMEs lag five years behind larger companies.
Following big business lessons
With South Africa’s progressive King Code guiding governance in large corporates, there are important lessons to be learnt from these principles as SME business owners seek to ensure they do not become another failure statistic.
Corporate governance is a set of rules, practices and structures which aim to drive an organisation to achieve its goals, build sustainable growth and fulfil the investment objectives of its shareholders, while playing a positive role in the greater community.
According to the King Code of Governance Principles (King III), good governance requires leadership that focuses on ethics, responsibility, accountability, fairness, sustainability, and the moral duties found in the spirit of Ubuntu. You can begin to implement concepts of King III by focusing on the following areas:
1. Implement a formal board process
This means a lot more than your monthly management meeting. Get independent directors not involved in the business to challenge your thinking on a regular basis with accountability and formal reporting. If your vision is exciting, you will find directors who are willing to support you with their time and experience. Be creative in how you compensate them, especially for the liability carried for being a director on your board. Avoid using family members on your board as independent directors.
2. Keep your roles separated
Recognise that there are differences between your roles as shareholder, director and manager and, as such, they require different decision-making processes.
Bates describes this principle in The Laws of Extreme Business Success as the Law of Three Hats – a shareholder focuses on their investment return, a director focuses on setting strategy and ensuring performance, and a manager ensures the job gets done.
Most SME owners get stuck in working in their businesses and forget their strategic responsibilities as a director and their investment goals as a shareholder.
3. Be prepared to be performance managed
As a business owner running your business, there is often no-one to hold you accountable for your actions. Who is watching that your personal expenses are not paid from cash in the till, or that you do not take Fridays off?
Good governance requires that even though you are the owner, manager or director of the company, you are willing to be performance managed just as you would expect of any other member of staff. That includes the risk of being fired should your conduct warrant it. Your board makes the decision whether you are capable of fulfilling your role as managing director or
4. Keep your eye on sustainability
While many SMEs struggle to lift their view out of survival mode, King III requires that a business focuses on its long-term sustainability. This includes profitability, solvency, returns to shareholders, business practices that ensure the business endures in the long term, and that the business can run without you. If your business only pays its bills and your salary, then it is in no way geared for future sustainability.
Use the strategic focus and long-term view of your board to keep the business geared towards delivering the results required, and take action where necessary. This may include rethinking your business model, getting tougher with yourself and your team, cutting personal expenses out of the business’s overheads, setting clear targets and getting realistic about
5. Get on top of your financials
The Achilles’ heel of the SME is the availability of accurate and timely financial accounts. This fundamental business practice is essential in staying on top of where you are and enabling you to make good decisions when you need to.
If this is not your strength, outsourcing this function may be the best decision you could ever make. If you are a (Pty) Ltd, then your fiduciary duties as a director are to understand your financials and make good decisions with accurate information.
While running two sets of books may seem like a good idea to put money into your own pocket, it does not create real and sustainable value in your business or promote trust for investors.
6. Manage your risk
Risk management plays a key part in good governance, and large companies have teams dedicated to it. Having a realistic view of the risks your business faces and their potential impact is essential. This allows you to plan accordingly and mitigate risks before they cripple you.
With the amended Companies Act coming into effect, directors carry a heavier responsibility for not taking action on risks that threaten a business’s solvency, legal status and operational ability. In order for SMEs to increase their positive impact on economies, business owners need to think differently about what ‘business as usual’ means. To create long-term growth and sustainability, applying the principles of governance is essential business practice.
If there is only one action step you take, it should be the recognition that a board of directors operating under the principles of governance, and including at least as many independents as there are executive directors, will take your mindset and your business to a new level of strategic thought, challenging debate, and improved decision-making.