YOUR SME: KING IV CORPORATE GOVERNANCE CODE MAY APPLY TO YOU
12 Sep 2016
The King reports over the last two decades have become locally and globally synonymous with good governance. To date the King Codes have had limited impact on small and medium enterprises (SMEs).
It is important to note that the King Codes are voluntary.
In terms of the latest King IV Report (it has been released for comment and will only be final once all comments have been considered) supplements have been released for various types of organisations to report on corporate governance. One of these supplements applies to SMEs.
How does King IV define an SME?
A company with at least 350 points in terms of the Companies Act’s Public Interest Score calculation is considered an SME.
The points are a combination of turnover (1 point per R1 million), employees (1 point per employee), third party liabilities (1 point per R1 million) and shareholders (1 point for each shareholder).
Thus, King IV seems to be looking more at medium sized entities than at smaller ones.
Why adopt these codes if they are voluntary?
Over the long term there is a strong link between sustainability and good governance. For example, good governance can help with getting access to finance and a well governed organisation will outperform the market in the long term.
What do the codes require?
The starting point is good ethical leadership – if an organisation has this, it invariably practices good governance – and thus the board of directors must lead in a responsible, transparent and fair way.
This foundation should apply to all businesses as the ethos of a business usually is defined from its early beginnings.
The composition of the board of directors should ensure it has the skills and independence of thought to effectively manage, control and report on its performance.
In order to ensure adequate control, the codes envisage that the board will govern:
- Technology and information,
- Compliance with all laws,
- Fair remuneration policies,
- Good stakeholder relationships and
- Assurance that adequate control and reporting integrity are in place.
When implementing practices to comply with the King IV Report, the size of the organisation will dictate the resources to allocate to the codes. Thus, whilst a large company will have, for example, an audit and risk committee, your medium sized company may allocate say 25% of a director’s time to meeting the requirements set out in the Report. It is up to each organisation to use its judgement.
In your organisation’s annual report, there should be a section on how it is implementing the Report. Some templates are provided for in the King IV Report but these are not prescriptive.