When a business turns all its attention to survival and growth, governance and compliance issues tend to fall through the cracks. Big mistake, say the experts.
Jac Marais, partner at Adams and Adams and specialist in corporate governance, sums it up: "If you want to play the business game, you have to know the rules. There are regulations applicable to all businesses and failing to adhere to them can have serious consequences. To adhere, you need to know what they are."
Guidelines on good corporate governance are in place for the benefit of business and society as a whole, so ignoring them is equally foolhardy. But for the SMME, governance and compliance often take a back seat as the business owner battles to drive revenue and grow the company.
Christo Botes, executive director of Business Partners, says: "You see it all the time. There are a lot of issues to be complied with. My view is that a small business grows – it evolves from a one-man show to an employer, then to a corporate entity. If the entrepreneur doesn't follow an evolutionary approach to bringing in necessary controls as the business grows, he won't grow as he should. If it doesn't comply with certain basic guidelines, regulations and standards, he could put the company at risk; he could have legal claims against him."
Mark Victor, a partner: governance and risk management at Deloitte, notes: "The reality is that the regulatory environment is increasing – impacting everyone, and increasing the barrier to entry for smaller players.
"Compliance can be expensive, and all the red tape may slow businesses down. On the other hand, without regulation, you get situations where pyramid schemes flourish and customers aren't protected. The trick is to find a balance."
Victor feels that more could be done to help small businesses operate within the law and still thrive.
"Some countries, such as India, offer SMEs more tax breaks and less red tape," he notes.
There are numerous pieces of legislation relating to tax, company structure, employment and governance to be complied with. A key one is the Companies Act.
Reggie Dlamini, the senior associate at Spoor & Fisher, says the old Companies Act (Act 61 of 1973) was designed primarily to cater for the requirements of large companies and it generally ignored the economic and administrative difficulties faced by small businesses.
As a result, the Close Corporations Act, 69 of 1984 was enacted to cater for the small business. However, as part of the effort to modernise South Africa's corporate law, the 'in-principle' decision was taken by government to abolish close corporations and instead provide, in the new Companies Act, 71 of 2008, for a company structure that reflects the characteristics of a close corporation.
"The approach of the Act is to provide for core company rules that are mandatory or 'unalterable', and for certain default or 'alterable' rules that would apply unless varied or altered in a company's Memorandum of Incorporation (MOI)," he says.
How companies are formed, structured and run is laid out in legislation and in the King III code on corporate governance. Ignorance of the laws is no excuse, points out Marais. Often, businesses only become aware of laws when they are threatened with a lawsuit or penalty for inadvertently contravening legislation.
"We often see cases of minimum resale price maintenance, when a supplier or manufacturer prescribes a retail price. Doing so could potentially expose them to risk in terms of the Competition Act, and the penalty could be as high as 10% of turnover. There are generally applicable laws, including the Consumer Protection Act, Business Practices Act and the Competition Act. It is the responsibility of business owners to have a general awareness of all applicable legislation," Marais says.
Making it manageable
Botes suggests businesses approach compliance and governance in phases, taking the most necessary as the company grows.
"First get business going – focus on doing the job and getting the widget out the door. When things start to change, and you move from a 'back of cigarette box operation' to something more formal, you can tackle it in stages. Corporate governance isn't about ticking the boxes – it is more about living what is meant by governance, like ethics and proper structure of business," he says.
Botes advises that businesses start by complying with necessary labour laws, company laws and tax laws.
"Then move on to setting up a board of directors – and in a micro enterprise, this could even be the owner and his or her spouse. As you mature, you will likely need funding for growth – and finance houses will look for checks and balances. Running your business properly will benefit you when seeking finance. Then you might bring in an independent director – this could even be your auditor. This is where you start discussing strategy and forecasts, and an independent director can help you focus on strategic direction."
To help them get their business in order, Botes recommends that MDs or business owners register with the Institute of Directors in Southern Africa – the non-profit body to develop professionals who are charged with governance.
Marais adds that good governance and compliance benefits the business in several ways: it ensures that it is run properly and is more likely to be successful; it mitigates risk.
"It is also critical from a business value perspective to be aware of applicable legislation in order to protect your intellectual property," he says.
A properly constituted, well-run company runs less risk of messy disagreements between shareholders; it avoids lawsuits and penalties and it stands a better chance of securing investment and financing, as well as growing successfully, say the experts.
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