SMEs’ corporate governance systems: status and effect on continuity

Abstract

Corporate governance (CG) is recognised as a key driver of company performance, improves the decision-making and strategic vision of the business, thereby making it easier to monitor and manage risks as the business grows and matures (Bradley, 2010; Wellalage & Locke, 2011). Effective governance promotes continuity in small firms, allows for growth, maturity and succession beyond the founder. South Africa is recognised as having world class CG codes; however it has the highest SME failure rate amongst the developing world countries. No data existed on whether SMEs were using CG principles to improve performance, growth and continuity. This study aimed to determine the extent CG principles in King III were implemented by SMEs; to understand the process followed by SMEs in entrenching ethical leadership and culture and to determine the context and content of a simplified code of CG for SMEs. Data was collected using exploratory qualitative method, through in-depth face-to-face interviews. A convenient sample of 11 SMEs was used to determine the state of King III implementation; challenges and benefits experienced by SMEs from adopting King III; and conclusions on ethics and agency problems in the SMEs. A CG expert specialising in SMEs was interviewed following a Delphi technique; on the need for SMEs to have a simplified code of CG. The overall results from the study confirmed that CG in SMEs brought accountability, transparency, improved performance and could be used as a driver of growth. The study also found that agency problems existed in the South African SMEs; and that there was a need for a simplified code of CG for SMEs and the seven key elements of such code were identified. The key words for this study were: corporate governance, King II Report and Code, SMEs and continuity.