Any review of the structure and methodology to be applied to the vexing intersection between shareholders and directors and governance at SMEs should also focus on sound corporate governance, or the lack thereof, to be adhered to and exercised by such directors. who are also shareholders.

This article will only deal with some of the issues impacting the directorships of SMEs.  A follow-up article will deal with an approach to resolving it.

Contact us if you want to discuss your own, or your company’s circumstances and need advice.

1    Defining the problem

Friends and relatives

It is estimated that more than 750,000 SMEs registered as companies or CCs exist in South Africa, comprising a few persons, be it friends, associates or family, who came together to establish/operate a business.  These relationships always commence on a good footing and everyone is positive and keen to make a success of their endeavours.

Over time, however, many of these relationships change; differences of opinion and arguments arise and remain unresolved.  The individuals drift apart.

In most cases, all the participants are shareholders and also directors.  They consider themselves as equals and no leadership structures evolve and vest.  Once these relationships have been damaged, it is difficult, if not impossible to agree to, design and establish mechanisms to restore the equilibrium.

I think that at least one in twenty SMEs are, or have experienced these issues.  Without outside help, few probably have managed to overcome it.

BEE

A further complication arises when existing SMEs bring a black empowerment partner on board to secure an attractive BEE rating for the business.

The BEE decision often creates tensions amongst the existing shareholders and/or directors.  Often, for the first time, a clearer focus is placed on the dreams and aspirations of each of the participants, leading to differences of opinion and a potential breakdown of relationships.

Even worse is when the BEE partners exploit their majority ownership, eg appointing more directors, salary increases, additional shares issued and other actions that benefit themselves, leaving the minority shareholders in the lurch.

Arguments ensue and relationships deteriorate.  The business suffers.

2    Issues impacting directorships and boards of SMEs

Structure and methodology to appoint directors

Matters involving shareholders and directors and governance at SMEs can sink any good intention.  Shareholders need to put in place a structure and methodology for the appointment of directors.  This framework establishes a protocol that has to be followed by all parties in the event of a dispute arising.

Furthermore, developing and implementing such a framework must be done at the outset, while everyone still feels positive and is committed to making a success of the planned venture and above all, are on a good footing with one another.

Directors to understand their roles and duties

Few companies go to the trouble of ensuring that individuals who agree to become directors, actually understand the implications of serving as a company director.  A good illustration of this can be found here.

People often confuse the different roles involved of being a shareholder, a director and a paid employee and more importantly, being able to think and act rationally when wearing a particular hat.  For instance, the board may decide that it is in the best interests of the company if some employees are retrenched, which could involve you as the employee.  How do you react?  Can you think like a director or shareholder while digesting the hard facts on the table?

Appointing outside directors

Many SMEs believe that they cannot afford to appoint an independent chairman as well as one or more independent directors.  Yet, this often is a wise move on the part of the shareholders – if nothing else, at least appoint an independent chairman.

From an outsider point of view, serving as an independent director or chairman, also has its challenges, as can be seen here.

Find someone who shares your vision and is prepared to settle for remuneration on a sliding scale – perhaps linked to a metric over which he has no control.

The chairman

The role of the chairman, amongst others, is to:

  • Act a sounding board for ideas, resolving disputes, bring a calm and collected view to meetings.
  • Agree with each director his/her role and accountability.
  • Expect nothing less than the best they can be from each director.
  • During the term analyse relative failures of each director to meet the standards in terms of means, ability and accountability, eg. did they speak up when they should have, etc.
  • Conduct serious and to-the-point annual reviews with each director.

The chairman’s role is annually assessed by the controlling shareholders.  He/she is in turn responsible for doing the same with the directors on the board.

 

This article only dealt with a few issues impacting the directorships of SMEs.  A follow-up article will deal with an approach to resolving it.

Contact us if you relate to the above and want to discuss your own, or your company’s circumstances and need advice.