This is the second of two articles dealing with the complexities often experienced at SMEs relating to shareholding, directorships and resolving corporate governance principles at this level. To better understand the approach we take and why we recommend it, you have to read the first article here.
If you can relate to this, you had better call us to assist you.
An outline of the governance framework we recommend is as follows:
1. Corporate governance at SMEs
In our view, the lack of focus on the design, implementation and resolving corporate governance principles at SMEs, and particularly when entrepreneurs set out to establish a business, is at the core of the potential issues they encounter at a later stage.
We believe that governance processes and activities should permeate the entire company while running in the background. These should be:
- practical,
- evolve and develop to remain relevant and appropriate with changes occurring; and
- should not get in the way of doing business.
The time and money invested at the outset under this heading will be a fraction of the ultimate wastage in manhours and finances to unscramble a difficult situation when dealing with conflicts of interest amongst disgruntled shareholders/directors who are blocking growth and development.
We have defined a methodology comprised of six steps that prudent entrepreneurs can and should take before any individual is brought on board as a second shareholder or director. This methodology is perfectly legal and open to anyone to implement, and we have been implementing it for several clients.
The fact that so many enterprises still suffer from conflicts of interest at the board level illustrates that few entrepreneurs are aware of this, and implement it.
2. Six steps to resolving issues amongst shareholders and directors at SMEs
2.1 Amend/replace the MoI of the company
The term “MOI” is an abbreviation for “Memorandum of Incorporation”. It is the founding document of a company registered with CIPC and sets out the rights, duties and responsibilities of shareholders, directors and other persons involved in a company.
Typically companies are incorporated with a short version of the MoI known as CoR15.1A.
It has to be replaced with a more comprehensive founding document which at its core provides for the protection of the interests of minority shareholders in a structured, logical and acceptable manner.
The effect of this is that all shareholders and directors will be bound by these provisions, i.e. owning a share in the company or serving on the board of directors of the company and abiding by the provisions of the board charter, are all linked to and subject to the provisions of the MoI.
2.2 Shareholders’ agreement
Every shareholder of the company is obliged to sign and be bound by the provisions of the shareholders’ agreement. Even shareholders joining the company in future, are to be obliged to sign an addendum agreement that binds them to the same terms and conditions as all other shareholders.
The company is also a party to the agreement.
This is particularly relevant where BEE partners are joining the existing shareholders and at a level 2 BEE rating, holds a majority equity stake in the company.
2.3 Board charter
The purpose of this Board Charter is to set out the governing body’s role and responsibilities as well as the requirements for its membership, its meetings and other procedures.
It is entrenched in the MoI and directors are automatically bound by its terms and conditions. It provides, amongst others, for the following:
- The appointment of an independent chairman of the board;
- The term of a director is one year, or until the next AGM, whichever occurs first, and this also applies to the directors nominated by the BEE partners.
2.4 Consent to be appointed as a director
The Companies Act 2008 as amended does not require that a director in writing consent to serve on the board. It is however an important document to avoid differences of opinion in future, and it should also make provision for such individuals to, upon demand, provide the company with a letter of resignation (if applicable) or a recent certified copy of his/her ID as required by CIPC.
2.5 Term of service as a director
All directors shall serve for a term of 1 year only, or until the next AGM of shareholders. The performance of every director is assessed by the independent chairman of the board on an annual basis, against the parameters outlined in the board charter.
This assessment is discussed with the particular individual and the reports in respect of all directors are submitted to the board for consideration and ratification.
The role and performance of the chairman are in turn assessed by a committee nominated by the board against the parameters outlined in the board charter.
2.6 Independent chairman
SMEs are seldom in a position to afford the appointment of independent directors. It is however necessary that at least one exception be made, namely that independent directors be appointed, and elected as chairman of the board.
The individual to fill this role must be carefully selected, and his role and function be discussed and agreed with him/her before the appointment is made.