In contrast to King I and II codes, King III effective from 1 March 2010 applies to all entities regardless of the manner and form of incorporation or establishment and whether in the public, private or non-profit sectors.  The principles have been drafted so that every entity can apply them and, in doing so, achieve good governance.  In South Africa all companies listed on the JSE have to comply with King III.  There is no such legal requirement for SME’s to comply with King III and as such many do not comply with King III.  King III is an apply or explain approach to corporate governance rather than an apply or else approach.  However this lenient stance has not encouraged SME’s to openly embrace King III.  They see it as an unnecessary cost and burden on the business.  An area that does not add to the bottom line.  A number of the sections in King III are rather onerous for an SME however there are also sections which would benefit all businesses, irrespective of the size. 

With the introduction of the new Companies Act (2008) the responsibilities and accountability of directors has increased substantially.  In terms of Section 76 (3) of The Companies Act, 2008 a director must:

  • Act in good faith
  • In the best interest of the company
  • With the degree of care, skill and experience that is expected of a similar person in like circumstances.

If something were to go wrong in the company it would now be easier for the courts to prosecute the directors.  One of the first and crucial aspects the courts will probably consider will be in the form of the governance of the company and the relevant best practice in this regard.  In terms of best practice the courts will look at King III as a benchmark.  Complying with King III would send a strong message to the courts that the director did perform his/her duties in terms of Section 76 of the Companies Act.

At first glance King III does appear daunting to the average SME with mention of audit committees, risk committees and independent non- executive directors.  This appears to be overkill for the average SME.  However, as mentioned, King III is an apply or explain set of standards.  Which means that all SME’s can be fully compliant with King III if the directors have been through each section in detail and have come to a knowledgeable decision that the specific section is just not practical for the business to implement.  SME’s should by way of explanation make a positive statement about how the principles have been applied or have not been applied. 

In conclusion, SME’s may not have external stakeholders in the form of public shareholders however they still have a duty to their stakeholders whether it be the employees, suppliers, customers or even the community in which they operate to be run in the best way possible and the benchmark for this would be to apply King III.

Gary Kemp

Audit Manager, Durban

 

Sources : King Code of Governance For South Africa 2009

                Companies Act 2008