The former manager and chairman issued a veiled criticism of the current Rangers regime, from which he resigned in August, and said directors should appreciate the seriousness of supporters' "Sack the Board" protests.
Rangers' chief executive, Craig Mather, flew to South Africa this week in an attempt to persuade Dave King to renew his formal connection with the club.
King invested £20million in Rangers when Sir David Murray was in charge but lost his investment, and his directorship, as the oldco went into administration and was liquidated. King was embroiled in a lengthy and complex dispute with the South African tax authorities before reaching a settlement agreement worth £45m. Since then he has been free to invest in Rangers again if he so wishes.
Smith welcomed King's possible involvement but said he found it hard to imagine the multi-millionaire returning to work with the current Rangers board.
"The right thing will happen and Rangers will come back," said Smith. "But it will not be without further pain. I don't think there is any doubt about that. You have to feel optimism for the simple reason Rangers are a great club. They cannot continue being run in the manner they are at the present moment. That can't continue. It can't be allowed to continue.
"Therefore, when you are seeing supporters protest in the manner they have done in the last few games you know that, effectively, will be the reason Rangers will get out of it.
"Does Craig Mather going to see Dave King make sense? I don't know. That's the difficult thing about Rangers: what makes any sense any longer? I don't know if that's true or whether Dave King would come back and get involved in Rangers again.
"I hope somebody can come in and end this situation we have at the present moment where there is a circumstance where EGMs can be called at any given time by any given person. That situation is not conducive to running a stable football club. So if we get an owner back and one who is basically interested in the football side of the club and seeing the football side of the club progress - as Dave King would be - that would be a good thing for Rangers. I don't know what his thoughts would be on that. I don't really envisage him coming back to sit amongst the board."
Supporters have chanted "Sack the Board" and raised banners at recent Rangers games. Smith said a manager would recognise the writing was on the wall if protests were being held against him, and the same should apply to a board of directors.
"As a manager, you expect that's how fans will show their discontent. If you are a manager you expect that kind of thing amongst the support. But it's the first time I can remember the board taking that kind of criticism. That's an indication.
"If you were a manager that would indicate you are having a struggle. It should also indicate to the board that Rangers are also in the middle of a struggle."
Smith praised the continuing contribution of his friend and successor as manager, Ally McCoist, and said there may have been some mischief-making in the fact his £825,000-a-year salary had become public knowledge.
Other past and present boardroom figures - Charles Green, Imran Ahmad and Brian Stockbridge - have been heavily criticised for their wages and bonuses, and there has been speculation McCoist's salary was leaked in order to take some of the heat away from them.
"They were probably trying to make other aspects of the Rangers situation look less bad," said Smith.
"What they forgot is the manager signed his contract when Rangers were in the Premier Division, and they were in a position to gain a European place. If there had been financial desperation then surely they would have gone to him prior to this?
"I don't think they have done. I think it is him who has made the offer to take a pay cut. It must have suited everyone for that to happen."