Corporate Governance

A C o r p o r a t e G o v e r n a n c e A s s i g n m e n t P a g e | 2

A C o r p o r a t e G o v e r n a n c e A s s i g n m e n t

CORPORATE GOVERNANCE Introduction

Governance issues have taken centre stage in the development discourse and in particular on

Africa’s development agenda (October, 2000). This is because most of Africa’s problems have

in the last forty-five years been linked to governance issues: principally the rule or control by

the State. In this context, governance has been construed to mean political governance. This is

because economic change or transformation is dependent on the willingness of the

political elite to steer the economy in some preferred direction. Therefore, the poor economic

performance of many States in Africa has been blamed on an inappropriate political

environment, particularly poor governance. It is a well-known fact that the political

environment defines the context in which economic governance and corporate governance are

practised. October (2000), states that the relationship between political governance, economic

governance and corporate governance can be likened to concentric circles in which the

political governance circle forms the outside, followed inwards by the economic governance

circle, with the corporate governance circle at the centre.

In October’s model, political, economic and corporate governance are all subject to

pressure from international trends and influences. The collapse of the Soviet Union, for

example, unleashed a series of changes and reforms in other countries. Political change came

first, which brought with it new economic policies and governance standards for both the

private sector and the public sector. At the centre of the concentric circles are the private

and public operators who are pressured by the more general economic and political forces.

In economic theory, there are basically three types of economic systems modeled on

particular ideologies. There is the free market economic system in which the market is the


principal institution through which buyers and sellers interact and engage in exchange.

The market


system is modelled on the capitalist ideology. The polar opposite of the free market system is

the centrally planned or command economic system in which the central government either

directly or indirectly sets output targets, incomes and prices and it is modelled on the socialist

ideology. The third is the mixed economic system, which may be influenced by eclectic

ideologies. The mixed economy is the most common system, as the pure market and

command economic systems do not exist in practice. It should, however, be pointed out that

there is no economic system which exists without government involvement and government

regulation.

Corporate governance also encompasses the setting of an appropriate legal, economic and

institutional environment that allows companies to pursue long-term shareholder value

and maximum human-centred development, while remaining conscious of their other

responsibilities to stakeholders, the environment and society in general (Okeahalam and

Akinboade, 2003).

Conceived this way, corporate governance assumes a developmental dimension, thus

explaining the interest that the discussion has generated around the world. Good corporate

governance practices are now being associated with the advancement of whole societies. The

provision of both public and private goods is affected by governance practices. It is also

concerned with the processes, systems, practices and procedures as well as formal and

informal rules that govern institutions. It concerns the manner in which the rules and

regulations are applied and followed, the relationships these rules and regulations determine

or create and the nature of these relationships.

It is clear from this discussion that corporate governance is not only about the maximization

of shareholder wealth, but an effort to balance shareholder interests with those of other


stakeholders, such as managers, employees, customers, suppliers of corporations’ inputs and

investors, in order to achieve long-term sustainable value and contributing to the economic


development of the countries in which the corporations operate. Implied in this broad

definition is the concept of corporate social responsibility (CSR). This is because good

governance promotes efficient, effective and sustainable corporations that contribute to the

welfare of society by creating wealth and employment. It promotes responsive and

accountable corporations; legitimate corporations that are managed with integrity, probity and

transparency and recognize and protect stockholders’ rights. All these elements and the

concept of corporate governance also stem from the concept of democracy.

Democracy can be seen as either a practice or a system of running government. As a practice,

it refers to the rule of law and embraces the virtue of social equality. As a system of

government, it refers to the rule by elected representatives. In other literature, it is defined as

a government

of the people by the people for the people. It implies that the population at large is

instrumental and active in choosing its representatives in government. Therefore, in a

democracy consent from the people is a necessary prerequisite or precondition for the

formation of government. As Sampa (2001) has put it, “the consent of the people is a must.”

In a democracy, there is a general demand for more political rights, less arbitrary rule, and

free and fair elections

(Shattuck and Atwood, 1998).

There is also a demand for transparency and openness and a demand for information about

how government is run. These are the ingredients of good governance. Good governance

involves transparent and accountable management of human, natural, economic and financial

resources for the purposes of equitable and sustainable development (Krebs, 2001). Good

corporate governance derives from such a system of government.


Definition of terms


Corporate referring to a large organization (Black 2006)

Governance Act or manner of governing (Pocket Oxford

Dictionary)

Corporate Governance The set of rules which are used to control and run a

firm or other organization (Rutherford 2002)

Organization “a group of people who work together in a

structured way for a shared purpose” (Cambridge

online dictionaries)

A group of people brought together for the purpose

of achieving certain objectives. (Stratt 2004)


What is Corporate Governance?


The concept of governance is very broad. This is because the issue of governance

touches many areas of human operations, including how economies and the entities within a

country are managed, the political and juridical methods of governing a country, and how

disputes are resolved in particular communities. Corporate governance is, however, specific

to business practice in private and public institutions. Oman (2001) defines corporate

governance as referring to the private and public institutions, including laws, regulations

and accepted business practice, which in a market economy govern the relationship

between corporate managers and entrepreneurs (corporate insiders) on the one hand, and

those who invest resources in corporations, on the other hand.

Others consider corporate governance as simply the prevention of theft (Nganga et al., 2003).

Shleifer and Vishny (1996), state that corporate governance deals with the ways suppliers of

finance to corporations assure themselves of getting a return on their investment, how

they make sure that managers do not steal capital or invest in bad projects. In other words,

corporate governance is “the mechanism through which outside investors are protected

against expropriation by insiders” (Shleifer and Vishny, 1996). Insiders, according to this

definition, include managers, major shareholders (individuals, other firms, family

interests or governments) as well as large creditors such as banks. Outsiders include equity

investors, providers of debt and minority shareholders. Thus far, the divide in the discussion

of corporate governance seems to be between insiders, those that have a management role in

the firm (at either management or board levels) and those that have an interest in the firm but

do not have any management roles, generally referred to as outsiders.

Nganga et al., (2003) have tabulated the many forms that expropriation can take, including

outright theft of assets, transfer pricing, excessive executive compensation and diversion

of


funds to unsuitable projects that benefit one group of insiders. Because of these forms, it

becomes inevitable to prevent expropriation through appropriate corporate governance

mechanisms and protect small investors from large ones, as well as debt providers from

equity investors.

It has not always been smooth sailing in trying to draw best practices for corporate

governance. Historically the origin of corporate governance is mainly in the United Kingdom.

The Cadbury report set the ball rolling and there have been several reports since. Two famous

ones now are set as references. The aptly named Combined code of 1998 combines the

several reports and covers most areas of corporate governance and separates issues into

main principles and supporting principles. The king report from South Africa after its

independence in 1994 also highlights what should constitute corporate governance.

Formerly one of Africa’s most promising economies, Zimbabwe has begun a process

of economic reconstruction after decades of political turmoil and economic mismanagement.

The advent of a national unity government in February 2009 launched a new but still

tentative era of political stability. The government has a daunting political and economic

agenda. Top priorities include restoring the rule of law, demonstrating fiscal responsibility,

and putting in place macroeconomic and structural reforms to win the confidence of

domestic and international investors.

There has not been generally accepted local code of corporate governance in Zimbabwe

though there have been attempts to establish them. In a story in the Sunday Mail dated 4

October 2009 it was noted that the main hindrance in the crafting and implementation of a

code on corporate governance was a lack of buy in from the key stakeholders. Core values

highlighted in the same


newspaper about corporate governance views in Zimbabwe are discipline, transparency,

independence, accountability, responsibility, fairness and social responsibility which are

almost similar to the ones described above in the FDIC definition.

The Reserve Bank of Zimbabwe (RBZ) after the banking and financial sector crises of 2003-

2004 drew up a code for corporate governance in this sector. This was after it had been noted

that the main reason for the collapse had been due to poor corporate governance and unethical

business practices.

According to Gup(Ed) (2007) corporate governance has the following roles

● protecting shareholders’ interests;

● protecting stakeholders’ interests;

● protecting the public’s interest in the banking system; and

● satisfying bank/government regulators.

In the1990’s the Zimbabwean financial sector was experiencing a boom such that what

happened in the 2000’s came as a shock to many. What emerged though when the dust

had settled, or when the new broom had swept exposed some corporate governance

issues that would have seemed improbable to think?

According to the RBZ report on banking and surveillance of 2004 the financial system can

be summed up as follows:

Corporate scandals and failures witnessed in the banking and financial services industry in 2004, revealed serious flaws and lapses in corporate governance standards for banks and similar financial institutions. These scandals and failures also revealed that if banks and other financial institutions are not effectively regulated, they are prone to bouts of instability which affect other banks and financial institutions and ultimately the entire national financial system.


This assignment paper is going to elaborate on corporate governance issues that have

rocked the financial sector over the last decade in Zimbabwe.

Failures of the board

There was at that time and still persisting board oversight on the dealings of the financial

institutions. This resulted in poor controls and risk management frameworks. There were in

most cases no separate and independent boards for subsidiaries and the holding companies

as reflected in the Barbican, Time, Trust and Royal Banks. The Herald of Tuesday 22

August

2006 had a piece of the problems that Barbican was facing. The board was said to be

dominated by the group Chief executive officer who operated with handpicked directors

who had no capacity to question his decisions. The report goes on to say that the board

failed to restrain the CEO in misleading the investors and failed to exercise oversight of

management operations.

In the Royal bank issue some of the board members were major shareholders of the

corporation and also had interests or ownership in companies which were receiving loans

from the bank. As for Time bank it had five directors of which the majority were executive

directors. These shortcomings expose the kind of decisions that were coming out of board

meetings of these respective institutions.

According to a study by Zororo Muranda, (2006), in all cases of pronounced financial

distress, either the chairman of the board or the chief executive wields disproportionate

power in the board. The disproportionate power emanates from major shareholding. The

overbearing executive overshadows other directors, executive and non-executive, thus

creating power imbalance in the board. The study shows that financial institutions in

Zimbabwe (as cited in abridged cases) underestimated the competitive forces that resulted


from first, economic deregulation and later economic decline coupled with political

meltdown. In order to survive,


banking institutions significantly shifted from their core business. In all cases the institutions

ended up engaging in financial and accounting imprudence. The study also shows that an

active role by regulatory authorities directly contributes to observance of good corporate

governance practices.

Inadequacies of internal controls

The board of directors in their role in running an organization is to ensure that there are

proper internal controls to safeguard the shareholders interest. Most of the CEO’s in the

financial sector in this period were also major shareholders as well as executives of the board

and they would simply override whatever decisions in the board and would do as they want.

This owner manager type of management system does not allow for good control measures.

ENG Directors who were all executives did not regard the importance of internal controls to

an extent that they promised very abnormal interest rates to their clients but at the same time

using depositors’ money to buy assets which however could not be liquidated easily. When

clients investments matured they were found wanting with nothing to pay out. The system

wide problem was also encountered in the sister company, Century Discount House which

was heavily exposed and eventually liquidated.

Ethical and legal challenges

As mentioned above one of the core objectives of corporate governance is compliance with

the law and government regulations. Directors in most financial institutions in the 2000s lost

their professionalism and became unethical opportunists. They abused power and trust. Most

of the unethical practices which were prevalent were fraudulent activities, inside lending,

failure to meet and settle obligations in time and conflict of interest among others.


Most banks have breached the legislation, including the Banking act (Chapter 24:20),

Banking regulations, Exchange control act. The Herald of 22 August 2006 details how a

former director of Barbican Bank voluntarily gave information of how the bank flaunted

some of the legislature. The bank was mixing banking and non banking business with no real

separation of

the books of accounts of the asset manager and those of the bank. There was abuse of the

group structure with some subsidiaries being entered in other books as being under the

Barbican asset Management. It seems like they changed the companies profile to suit what

they wanted. But barbican was not the only institution doing that. In an Investigation of the

books of Trust Bank by KPMG, it revealed that the corporation’s directors would approve

loans to finance their offshore investments.

It is unconceivable to note that some directors were cooking the books of their companies and

making false statements about the financial position of the company. Some were forwarding

themselves with loans like the recent case in Renaissance bank. Recent developments at the

bank were that Depositors’ funds were siphoned under a well orchestrated and calculated

fraudulent intricate web of related party transactions. Some of the asset management firms

were Briefcase businesses with no physical operations premises. ENG Capital concentrated on

converting investor funds into assets which are illiquid. During the cash crises of 2003 asset

management firms held more that 60% of the cash for speculative purposes thereby denying

people of their cash. They at that time before the multicurrency system were perpetuating the

Black market by buying forex on the parallel markets.

Reserve Bank of Zimbabwe Interventions


The above mentioned corporate governance issues are not the only ones to hit this sector. If

left to continue unabated the situation could have gotten worse by continual bouts of

instability affecting the whole financial sector and the nation at large. In 2004 the RBZ noted

the

notorious absence of a comprehensive Code on Corporate governance and drawing lessons

from the King 2 report and other instruments issued two guidelines, namely the Corporate

governance guideline and Minimum internal audit standards in Banking institutions. The

RBZ ensured that through its Banking, Licensing and surveillance division the banks would

comply with the regulations. The reserve bank governor Dr Gono in his inaugural speech as

governor set the tone of the task at hand by saying that:

As Monetary Authorities, the Bank will not stand by and watch without consequence, malpractices taking place within financial institutions under its jurisdiction. The financial sector is, therefore, forewarned and is expected to uphold sound corporate governance standards. Only by encompassing sound corporate governance practicescan we maintain soundness, and the prosperity of the financial sector which in turn will guarantee same to the economy as a whole’.

Below are extracts taken from the RBZ Banking, Licensing and Surveillance Guidelines of

2004:

Firstly with the financial institutions in trouble the RBZ maintained its Big Brother

attitude of trying to save them if they can be saved. Pursuant to the objective of

market stability, the Bank with effect from January 2005, adopted a comprehensive

Troubled Bank Resolution Framework to effectively deal with problem banks. The

framework outlines the solutions and course of action for weak banks. The key

objectives of the Troubled Bank Resolution Framework are to:

• Restore stability of the financial sector;

• Strengthen the banking system and promote sound banking practices;

• Develop permanent solutions for troubled banking institutions, and;


• Promote economic development and growth.

With effect from January 2004, the Reserve Bank of Zimbabwe became the

licensing and supervisory authority of asset management companies.

Banking Supervision activities were decentralised through the establishment of

Regional Centres in major centres such as Mutare, Bulawayo and Gweru with

effect from 1 November 2004. This was designed to enhance supervisory presence

in those areas to ensure that the banking and non-banking institutions’ operations

are safe and sound.

Supervision department was elevated to a division. Within that division the

Corporate Governance and Compliance Unit was set up in August 2004 to monitor

compliance with laws, rules, and regulations, and to promote effective corporate

governance systems in financial institutions, in line with international best practice.

New Minimum Regulatory capital requirements which are now pegged at

US$12.5 million

The Guideline calls for the appointment of independent chairpersons, a balance of

power by calling for separation between the chairperson and chief executive officer,

with the appointment of independent non-executive directors and boards comprising

of technically competent persons of impeccable integrity with a strong sense of

professionalism

Clause 2 of the Corporate Governance Guideline states that no shareholder with a

10% or more shareholding in a banking institution would be appointed Chairperson,

Deputy Chairperson, nor form part of management. Further, no individual shareholder

who had significant shareholding in a failed institution or anyone previously involved

in the


running of a failed institution would be allowed to hold a significant shareholding in

a banking institution or to hold a position of accountability in a banking institution.

Boards of directors are required to set up committees to provide assistance in

discharging their duties and responsibilities. However, the board remains

accountable.

Financial institutions are required to seek prior written consent of the Reserve Bank

on appointment of a chief executive officer or chief accounting officer as stated under

section 20 of the Banking Act.

As part of the vetting process, directors are also required to disclose their

directorships and shareholdings in other companies. And as part of that a person is

not allowed to have more than 7 directorship positions.

The guideline highlights the requirement for directors to play an active role on

their boards by setting a minimum 75% attendance rule, compliance to which

must be disclosed in the institution’s annual report.

The only drawback of these guidelines is that they are not mandatory but are just suggestions

to the financial institutions. This is not only a problem for Zimbabwe but worldwide as it has

been difficult to make the codes of corporate governance mandatory.

Solutions to Corporate Governance Issues in Zimbabwe’s Banking Sector

Managing the financial sector is no easy feat. Money is the root of all evil and people change

when they sniff a little cash. The problem in the banking sector starts with the government

and RBZ. According to Mervyn King in an interview in the Sunday Mail of 4 October 2009


“you need a government that practices good corporate governance and for companies to

practice it as


well otherwise these large gurus of capital in the world-the trustees- have a duty to their

beneficiaries not to invest in companies they believe are badly run. Firstly there is a great

mistrust between the institutions and the regulator. The RBZ needs to have an image change

so that people are confident in the institution. Many of the recommendations put forward

after the banking crisis are commendable but then most of the closed institutions are winning

their cases at the courts. The RBZ has to take a look at itself and see where the rot is. Most

reserve banks advocate that the governor be the chairman of the board as they say decisions

are easier to make, but this runs contrary to what the code of governance advocates for.

Therefore I think

the governor should be a member of the board but not the chairman so that the board does

not become a rubber stamping board.

The RBZ should work closely with the Ministry of Finance so that the country makes its own

code of corporate governance which in enforceable. There is need to have boards more

accountable to the goings-on of the organizations. As clearly highlighted in the guidelines it is

imperative that the boards are constituted of professional people with at least 5 members and

most of them being non executive because an outside eye can see things differently than the

executives. A board member should have a 3 year term with a maximum of 2 terms so that

new ideas keep coming to the corporation. Board members should be compelled to declare

their interests so that unethical behaviours can be nipped in the bud. In the same light board

members should have the full board approval if they can access a loan from the same

financial institution.

The RBZ should make sure that the same board members do not meet in several boards as

they would become more accustomed to each other and there will be no progression in

business. Whistle blowing culture should be engraved in the culture of the financial sector so

that unethical behaviours can be found out earlier. The RBZ should make sure that the bank


inspectors are well remunerated so that they are not easily bribed. These persons should

also declare their assets so that they are also easily monitored.

Recent initiatives have focused on the development of a corporate governance code and the

promotion of corporate social responsibility (CSR) — also called corporate citizenship — as

a guiding concept for business operations in the country. CSR was considered in Zimbabwe

in the past through the Environmental Impact Assessment Policy (EIAP) established in

1994; however, the law was non-mandatory and, therefore, largely ineffective (Maphosa,

1997).

This is not surprising; the Benchmark Corporate Environment Survey done by the United

Nations Conference on Trade and Development (UNCTAD) in 1990-1991 found that the

motivating factor for transnational corporations to develop environmental policies was

legal liability, in their home country in particular (UNCTAD, 1993).

More recently, the unity government has endorsed an initiative by the Zimbabwean Leadership

Forum to establish a corporate governance code. The drafting of the code began in November

2009, and it is expected that it will be finalized by October 2010 (Kangondo, Fanuel, 2009;

The Herald, 2010). As part of a large-scale marketing strategy designed to attract short- and

long- term investments, the code will target local and external investors, aiming to reassure

them

their investments are entering a secure market. A significant aspect of this initiative is the

involvement of stakeholders, including the government and the international community

through the World Bank. The viability of the initiative depends on the participation of these

actors and other private and public sector institutions that are invited to participate. The

Forum’s hope is that the existence of a code will be followed by better corporate governance

in the country and all these efforts should help to retain sanity in Zimbabwe’s banking sector.


Conclusion

In an article on corporate governance in The Herald of 1 October 2009 Allen Choruma states

that Corporate governance focuses on a number of issues such as ; organisational structures,

separation of ownership and control, decision making processes, internal control

mechanisms, checks and balances, accountability, transparency, ethics, performance and so

on.

The financial sector in Zimbabwe has gone through trying times with the spectacular collapse

of notable institutions without warning. Corporate governance or the lack of it has been the

root cause of most of the problems in the sector. Zimbabwe has no code of corporate

governance at the moment as there is no buy in from the stakeholders. The RBZ has tried to

bridge the gap by formulating some guidelines which though not binding is a step in the right

direction in trying

to sort corporate governance issues in Zimbabwe.


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