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Challenge of changing norms in corporate sector

Alex Tawanda Magaisa

ONE of the key problems faced by developing countries in their attempts to reform their corporate governance systems is the potential tension between the imported legal rules and prevail

ing norms in a given market.


In trying to change the legal architecture they tend to focus on the symptoms rather than the cause of the problems. Often they identify that poor corporate governance is a problem, failing to recognise that in fact, poor corporate governance is merely a symptom of deep underlying problems within a market.


Consequently, they fall into the trap of reproducing replicas of laws developed in the industrialised countries thus adding to the available legal structures and substance without addressing the core causes of poor practice in corporate governance.


In my view, in its attempts to address the corporate governance problem, Zimbabwe is following the same route which is fraught with difficulties. We see some common contradictions recurring within the Zimbabwean system.


The first point is that Zimbabwe does not have a shortage of laws to deal with problems in the corporate sector.


Among others, the Companies Act and the Banking Act provide various mechanisms for dealing with problems in companies and banks in particular.

For example, where shareholders are unhappy with transactions that directors enter on behalf of the company, they have the option of pursuing derivative actions on behalf of the company.


They also have the chance to monitor the board through the general meeting as they have the power to appoint and remove directors.


The Companies Act and common law also impose enforceable legal duties on directors. The criminal and civil justice system also generally provides avenues for holding companies and directors legally accountable where misconduct if proscribed by the law.


Until the current crisis, few shareholders have resorted to these actions and the state has rarely taken action against errant companies and directors.

Therefore, the central question is why there has been the divergence between law and practice in the corporate sector.


Some legal and economic experts on comparative corporate governance have argued that norms or non-legal rules often operate in substitution of the legislated rules and regulations within the corporate sectors of most countries.


This is particularly the case where foreign laws are transplanted into the local systems without due consideration of the legal and business culture of a given country. The thesis is that interested actors in the market generate informal rules to govern their firms and relationships which eventually solidify to become norms. These norms become the de facto rules that dominate market affairs and relations. This is what they mean when they say “this is how we do business here”.


The state sometimes supports the growth and solidification of these norms by either giving tacit support to companies or simply failing to use the available laws to clamp down on prevailing norms. In this situation, such norms are maintained not necessarily because they are efficient to the whole country but precisely because they satisfy the interests of the parties that apply them.


This also includes state actors such as regulators who as long as the norms operate without suffering the impact of external shocks, will deploy less time and capital to supervision. Shareholders take a back seat and leave corporate affairs in the hands of managers and boards are effectively nominal entities under the control of controlling-shareholder managers.


Where legal disputes should be solved using the available laws, actors simply resort to their informal dispute resolution mechanisms. Even before the recent bold statements, there also seems to have been a subtle rule that banks cannot be allowed to fail hence the general availability of soft-landing whenever banks fell into liquidity problems.


The only exceptions have been United Merchant Bank and Universal Merchant Bank – both merchant banks although the latter was effectively rescued through a takeover.


The rest such a FNBS, although not operational, cannot be said to have been effectively closed as the rescue scheme of the ZABG demonstrates.

The ZABG effectively represents the perpetuation of the state-sponsored Norm of “No Bank Failure in Zimbabwe”.


We notice also, that despite clear suggestions of fraudulent activities in the late Boka’s United Merchant Bank saga, there were no effective civil or criminal actions pursued by the state or individual shareholders.


This was despite the availability of laws and demonstrates again the divergence between law and actual practice.


In my view, it shows the perpetuation of these norms because they favoured certain groups. Change at that time involved various political and social costs hence people resorted to the non-legal regime where things were solved quietly, beyond the public domain or simply left to fade without much question.


Although people are quick to point to the alleged misconduct in the banking sector as having been a result of greed in the past few years, I suggest that the behaviour of actors was nothing new or odd. It was simply what they had done before, with the tacit consent of state actors.


It explains also why many actors panicked when change-agents emerged because these change agents have not acquiesced to the norms operating in the system but have sought to apply the law and add new laws to the legal architecture. These change-agents are represented by the RBZ and the new governor, himself a former player in the market, and therefore with knowledge of the norms operating in the system. Yet in doing so, the change-agents have failed to focus on the key issues or properly direct a course of action that deals with the problems.


If corporate governance is the system by which companies are managed, it follows that one must have a clear understanding of how Zimbawean companies have historically been managed. That way, we can discover the norms that diverge from corporate law. The challenge becomes one of changing norms and not necessarily adding new laws.


The authorities should tackle the norms in the corporate sector as a whole and not simply focus narrowly on the banking sector. There has been a plethora of new laws in the last few months and more are set to come but the truth is that most laws do nothing to add to the available legal structure and substance.


The task of tackling norms is understandably difficult because as informal rules, there are no formally mandated procedures for amending them.


In light of the number of arrests and pursuits of corporate executives there seems to be a perception that enforcement of criminal sanctions is the only answer to changing the normative culture in the corporate sector. Yet this process is also fraught with difficulties not least the fact that the laws under which persons are being pursued are potentially in contravention of human rights embedded in the constitution. There is also the problem of the questionable independence and efficacy of the legal structure, ie the courts and enforcement system.


One of the assumptions on which the new corporate governance regime is based is that there is an efficient, well-functioning and impartial civil and criminal justice system.


If conditions under which people are arrested and incarcerated fail to demonstrate this, it is unlikely that good corporate governance can emerge as people will always resort to other cost-effective and hidden mechanisms of carrying out their business.


The danger also is that focusing simply on high-profile figures gives a tacit licence to rather than deterring other players who continue in the belief that they are not big enough to warrant pursuit. That way, norms persist in the sector.


In my view, other and more effective mechanisms ought to be explored to deal with the norms rather than simply focussing on high-profile criminal prosecutions. The danger is that if people (as some do) view the arrests as politically-motivated and if indeed after the necessity of extracting political capital expires and the criminal prosecutions drag and eventually stop, people will resort to the norms.


Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at the University of Nottingham. Contact: alexmagaisa@nottingham.ac.uk

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