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What corporate governance requires

By Alex T Magaisa

THE purpose of this article is to demonstrate the futility of corporate governance in an atmosphere of poor political governance. I advance the thesis that as long as conditions of politica

l governance remain poor, there is very little hope for improving corporate governance in the country. The state and the regulators cannot claim moral authority to promote and enforce good standards of corporate governance when they do not practice good governance.

Corporate governance requires a sound and stable economic environment. The agenda for corporate governance is premised on certain assumptions.

A chief assumption is that there is a prevailing system of law and order, which is based on certainty and consistency.

A further assumption is that there is a normal environment in which the market forces operate without unnecessary interruption. In other words, the success of corporate governance is predicated on the overall assumption of a normal economic environment.

The high priests of corporate governance must not only preach about it but must be seen to abide by the rules and principles of good practice. When the regulator does the very same thing that it castigates when done by the regulated it becomes very difficult to take it seriously.

The case of the RBZ purchasing a large fleet of luxury motor vehicles demonstrates a failure to stick by what it requires others to do. Not so long ago, there were detailed criticisms by the RBZ of executives of banking institutions who spent vast amounts of money on luxury vehicles and other assets at the expense of other key business needs.

Even if the RBZ says it has justifications for purchasing the cars, we do not forget that the bank executives also had reasons to justify the purchases. At a time when there are key needs beyond the comfort of employees and even if under normal conditions it would have been acceptable such conduct is seen by the public as flagrant display of extravagance and erodes whatever moral authority the regulator has over the market.

The rules of corporate governance on their own are insufficient to perform the function of regulating the affairs of the company. This is because most rules are voluntary codes and not legally enforceable in a court of law. That is why, as I have indicated in previous articles, it is necessary to have a clear, strong and reasonable regulatory structure.

The chief law regulating corporate activity is company law. I have argued, in the series on company law reform, that the modernisation of the company framework is a condition precedent to the success of corporate governance.

Such a development, and improvements in the regulatory structures in relevant sectors such as banking, insurance and other key financial services sectors play a key role in improving legal certainty. In that framework corporate governance rules act as supplementary, voluntary codes to complement the legal rules.

A normal environment in which market forces operate with minimum interruption augurs well for the development of corporate governance. If there is excessive regulation and unnecessary interruption, it is very difficult to permit the operation of normal market rules. State interruption interferes with the rules that would otherwise permit the success of instilling a culture of corporate governance.

Instead of voluntarily adopting rules of good practice, corporate boards will spend time trying to devise ways of circumventing excessive regulation and interference. Corporate governance does not necessarily succeed because persons are forced to adopt rules.

A culture of willingness to abide by good practice has to be carefully cultivated. On the other hand, adopting a belligerent approach can only serve to create defensive attitudes and sometimes adverse reaction.

Instead of abiding by rules, boards will take steps to beat the system.

In addition, where the economic situation is not normal, businesses tend to adopt tactics that enable them to survive and sometimes to exploit the weakness of the economic system. The legality or otherwise of the methods that they use becomes secondary.

A prime example is the foreign currency problems in Zimbabwe. The setting of exchange rates that fail to match the realities on the ground means that either for survival or greed, businesses will always resort to the market, which allows them to reap the greatest benefits.

The best way to resolve the problem is to create conditions that enable the enhancement of the productivity that brings in foreign currency in the normal way. Over the last five years, we have literally exhausted some of the lines that brought foreign currency into the country.

The destruction of the country’s agricultural capacity on the back of an unplanned, ill-executed and chaotic land reform programme is one of the prime reasons for the dire situation in which the country finds itself. While the human rights paradigm has dominated the debate on that issue, in my view, the domination of this approach has had the effect of obfuscating the key issue, which is that this was simply a case of bad economic management.

The harsh reality is that the economic situation in Zimbabwe is not normal. The state interferes in the market so excessively because it tries to appease the ordinary members of the public but often this is also at the expense of corporate activity.

It is almost futile to talk of good corporate governance when the companies have to engage in extra-legal activities simply because of the desire to survive. It is all too easy for regulators and the state to cast blame on corporate executives for all the wrong things in the economy.

The reality however is that the ultimate responsibility lies with the state and its capacity and willingness to set conditions that are necessary for viable entrepreneurship. In order to do this, the state has to demonstrate good political and economic governance.

By creating the conditions that promote legal certainty, economic predictability and freedom and general stability while also demonstrating a culture of accountability, the state will be leading by example. More crucially, it will enhance its moral authority over the businesses that it regulates.

It is also interesting that while the government is pursuing a “Look East” policy in its foreign and economic relations, there seems to be an assumption that the East somehow operates on an approach that is fundamentally different from the West.

In the context of corporate governance this is of course inaccurate and misleading. Anyone who has done research in these areas of corporate activity will know that most Asian countries, including China, are actively re-modelling their corporate governance structures along Western lines.

Most reforms in corporate governance in Asia tend to borrow from the Anglo-American approaches. Indeed the Chinese and fellow Asians every year send hundreds of thousands of their students and future business leaders to leading universities in Europe and America.

As I indicated in a previous article, while we are looking exclusively to the East, the East itself is actively looking to the West. Some consistency and realism in economic and foreign policy may guide us in a better direction, unless we wish to remain in the 1970s global divisions, because in reality, the world is converging whether or not we like it.

In conclusion, if the state is to retain the moral authority to regulate the affairs of business and encourage good corporate governance, it has to start by promoting a culture of goods political governance. Good political governance augurs well with good economic stability and freedom. Rules of the market are respected when things are normal and there is no need to scavenge.

As long as businesses have to scavenge to make ends meet, it will be very hard to abide by the normal rules of corporate governance. It is very easy and convenient to place blame for the country’s woes on corporate executives but the reality is that it is the state that has the overall responsibility for the state of the economy.

In short, good corporate governance cannot develop where there is no good political governance.

* Dr Alex Magaisa specialises in company and financial services law. He can be contacted at alex.magaisaa@nottingham.ac.uk or wamagaisa@yahoo.co.uk

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