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Setting agenda for company law reform

Dr Alex T Magaisa

A MODERN and stable marketplace characterised by a strong and well-developed company law framework and a developed company law system are important planks upon which to build and cultivate

a culture of good corporate governance.

It seems to me that while there has been so much discussion focusing on how to enhance good corporate governance in developing countries, there has been an absence of rigorous debate about the legal foundation upon which regulation of corporate activity is based.

The reform of the old and archaic company law frameworks has been slow, piecemeal or non-existent. The focus on corporate governance systems, most of which are grounded upon voluntary submission to “soft” laws, has been less successful because company law, which is one of the key ingredients has not been strong or properly administered and enforced in the recent past.

In fact, it has remained backward and poorly structured even in style and language, making it inaccessible to most users in the market. It is hardly surprising that corporate governance has not developed very well because the main actors have a very small understanding of the primary laws that govern their operations. I suggest in this article that it is necessary to develop the country’s company law framework in line with modern developments.

A key motivation for embarking on this theme at this time is that I am currently engaged in a corporate law reform project in the course of my work. At the same time, the UK is moving towards the latter stages of its company law reform programme that began around 1998.

A key company law reform programme document was presented to the UK parliament in March. Even though in today’s Zimbabwe, some may find it politically incorrect to look to the UK for legislative precedents, history and economic circumstances mean that there are a number of reasons why it may be necessary to take a peek at what is happening there.

Firstly, for obvious historical connections, company law in Zimbabwe is largely based on the UK company law. Unfortunately, save for a few amendments, our company law is still based on the UK law as old as the 1948 statute. This means that save for a few amendments, most of our company law is more than 50 years out of date.

Meanwhile, over the years UK company law has undergone a series of changes partly in response to developments at the European Union level. While on the one hand there is the disadvantage of having a bad legal transplant, particularly if the law that is adopted is not properly suitable for the environment into which it is imported, there is an advantage in that when reform is needed, the importing country can always place some measure of reliance on the developments and reforms in the exporting country.

The importing country can always free ride on the experiences of, and research in the exporting country and adapt reforms to its local context whenever it becomes necessary. Simultaneously, the exporting country benefits also because these are probably what economists call invisible exports — they manage to export their legal culture across the world in moves towards convergence.

Company law is fluid and ought to adapt to changes in the business environment. There are some aspects of business, which were not foreseeable and therefore not accounted for in the law 50 years ago.

For example, the development of information and communication technologies in the last 20 years has transformed the way business is conducted across the world. In addition, the convergence of markets and electronic communication means that shareholders are now based in diverse parts of the world. So for example, where current law requires paper-based communication to shareholders, it may be more convenient, cheaper and efficient to use electronic mail or the websites for such communication.

It may also be necessary to change the way we see general meetings in the physical sense because video-conferencing technology may enable meetings to be held even if parties are in different places.

There are many other areas of the Companies Act which reflect the time when it was enacted but fail to take into account developments over the years. In fact, adapting the law to such technologies can produce significant savings in terms of both time and money. This is particularly clear if one imagines the amount of money and time spent on production of voluminous reports and other company documents which could easily be dispatched by electronic means. However, the law may need to be changed to enable companies to do so and dispense with paper-based communication systems.

In addition, although most provisions of the Act are necessary in the daily conduct of business from formation to the demise of a company, the provisions are couched in archaic, complex and incomprehensible language.

This makes the law inaccessible to most users. In most jurisdictions, there are on-going revisions to the old economic laws in order to ensure that they are drafted in simple terms and are user-friendly.

Arguably, only a few people, other than the legally-trained or experienced business executives can claim to have an adequate understanding and comprehension of the law of companies, let alone the company annual reports and accounts which are supposed to be key avenues for disclosure to shareholders.

The law regulating the manner and form of such disclosure instruments is inadequate, thereby permitting companies to produce reports that have limited data, most of which is incomprehensible to the targeted stakeholders. Therefore, it is hardly surprising that shareholders and other key stakeholders do not understand their rights and responsibilities in the governance of companies. It is inconceivable in such climate that relevant stakeholders would know their roles in corporate governance.

Another consequence of the complexity is that often companies and investors have to resort to professional advisors and spend lots of time and money even for what might otherwise be simple matters if they were stated and explained in simple terms.

A clear revision of the law would be necessary to modernise the law, which would enable relevant stakeholders to play their roles. It may also be advisable to follow the dominant phenomenon in law reform of drafting guidance notes to accompany legislation which users can refer to as they interpret the law.

* Dr AT Magaisa can be contacted at alex. magaisa@nottingham.ac.uk or wamagaisa@yahoo.co.uk.

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