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Royal Bank – Challenges to corporate governance in Zim

By Alex Tawanda Magaisa

THIS article discusses the challenges to corporate governance posed by the political and economic environment in Zimbabwe.

ca, sans-serif”>At the close of 2003 interest rates surged to above 900% and inflation was pegged at more than 700%. The “real” exchange rate has been at about $8 000 to the US dollar. Although many public companies especially in the finance industry reported huge profits most small companies have collapsed.

Research has shown that there is close connection between corporate governance and economic development but there are several factors that determine whether its theoretical gains can be realised in practice. The prevailing conditions in Zimbabwe create huge dilemmas but also present the great tests to directors and managers as to whether they can actually do business in terms of good practice.

Corporate governance

In legal and economic terms, corporate governance can be seen as a mechanism of safeguarding fundamental economic rights, in particular the rights of investors. The protection of rights of investors is particularly important in a market economy where there is always a risk that a small group of people endowed with political and economic power can abuse them if left unchecked.

At a macro-economic scale a proper system of corporate governance in the market generates confidence among investors. In an increasingly globalising world, markets become more interdependent and investors look at various alternative markets to invest their money. They are more comfortable with markets that resemble their own in terms of security and transparency.

Increasingly investors look at the corporate governance systems in any given country before committing their investments. In addition, at the firm level a company which has good corporate governance systems has greater access to external financing. This means there will be more opportunities for investment and growth of the firm.

A company with poor practice is likely to be viewed as more risky by investors and when such investors decide to lend money they are likely to do so at higher rates. If good practice improves access to external financing and reduces the cost of capital, arguably the benefits translate to the economy generally by increasing opportunities for growth, employment and firm valuation.

In addition, at the firm level good practice strengthens the company’s risk management strategies and therefore reduces exposure to financial distress. Conversely, bad governance increases risk and distress, which might lead to corporate collapses. When public companies collapse they have great repercussions on the economy as a whole and for smaller economies that can be disastrous.

At another level good stakeholder approaches to corporate governance can also improve social and economic relations among the various stakeholders. These include employees, consumers and other interests such as the environment consequently reducing the risk of unrest and work stoppages. Overall, it creates a good and sustainable economic environment for conducting business.


Nonetheless, there are challenges to good corporate governance that arise from external sources. The political and economic environment in which the firm operates can give rise to challenges that erode the gains of good corporate governance. This article considers certain challenges related to the current crisis in Zimbabwe and shows why it may be difficult to practise good corporate governance. It also shows that the general crisis has also given cover to many businesses to flout corporate governance standards as they engage in profiteering and scandalous activities.

Legal and judicial systems

Corporate governance aims to protect the economic and social rights of stakeholders such as shareholders, employees and creditors. In this regard property rights are paramount. Investors want to know that when they commit their property it will be properly protected. Creditors need to be assured that they will get adequate and secure returns. To that extent, corporate governance is vital for securing finance. The legal systems must provide adequate protection to shareholders and creditors. The courts must be actively engaged in the protection of these rights. However the situation in Zimbabwe does not inspire any confidence among external investors. The violence associated with the farm invasions has been beamed across the world. Whatever the reasons behind land redistribution, the highlight from a corporate perspective is the insecurity of investments and property in Zimbabwe. More recently the state has been adamant in its refusal to allow the ANZ, publishers of the Daily News and the Daily News on Sunday, to continue operations despite court orders to the contrary. Recent threats indicate that this harassment has even extended to one of the few successful Zimbabwean corporate exports Econet. Beyond all these political manoeuvres, there is greater damage to the corporate sector, which is vital for development. Investors question the strength of the legal market in which the company operates when there is no rule of law or when law is applied selectively by the state. It is common knowledge that more developed capital and financial markets exist in countries that have strong legal and independent judicial systems. Capital markets are stronger and more effective when there is adequate shareholder and creditor protection through durable property rights.


An operating environment where corruption is rampant does not augur well for good corporate governance. Directors and company officials will be engaged in conduct that is not in the general interest of the company but merely to satisfy their own personal needs. Such an environment compromises the independence of non-executive directors. Transparency International rate Zimbabwe as one of the most corrupt countries in the world. Corruption exists in the public and private sectors extending even to the individual levels. It is becoming a culture among Zimbabweans. That means that it is very difficult but ever more important to create good corporate governance structures. The State needs to take more positive action to fight corruption within the ranks of the public and private sectors.

Parallel market

The economic problems have led to a steady rise in the parallel market for goods and foreign currency. The parallel market arose largely in response to the state’s insistence on unrealistic foreign exchange rates and fixing price controls on goods. Good corporate governance normally thrives in an environment where the market operates properly and formally. Owing to the shortage of foreign currency in the formal market, companies have been forced to resort to the parallel market. Similarly they have to resort to the parallel market to secure goods such as fuel and other raw materials for their operations. Can managers be faulted for going beyond the formal markets to secure essential goods to ensure that the company operates smoothly? Arguably companies enter the parallel market in order to survive although there is also the added risk that by engaging in those parallel market activities some managers may abuse the company’s resources to secure personal wealth.

This environment presents enormous difficulties in creating accountability structures within the company. The general staff know what their senior management is doing and they too may be lured into these nefarious activities. The increase in financial crime in the finance industry is not surprising given the centrality of that industry in the foreign parallel market. Similarly some companies take advantage of the crisis and increase prices of goods and services without regard to the impact on the consumer. Some may create artificial shortages to create a parallel market in which they benefit. Others have to dodge the price control system by creating new packaging and brands. At the same time, the state’s insistence on price controls may be motivated by more than the need to protect the consumer but to safeguard the position of the political leadership. Overall, these conditions pose challenges to good corporate governance.

Political instability

In an environment characterised by political instability it is difficult to appreciate the gains of good corporate governance. However, the problem is that while companies can do very well to keep their labour force happy, some causes of unrest may be beyond the control of the company.

Zimbabwe’s political scene has been unstable since the parliamentary elections and chaotic farm invasions in 2000. This was exacerbated by the disgruntlement following the controversial presidential elections in 2002. At present there is a stalemate between the ruling Zanu PF and the opposition MDC leading to uncertainty. Employees’ wages have fallen way behind inflation and poverty is increasing in both urban and rural areas. The lack of law and order means that regulation of activities is selective and unfair. Business leaders are also expected to tow the ruling party line otherwise they are castigated as opposition elements. It is hard, under such conditions to create corporate governance strategies, as they may appear to have no serious effect at all.

Loss of skills

For good corporate governance to prosper it is important that the boards of companies are constituted by people who are skilled and knowledgeable.

While Zimbabwe has trained a lot of people since independence, the gains of those efforts have been eroded by the massive brain drain that has been occasioned by the political and economic instability. Talented young men and women who could easily constitute the pool from which able non-executive directors have left for pastures new and in the long run, Zimbabwe faces a massive skills shortage. In the process new and brighter ideas are lost. While companies can offer more incentives to retain talented staff, it is the return to good political governance that is the key to reducing brain drain.


Arguably, corporate governance plays a vital part in economic and social development. When the right strategies are applied at the firm level they can translate into major gains for both the firm and the economy in general.

The political environment shapes the strategies that companies adopt to operate and survive. The prevailing difficulties make it tough for companies to practice good governance within the bounds of the laws as they are forced to scour the parallel markets. At the same time it gives room to management to engage in activities that would be considered wayward in normal economies. This creates an image problem for the companies and country generally and scares external investors leading to decline in development. One beneficial aspect of this climate is that Zimbabwean companies have become more innovative and gone out in search of opportunities beyond borders. It is significant because when a company issues capital or lists abroad, it subjects itself to higher standards of corporate governance and disclosure requirements in those countries. In order to sort out our corporate governance for internal companies, the lesson is that we must first sort out our politics. Simultaneously, serious business executives should strive to practise good corporate governance lest they invite the state to meddle and slowly take away the benefits of free market economics.

-Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate and Commercial Law at The University of Nottingham, UK. He can be contacted at alexmagaisa@hotmail.com, alexmagaisa@nottingham.ac.uk

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