Corporate governance in state firms

Alex Tawanda Magaisa

THE governance of state-owned companies is a significant issue in view of the fact that such companies are essentially funded by taxpayers and are meant to play crucial social and econom

ic roles in the country.


State enterprises exist in different forms but the main characteristic is that the government usually holds a majority or at least a significant stake.


The ownership may either be total or partial. The involvement of the state is often justified on the basis that it has to maintain control over strategically important areas of the economy. Common examples are Zisco, Noczim, Air Zimbabwe, Zesa, Cottco and Dairibord. A key point is that most state companies are characterised by chronic inefficiency and poor levels of productivity and very few are profitable. While there are several reasons to explain this position, in my view, a key issue is the prevalence of poor standards of corporate governance in state companies.


Independence

The overriding problem in state companies is that the state exerts excessive control, which diminishes the independence and transparency of the board of directors and management of the company. Typically, the company falls within the control of a government ministry, meaning that the responsible minister is effectively in charge of corporate affairs. The minister represents the government as the major shareholder. The government in turn represents “the people”.


The minister is in charge of the appointment of the board of directors and effectively oversees the appointment of the managing director and his fellow executives. Therefore, the board and management are accountable to the minister. They are beholden to him as he has wide powers, of appointing and removing them from their positions.


Since the minister is essentially a politician, most board and managerial appointments are based on political preferences rather than merit. There are numerous conflicts of interest. Political appointees often serve the personal interests of the politicians who appoint them rather than those of the company.


Corporate policies and decisions are made in the interests of pleasing a particular individual or constituency. Assets of these companies can be diverted for government or personal use at non-commercial rates and at times affecting the usual business of the company.


Air Zimbabwe has lost a significant stake of its market because of failure to deliver to customers who are often inconvenienced when it has to serve other interests. Excessive political interference leaves the board and management with very limited control over the affairs of the company. This diminishes their roles to mere spectators and serve to simply rubber-stamp the decisions of the politicians whose business knowledge may be very limited.


In addition, the appointees may be simply political colleagues whose knowledge of basic business, accounting or legal aspects necessary to run a modern commercial enterprise is very limited. Their contributions to the strategic and operational growth of company are minimal. Some may even flex their political muscle to thwart sound business decisions by the executives.


They may act as the hand through which the minister exercises control over the board and management thus compromising managerial independence.

In such a case, the state is no different from a majority shareholder in a private company whose hands are everywhere and compromises accountability and transparency in the corporate affairs.


These are the criticisms that have been levelled against most banking organisations in Zimbabwe and the RBZ has insisted that such conduct bordering on corporate incest should cease. The same argument applies to the excessive control and interference exercised by the state in the parastatals.


The lack of independence and knowledge of the board means that there is often limited control over management who are left to conduct corporate affairs according to their personal whims.


The ownership structure of the typical state company is the source of problems as it impedes good corporate governance. The current governance systems encourage inefficiency and poor accountability. There are too many agents in the chain from “the people” who elect the president who in turn appoints the minister and the permanent secretary who are responsible for appointing the board which eventually oversees the appointment of the executive directors.


In between there are a number of other officers added for good measure. Unlike a modern company, there are clearly greater agency costs in a state company. These people in the chain lack sufficient incentives to promote the economic efficiency of the company.


This has led to the “kambani haina munhu” syndrome in state companies. (The company does not belong to anyone). In such a situation transparency and accountability are severely compromised. The directors can hardly make tough but rational business decisions without being held at ransom by employees who see their jobs as life insurance.


Any prudent executive directors are caught between serving the commercial interests of the company on the one hand and serving the social utility function required by the government and employees on the other.


It is difficult to see how the company can operate efficiently where the state takes multiple roles as the manager, supervisor, shareholder and creditor simultaneously. Also, there is always going to be a clash between the state’s macroeconomic policy and microeconomic roles when it participates in companies. The inherent conflict may lead to compromise of good corporate practice at the company level. From a macroeconomic perspective the state must pursue policies and strategies that enhance the welfare of all companies yet it may be hard for the government to implement the policies equally where they conflict with the microeconomic interests of one of its companies.


This is one of the challenges of the RBZ as it pursues its macroeconomic policies since it has to confront not only private but also state banks and ensure that corporate governance standards are properly enforced. Will it treat them on an equal basis? It remains to be seen how the chain of ministers, permanent secretaries and political appointees will react to these reviews.


Subsidies

Most parastatals are perennial loss-makers. In view of the fact that they serve strategic economic and social utility functions the state cannot afford to let them fail. The result is that the state always grants support to its failing companies. The guaranteed support system creates a serious moral hazard.

The board and managers know that the company will always survive and consequently they are not judged on the basis of performance. Crucially, there is no distinction between success and failure in terms of their rewards.

The system covers inefficiency and failures of the board and managers and diminishes the culture and standards of accountability necessary for good corporate governance. In such an environment, standards of corporate governance are unlikely to prosper since there is simply no incentive to enhance them. It is hard to expect any significant change at for instance, Ziscosteel, which despite its strategic market position, is a perennial loss-making entity.


Unless these companies can be focussed towards profit-making and financial independence, it is hard to envisage any improvement in the standards of corporate governance.


Corruption

The endemic corruption is one of the most significant problems in Zimbabwe. Parastatals have been centres of chronic corruption over the years. Despite the existence of the Prevention of Corruption Act, many cases of corruption that have come before the courts have failed to produce positive results.


Directors and management of state companies give donations to their political godfathers in order to retain their positions. Simultaneously, outsiders may gain access to corporate resources without following proper procedures. Directors can divert resources that are meant for the development of corporate business for personal use.


The conflicts of interest are exacerbated by the competition that takes place between directors’ own companies and the companies that they serve. When there is such conflict, the interests of the company will be secondary to those of the directors’ company. The directors or politicians in charge of such companies can hardly be expected to prioritise the interests of the state company.


Corrupt practices include the creation of contractual relations between the state company and the companies owned by directors. This may be to provide services such as accounting, catering and security. A great number of credit agreements with fictitious companies and insider credit-arrangements because of poor risk management and financial controls within the company are responsible for massive bad debt in most state companies.


The same applies to the prevalence of non-performing loans, which may eventually burden state-owned banks if the practice of granting loans without proper checks and accountability continue. Agribank, now the Land Bank recently awarded loans to the tune of $60 billion to assist in the agricultural sector. Now, if there is no accountability, these may end up as non-performing loans, which will cripple its operations and affect its liquidity.

In some cases problems can be neutralised but in my view the problems that affect state banks will eventually affect the general financial system. The RBZ needs to take a closer look at the operations and corporate governance standards of these entities if its mission of cleaning up the financial sector is to succeed.


These arrangements and activities also contravene the traditional duties that directors owe to the company. However, quite often there is nobody to enforce the rules since the company must act to protect its interests is under the grip of individuals with personal interests to safeguard. The poorly developed area of personal liability of directors of state companies also creates a moral hazard as the directors know that even if the company suffers losses they will be shielded.


Conclusion

The state plays a significant role in most spheres of the economy through direct and indirect participation in many companies. The common theme in most state companies is that there is gross inefficiency. One of the primary causes of the problems that bedevil them is the prevalence of poor standards of corporate governance.


There are several barriers to the improvement of corporate governance standards but chiefly the prevalence of political interference leading to lack of independence and transparency, endemic corruption and permanent availability of financial subsidies play major role.