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Tackling key corporate governance issues

By John Chikura

EVER since laws governing the incorporation of organisations were enacted more than 200 years ago, we are still bedevilled by problems, abuses and confusion about the workings of the boards o

r how organisations must be governed.

Corporate governance is the system by which corporations are directed, controlled and held to account. It is “concerned with holding the balance between economic and social goals… the aim is to align as nearly as possible the interest of individuals, corporations and society” – (Sir Adrian Cadbury). It is about oversight of corporations by those responsible to shareowners and stakeholders.

Globally, corporate governance has been accepted as one of the essential elements in underpinning and strengthening the foundation for sustained performance of countries and corporations. It is an essential tool for prosperity, economic growth and social progress.

Globally corporate governance has been recognised as a tool to fight, among other ills, corruption, corporate scandals, poverty and the agency problem ie ensuring that managers avoid serving their own interests and serve those of the share owners and other stakeholders.

Globally it has been accepted that the private sector (made up of corporations) is the wealth-producing organ of society, the engine for growth. Corporations as creatures of lawexist because socie-ties recognise that incorporation is an efficient form of orga-nisation that benefits society as well as firms.

Society gives a licence to operate, as it were, by way of approval, allowing the company to operate. Enterprises – be they public or private – are organs of society. They operate in society, on society and for society.

As a result, society demands transparency and accountability onhow corporations aregoverned. The operation-al activities of the corporation, therefore, should be compatible with the welfare of the society in which it conducts its business.

All issues of corporate governance focus mainly on the board of directors. Why is that so, is it fair given that managers run the company on a day-to-day basis?

“Mobilising the army requires ability on the part of leadership, when the leadership is able, then there will be discipline,” The Art of War, Sun Tzu. Likewise Jesus says: “Let them be. Blind guides, is what they are. If, then, a blind man leads a blind man, both will fall into a pit,” Matthew 15:14.

Directors are responsible for leadership probity, efficiency and effectiveness, leadership with responsibility, accountable and transparent. What does this mean? What is expected of our directors?

Based on the four pillars of good corporate governance which are fairness, responsibility, accountability and transparency we expect:

Leadership for efficiency and effectiveness: leadership for improved strategic operational guidance of business enterprises to ensure efficient use of entrusted resources and competitiveness in the liberated global market;

Leadership for probity: leadership that is honest, trustworthy and acts with integrity such that it commands respect and credibility and thus can be relied upon to use resources efficiently and effectively;

Leadership with responsibility: leadership that takes its responsibility to the various stakeholders (not just shareowners) seriously and which is responsive to the needs of stakeholders and the wider community; and

Leadership that is transparent and accountable: leadership that has nothing to hide and which accounts transparently for the use of power within its scope of authority.

Going back to our earlier question, it is only fair that directors face the issue of corporate governance fair and square.

In Zimbabwe we boast of robust infrastructure, best education, advancement in technology, agriculture, mining etc. But the question begging an answer is; why is corporate governance so much of an issue today? Why so much corporate scandals and collapses? The major reason among others is lack of good corporate governance.

Looking at the recent turmoil in the financial sector following announcement of the new monetary policy by the new RBZ governor Gideon Gono, the question to ask is; where were our directors when malpractices of the magnitude witnessed, became the order of the day? The importance of the financial sector to any economy cannot be over-emphasised.

Banks as financial intermediaries are the reservoirs of personal wealth; their collapse can lead to large systemic and social costs. In recent years, all major economic crises experienced in Latin America, Russia and East Asia were accompanied or triggered by crises in the financial sector.

In his address to various interest groups, Gono put it on record that most of the problems that bedevilled the financial sector were of a corporate governance nature. Some of these problems are:

Shifting from core business to speculative transactions;

Abuse of holding company structures to evade regulation (regulatory arbitraging);

Poor board and management oversight;

Undue influence and board dominance by a few individuals especially in owner-managed banks;

High concentration of insider loans to associates and related parties;

Poor risk management; and

Rapid local and regional growth without adequate internal controls and early warning systems.

As we know corporations as creatures of law think and act through directors as they make up the heart and soul of these entities. There can only be two explanations to the misdemeanours we witnessed in the banking sector recently.

Either directors are ignorant of their onerous fiduciary duties to the corporate or they, together with management, collude and become greedy and corrupt. Instead of benefiting society and the community of Zimbabwe that has allowed their businesses to flourish, directors are seeking to fleece them. By way of commission or omission directors here sought to impoverish the entire nation and the economy.

But back to basics, what are the responsibilities of directors?

The board should have a charter setting out its responsibilities and this should be disclosed in the annual report;

It should define the company’s purpose, values and the stakeholders relevant to the business and develop strategies combining these three factors and ensure management implements these strategies and the company and its employees, operate ethically;

Selecting, evaluating, and if necessary removing the CEO and ensuring that top management succession plans are in place;

Key risk areas and key performance indicators must be identified and managed; and

Report going concern, succession plans, structure, internal control, effective communication and ICT strategy.

Areas of concern in Zimbabwe:

Insider trading;

Crafting of the board structure and recruitment, induction and development of board members (cloning effect);

Absence of board and director appraisals;

Dysfunctional boards i.e. lack of attentiveness and skills;

Absence of a register of delinquent directors;

Disclosure of directors emoluments on an aggregate basis;

Non-availability of independent directors;

Lack of essential information for the board (application of the mushroom technology);

Poor accounting and disclosure standards;

Automatic re-appointments to the board with scant information to the shareholders;

Aligning ZSE and banking regulations to corporate governance best practice and putting training as a condition for appointment to the board;

Lack of shareholder activism (participation and asking relevant questions at the AGM); and

Poor risk management practices;

Shall our boards draw lessons from the likes of Enron? The directors of Enron allowed their executive directors to be in an open conflict of interest situation to the extent of even suspending the operation of the code of conduct because they wanted to make money.

They evaded tax in spite of the company making profits. Directors built relationships with politicians and donated significantly in order to win favours. It also follows that these abusive companies have the greatest incentive to make political contributions to secure the aid of prominent politicians in order to weaken regulation and prevent enforcement of actions.

The directors used creative accounting to keep the share price high, investment inwards were reported as profits, management used employees pension funds and lied to them that there was nothing wrong when the company was collapsing.

The auditors turned a blind eye and when the situation went out of hand they sought to change the accounting system and later started to shred Enron records.

The lesson from Enron is lack of transparency and accountability breeds corruption and even if you are operating a modern and sophisticated, highly technologically driven business:

You still make money in the new economy in the same way you make money in the old economy – by providing goods or services that have real value;

Financial sophistication, engineering or cleverness is no substitute for a good corporate strategy;

The arrogance of executives who claim to be the most innovative, the best, the brightest and superstars should serve as a “red flag” for investors; and Enron’s board authorised the chief financial officer to be in a naked conflict of interest situation to defraud shareholders and hide real losses and creating phoney profits.

They thought he would be loyal to them and only cheat shareholders. The truth!

There is no honour among thieves; they even steal from each other!

In spite of the enormity of the responsibility of our directors, in practice many of them seem not to care.

It is difficult to talk about corporate governance and not talk about business ethics. With reference to corporate scandals, some of which Zimbabwe has witnessed in the recent past, the book the Death of Ethics in America laments: “While the nation has been pre-occupied with the deadly disease…Acquired Immune Deficiency Syndrome, another kind of Aids (Acquired Integrity Deficiency Syndrome) seems to have become epidemic. Yet it has not prompted similar urgent calls for a cure.

The current macro-economic environment presents formidable challenges. Perhaps due to the need to survive, there was no more shame in being corrupt. In fact it is the honesty person who had to worry and justify why he is honesty in many of our organisations. This is a real challenge. It presents an ethical dilemma.

Think of the rampant corruption witnessed in the recent past in Zimbabwe, we were actually re-defining terms like stealing, taking, possession, and trespass). The excuse was everybody is doing it, who are we not to and how can our businesses survive? Hence our coining of new phrases like “survival corruption”.

We sought to legalise wrong things in the name of survival and we engaged in the old blame game. The corporate sector blames the public sector and the public sector blames the corporate sector.

Some of the factors determining the level of corruption generally are the individual sense of values inculcated at an early age and social norms. That is why we find that there are corrupt people even among the highest paid and the rich and there are honest people who are poor and do not get tempted to be dishonesty.

Other factors driving corruption are lack of transparency, scarcity of goods and red tap. Key players in the corrupt scene are the corrupt politician, the corrupt bureaucrat, the corrupt businessman and the criminal who have come together in different formulations, permutations and combinations. These are making Zimbabwe one of the most corrupt countries in the world.

As we play the blame game and we point a finger at each other please remember that corruption is a number game, you cannot be successful if you are alone, and it takes two to tangle. Every time you feel your world is not right please remember the first port of call is yourself, look at yourself.

To enforce corporate governance codes and ethical codes of conduct we need to encourage the internal check of the conscience. There is need to handle this whole issue of corruption as anybody would handle malaria.

* John Chikura is chief executive officer of the Deposit Protection Board. He is also a councillor of the Institute of Directors and past president, Institute of Chartered Secretaries and Administrators.

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