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Zim corporate governance code overdue

A STATEMENT from the revised King Code and Report on Governance for South Africa (King III) report released on September 1 2009 set me thinking.

The statement reads “As with King I and II, none of the members received remuneration or reimbursement of expenses. The only value driver for members was the service in the best interest of corporate South Africa”. Seeing the King Code is primarily crafted to serve the interests of corporate South Africa, an assessment of its relevance to the Zimbabwean context is imperative. King III is undoubtedly an excellent document that addresses pertinent governance issues that are correlated to emerging global dynamics.


The need for a home-grown corporate governance code is imperative judging from the current salaries debacle playing out in the quasi-government circles. A careful analysis of the thread running through the “remuneration scandals” reveals a failure of governance or a lack of sound institutional moral authority. Common sense dictates that failure at delivering on the organisational mandate should not be rewarded with hefty salaries and perks. What is clear based on this discrepancy or corporate hypocrisy is the fact that the current corporate governance system is broken and is in need of urgent fixing. A few tips can be picked from the King III code which came into effect on March 1.

We will celebrate the areas King III has done well-in my opinion.

First, the compliance approach suggested by King III is a stroke of genius. Having witnessed the ineffectiveness of the Sarbanes-Oxley (SOX) Act of the US in preventing the occurrence of the corporate shenanigans that birthed the current global financial crisis, it has been argued that the “comply or else” approach on which the US corporate governance compliance is premised  is flawed to the core.

The SOX Act was a knee-jerk reaction to the corporate scandals personified by Enron. Legislating corporate governance compliance has serious limitations and can reduce the competitiveness of a country as the boards of directors will spend their intellectual and executive capital on compliance instead of directing that capital towards value-creation. In sharp contrast, King III embeds flexibility into the application of the codes through the “apply or explain” approach.

Under the “apply or explain” compliance regime, organisations are not forced to comply with the practices and principles, except for those that are subject to acts of parliament. Put crudely, firms are allowed to “pick and choose” the practices that best serve their interests. At face value this might appear as condescending and self-defeating.

However, the organisations are obliged to explain in full the reasons for not applying the suggested practices. Effectively the “apply or explain” approach will cajole organisations into making full disclosure of their corporate governance practices by presenting a well reasoned case for non-compliance. There is merit for a Zimbabwean-grown governance code to embrace the “apply or explain” approach.

A few organisations in Zimbabwe have already made public pronouncements to the effect that they will be embracing King III. One sensitive issue which organisations in Zimbabwe might find difficult to embrace is encapsulated in the Recommended Practices 2.26.2 and 2.26.7, which respectively require the disclosure of the salaries of the three most highly paid employees who are not directors and justifying salaries above the median.

On the basis of the “apply or explain” premise those organisations in Zimbabwe that purport to embrace King III have no option but to explain reasons for non-disclosure. Since King III requires the board to give a clear statement to the effect that the integrated report (financial and non-financial) has applied King III, the room for side-stepping certain issues through “corporate silence” is not there at all. If only these principles could be extended to parastatals, we might get headway as a nation in correcting the current service delivery-remuneration misalignment.

Secondly, King III emphasises the harmony between the law and corporate governance, effectively reminding the chieftains of the corporate world their legal duties to make sound decisions informed by due regard to care, skill and diligence.

The buck stops with the board member. Failure to discharge their legal duties can result in personal liability at law, with the prospect of serving jail time being a stark reality. A Zimbabwean governance code also needs to establish this linkage with the law.

Highlighting the attendant risk of not taking governance issues seriously should encourage those sitting on boards to review the quality of their participation and value-add through a sober evaluation of the risk-reward trade-off.

Corporate mischief as reported recently in the media whereupon some board members are conniving with their executive team to furnish authorities with falsified information should be handled decisively by a corporate governance code that ties corporate governance with the law.

Thirdly, King III now applies to both the listed and unlisted companies as well as the not-for-profit organisations. This is a milestone that deserves commendation. By combining elements of good corporate governance as recognised in the South African law with the voluntary and non-legislated corporate governance best practices, King III is effectively spreading corporate governance into virtually every organisation in South Africa.

This route is highly recommended for Zimbabwe, to help entrench good governance in quasi-government institutions, where glaring corporate governance gaps are evident as evidenced by the current executive pay scandals.

Embedding corporate governance into the Zimbabwean way of doing things, not only builds brand Zimbabwe, but also enhances the individual organisational brand — universities, hospitals, parastatals, listed companies and the like. Leveraging off good corporate governance practice, Zimbabwe as a whole can pass the “wallet test”, transforming Zimbabwe from the paper tiger to the African tiger status.

Fourthly, King III got it right in terms of bringing into prominence Alternative Dispute Resolution (ADR) as a hallmark of good corporate governance. The litigious culture so prevalent in the American culture represents lost opportunities to engage in creative dialogue. Creation gives rise to things that did not have prior existence.


Instead of parties to a dispute rushing to the courts to assert their rights and seeking to enforce obligations, smart organisations leverage on the power of seeking the third alternative, a superior solution to the one sought by either of the disputants.

That makes business sense in terms of huge savings in legal fees and the protection of each disputant’s corporate brand. Arguing that investors look at the economic value of the firm and not the book value, King III points to the fact that the wallet holders assess the firm’s ability to create value tomorrow. ADR is an approach which a Zimbabwe governance code should embrace. The tendency of employers and employees to wash their dirty linen in public when a stand-off arises will soon become a public sign of poor corporate governance.

Zimbabweans from different persuasions need to come together to catalyse the development of a home-grown corporate governance code and give it traction.


The Human Capital Telescope
By Brett Chulu

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