Brett Chulu: Zim corporate governance: The business case

TWO weeks ago, Jon Younger, Dave Ulrich, two of human resources’ leading minds and I engaged in a passionate discussion over the concept of ‘organisation capability’, the brainchild of Dave.

Organisation capability is what an organisation is known for, what it is good at. For customers, organisation capabilities become the brand they experience; for the investor, they are the intangibles that give them confidence in future earnings; for the employee inside the company they are the desired culture. Obviously, the implications of this concept are profound since organisation capabilities connect the internal customers to the external customers. By delivering on organisation capabilities, customers and investors will keep signing cheques over to the firm. Organisation capabilities are the deliverables of HR, transfoming HR from being a mere cost centre to a profit centre.
Theory without practice is useless. We need to illustrate organisation capabilities in practice. There are over 14 capabilities. We will consider a few. Charity begins at home. A careful analysis of Econet shows that its phenomenal success rests on three capabilities namely: talent, learning and shared mindset. Talent as an organisation capability means: we are good at and known for attracting, retaining and motivating competent and committed people.
The organisation capability of learning means: we are good at and known for generating and sharing ideas with impact. Shared mindset as an organisation capability means: we are good at and known for making sure our external customers (investors and customers) and employees have a positive experience with the company.
To illustrate further, we will look at Econet’s learning capability in brief. Econet is good at benchmarking (comparing best international standards), be it communications technology or store layout and intelligently adapting these. It explains largely why Econet is almost always first to the market with the latest technologies. South African telecommunications giants are still struggling with the 3G technology while Econet has already introduced the 4G technology. Of late, due probably to its on-going network upgrading programme, the shared mindset capability is weakening, judging by the frequency of customer complaints over service.
Back to my discussion with the two HR fundis. I pointed out that in their latest work on capabilities, corporate governance was not mentioned. I had felt that corporate governance should be a key capability. Younger and Ulrich concurred with me that indeed corporate governance is a key capability. They pointed out they had spread aspects of corporate governance into capabilities such as risk (we are good at and known for anticipating and managing disruption, predictability and variance) and speed capability (we are good at and known for making important changes fast). The discussion led me to launch into a full research on the relationship between corporate governance and finance.
We shall define corporate governance as an organisation capability: we are good at and known for making and implementing decisions that ensure the long-term success of the business. We will proceed to look at some studies on the relationship between corporate governance and investment.
According to a paper from the Norwegian School of Management titled Corporate governance and real investment decision firms that are well-governed have a higher probability of making investments, have higher market to book ratios (investors willing to pay higher share prices share compared to current after-tax profits per share) and better access to outside financing.
The Deutche Bank studied Standards and Poor 500 firms and found that over a two-year period firms with improving corporate governance outperformed those that did not by an average of 19%.  In a paper written by the financial giant ABN/AMRO titled Corporate Governance in Brazil: Is there a link between corporate governance and financial performance in the Brazilian market?’ revealed that in 2004, firms based in Brazil, with higher corporate governance rankings received price-to-earnings ratios that were 20% higher. Price- to-earnings ratio, also known as P/E simply shows how many times the current share price is bigger than the current after-tax profits per share (earnings per share).
Normally, the higher the P/E, the more confident investors are that the firm will in future continue to produce good after-tax profits. They show this confidence through buying the shares now to ‘‘book’’ for a portion of the anticipated growth in earnings.
A paper published in the Journal of Corporate Finance titled  Predicting Firms’ corporate governance choices: Evidence from Korea showed that Korean (South) firms perceived to be properly governed had share prices trading at a premium of 160%.
This means investors were willing to pay 2,6 times the actual worth of the shares of well-governed South Korean firms. The Mckinsey and Company 2002 investor opinion survey shows that for every 10 respondents eight would pay a premium for the shares of a firm with strong corporate governance practices. The premiums averaged 20-25% in Latin America and Asia, with the highest premiums in the study recorded for Eastern Europe and Africa at 30%. The distribution of premiums is telling. African firms that move to strengthen corporate governance stand a better chance of attracting investor funds. Here is hoping Zimbabwean firms are paying attention.
I could have given study after study showing beyond contest that good corporate governance attracts investment into the company. Three lessons for the Zimbabwean corporate arise from these empirical studies.
First, when Zimbabwe’s national political and economic environment improves investor dollars will flow in. However, only those organisations with strong corporate governance practices will receive a meaningful share of the investment inflows. Minister Gorden Moyo made a profound statement as reported in the NewsDay when he said that 60% of the problems of state-owned enterprises would dissolve by simply improving their corporate governance practices and further said that ‘‘it does not cost a cent’’ to adopt good corporate governance practices.
Second, firms do not need to be cajoled to adopt good corporate governance practices. On the back of the overwhelming evidence, adopting good corporate governance practices should be an automatic business decision. It saddens me when firms have to wait for a national code of governance and statutory instruments to begin to take action to practice good corporate governance.
Third, HR as business leaders in Zimbabwe needs to sell the idea of corporate governance as a key organisation capability. Lack of cash is a serious business challenge at present. A preliminary study I am doing on the extent of liquidity challenges in Zimbabwe shows that for the half-year ending June 30, listed firms are struggling to generate enough cash from their operations to fund taxation and debt-servicing. One listed firm with a very high P/E ratio generated negative cash flow from its operations. Luckily, for the said firm to survive the first six months, cash generated from last year is being used.
To survive, Zimbabwean firms have no choice but to adopt corporate governance as an organisation capability. Competiveness is not strategy. Competitiveness = strategy x organisation. Organisation is not structure. Organisation is capability. That is the new HR’s speciality.
Telescope Bits
Tax-free threshold in South Africa at the current exchange rate is US$667 compared to Zimbabwe’s US$175.

Is there a business case for corporate governance in Zimbabwe? Share at brettchulu@consultant.com.

By Brett Chulu

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