With the relegation of prudent corporate governance to the dustbin, the two companies suffered a prolonged cannibalisation at the hands of those individuals entrusted by the law to be its stewards. Given this untidy experience, the need for the entrenchment of corporate governance principles in company legislation in the country cannot be overemphasised.
At ReNaissance, Patterson Timba was forced to quit the group when shocking revelations of unethical business practices were unearthed.
In his capacity as executive chair, Timba, was able to brood over stinking corporate rot. The internal decay was exarcebated by the fact that the executive chairperson also adorned the mantle of major shareholder, which literally made him a sacred cow. The board of directors was rendered a sham or lame ducks because the executive chairperson wielded unbridled power.
In the absence of checks and balances, the cancer started engulfing the entire holdings company. Good corporate governance advocates for a separation of ownership and control for purposes of transparency and accountability. Just like in the field of constitutional law, where the principle of separation of powers forms the cornerstone and lifeblood of democracy, in the same vein separation of powers results in the proper running of companies. One cannot expect to get a clean fish from a sewage pond. In the same wavelength, where good corporate governance has been assigned to the scrap heap, corporate decay is inevitable.
The situation at ReNaissance before the infamous departure of Timba was like a ticking time bomb. The free-fall was precipitated by the complete absence of reins because the directors were merely figureheads.
The King Report on Corporate Governance (see The Institute of Directors in Southern Africa, The King Report on Corporate Governance (1994) par 4.9) identified four important functions as part of non-executive directors’ duties which can be summarised as follows:
a) They bring their special expertise and knowledge to bear on the strategy, enterprise, innovative ideas and business planning of the company;
b) They can monitor and review the performance of the non-executive managers more objectively than the executive directors;
c) They can play a role in resolving conflict of interest situations; and
d) They act as a check and balance against the executive directors.
In a company where the board of directors abdicates its responsibility of acting as the watchdog of the actions or inactions of the executive directors, chaos will ensue because the latter will run the show without being accountable to anyone except themselves. This state of affairs is both undesirable and unpalatable. It is a recipe for corporate disaster because where there are no controls, abuse is inevitable.
The situation gets worse where the executive director is also a majority shareholder in the company and at the same time the executive chairperson. The board of directors will be forced to dance to his/her tune. More often than not, appointment to the board of directors will not be based on merit but on patronage. Any director who dares contradict the demi-god executive chairperson by failing to toe the line ,will face the axe.
Eventually, the board becomes a pliable tool and appendage at the hands of the unscrupulous executive chairperson-cum-shareholder. This is exactly the situation that obtained at ReNaissance before Timba’s tenure came to its sunset.
The board of directors must be independent in the discharge of its mandate and must not be on the leash or under the hand hold of the major shareholder. The independence must not be merely cosmetic, but it must manifestly appear to be there. In other words, the directors must exercise independence in the letter and spirit to avoid a “one-man show” syndrome.
As the nation was recovering from the shock of the near-collapse of the once glamorous Afre Corporation, another lethal blow came sometime in November 2011 when Fred Mutanda, CEO of the then Caps Holdings, was accosted on allegations of defrauding his company. The nexus between the ReNaissance and the Caps Holdings sagas is that the major shareholder was endowed with far-reaching powers to run the company like a personal fiefdom.
Furthermore, the board of directors in both instances was immobilised to the extent of being rendered mere stooges to give way to the dictates of the major shareholder. In the ReNaissance debacle, the board members were allegedly handpicked by the CEO who happened to be the executive chairperson of the board and majority shareholder. In the end, the company was run like a tuckshop, with the executive chairperson holding both the company and the board of directors at ransom.
According to Gower and Davies’ Principles of Modern Company Law, Eighth Edition, 2008 on page 647, an important determinant of behaviour in a company is the structure of its shareholding, along the continuum between highly dispersed and atomised shareholdings, to one person holding all the shares. Where there are many shareholders, each with only a very small shareholding, the risk to the shareholders is that management will be the true controllers of the company.
On the other hand, where there is a controlling shareholder or a small group of shareholders who can exercise control, the management will certainly be accountable to the controlling shareholders, but the latter may act opportunistically towards the non-controlling shareholders. The law must deal with the outrageous examples of majority opportunism, if those responsible for company law wish to encourage investors to place their money in companies which are controlled by one or a small group of shareholders.
In Zimbabwe, the Companies Act (Chapter 24:03) is mute about corporate governance. There is no provision for good corporate governance in the company legislation and, hence, many companies have fallen prey to delinquent directors. Some errant directors have defrauded companies and gone scot-free.
To make matters worse, Section 318 of the Companies Act, which makes directors personally liable for reckless conduct of business, has never been meaningfully invoked. At the end of the day, minority shareholders have endured institutionalised exploitation at the hands of some dishonest major shareholders who have been running companies down.
In some cases, the courts have taken a hands-off approach when minority shareholders take recourse against abuse of power by the majority. A case in point is Matanda and Others vs CMC Packaging (Private) Limited 2003 (2) ZLR221, where the minority shareholders approached the High Court of Zimbabwe in terms of Section 196 of the Companies Act to challenge the arbitrary decision of the majority — their case was shot down by the Court on the basis that it is not the business of the courts to question the wisdom of how companies are run.
In its current form, the Companies Act is impotent to deal with bad corporate governance because the subject of corporate governance itself is not codified in the Act. This means that companies are not legally obliged to adhere to good corporate governance. This lacuna (gap) is what has given birth to a myriad of corporate scandals in Zimbabwe.
According to Len Sealy in his book, Sealy’s Cases and Materials in Company Law, Ninth Edition, 2010, Oxford University Press, page 261, the relatively few legal rules relating to the appointment, tenure and remuneration, allow those who control a company considerable scope to look after their own interests, generally without any serious risk of being successfully challenged by the minority.
Even where the directors do not hold the majority voting shares, the passive attitude of most members towards company general meetings and corporate decisions means that the directors can often ensure they are re-elected when their terms expire, that their service contracts contain advantageous provisions, and the directors’ fees, salaries and perks are set at an attractive level.
In the UK, corporate governance has been embedded by means of the corporate governance code/rules for listed companies. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. It has published the UK corporate governance code. This describes “best practice” corporate governance for large companies. However, the only shortcoming is that it is not enshrined in legislation, but soft law, i.e., there is no legal compulsion to obey.
Nevertheless, even without statutory backing, it is in practice virtually obligatory for listed companies to adhere to it in most respects. The UK Stock Exchange has appended the corporate governance Code to the Stock Exchange Listing Rules, and requires every listed company to include in its annual report a statement of whether it has applied the principles of the code, how it has applied them, and, to the extent that it has not applied them, the reasons why it has not.
This approach is now routinely described as the comply or explain regulatory regime, and has been adopted in many other jurisdictions around the world to address corporate governance challenges. The European Commission has established a European Corporate Governance Institute to encourage the co-ordination of national corporate governance codes.
As a developing nation that emerged from the doldrums of the financial crisis that saw the collapse of some financial institutions and several companies during the last decade, Zimbabwe cannot afford the expense of operating without a corporate governance code and legislation that gives the impetus for its enforcement. The collapse of one entity has a ripple effect on others. The propensity by some directors to sacrifice their fiduciary duties of utmost good faith to the company for personal benefit has been at the core of the collapse of some of the once vibrant corporations. Prevention is always better than cure.
The ReNaissance and Caps sagas are a serious indictment on the legislature and powers that be to urgently enact corporate governance legislation to save corporations from coming to their knees resulting in massive job losses and public loss of confidence.
The author teaches Company Law at the Faculty of Law, University of Zimbabwe.