Brett Chulu

IN this two-part series, we seek to evaluate the suitability of different corporate governance enforcement mechanisms.  Last week’s revelation by Businessdigest that the suspended Zimbabwe Stock Exchange(ZSE) head honcho, Emmanuel Munyukwi earned an annual remuneration in excess of US$400 000 casts a very dark and tall pall over Zimbabwe’s fledgling corporate governance landscape.
The gravity of this apparent shenanigan should not be underestimated—a country’s bourse is a window through which investors gauge the quality of a nation’s corporate governance standards. Our local bourse is supposed to be the vanguard and doyen of the highest possible standards of corporate governance. Sadly, these recent revelations, if true, point to a national crisis. To underline the importance of a national stock exchange in mustering reputational capital we shall examine two recent developments. Aliko Dangote, Africa’s richest billionaire hailing from Nigeria and who is also the world’s 76th richest individual, was last week reported to be mulling over listing a fifth of his US$11billion-corporate empire on the main board of the London Stock Exchange (LSE). The LSE has some of the world’s most onerous and super-strict listing requirements, including corporate governance. Some analysts view the eventual success of Dangote’s firm as not just achieving a personal feat but constituting a national exploit. The envisaged listing is being viewed as a potential ‘cleansing ceremony’ for Nigeria’s battered national corporate reputation owing to the cyber scams perpetrated by some of the country’s nationals. Mark Lamberti, a former chief executive of the South African retail giant Massmart is reported to have listed his new financial company, Transactional Capital, on the main board of the Johannesburg Stock Exchange (JSE) on June 7 for an unusual reason. Lamberti said the reason for listing Transaction Capital was to send a clear message to stakeholders that the company met strict corporate governance requirements. That’s how so highly esteemed bourses in some countries are. Under present circumstances, the same cannot be ascribed to our local bourse.
ZSE corporate governance
The irony of the ZSE shenanigans is that corporate governance transgressions are evidently being committed by a body that is supposed to be the beacon and showcase of Zimbabwe’s corporate governance. The remuneration-related scandal points either to a breakdown or absence of remuneration governance at the ZSE, which should not happen under a vigilant board of directors. Several questions beg answers pertaining to the ZSE’s remuneration governance.
Does the ZSE board take remuneration governance seriously?
Under current standards of corporate governance a board should have a dedicated remuneration committee to approve the remuneration policies relating to senior executives. Even if a corporation does not have a dedicated remuneration committee, the board should ensure that it approves the remuneration policies relating to senior executives. Having had the privilege to work on remuneration-related consultancy projects both locally and regionally, I can with certainty state that the suspended ZSE chief executive’s reported remuneration is way beyond the remuneration levels of senior executives from well-resourced firms, both locally and regionally. A rudimentary task of a board of directors is to approve remuneration benchmarks for senior executives. Such benchmarks can be based on either internal or external pegs. The suspended ZSE chief executive’s remuneration is obscenely out of sync with both internal and external benchmarks. Internally, a chief executive’s remuneration cannot claim two-thirds of the total wage bill. It’s absurd. To reconcile this absurdity, I tried to hire an external competitiveness premium argument, thinking that perhaps the suspended chief executive has in possession of an extremely rare set of competences that warrant a huge premium above local and regional remuneration levels. This line of defence is even less convincing. This brings us to another question: Was it so difficult for the ZSE board to find remuneration data to make a simple compa-ratio analysis? We are left with no plausible rational explanation except to make two postulations.
It could be possible that the suspended chief executive was making decisions on how much he should be remunerated without deferring to the board. If this is the case, then the board abdicated its governance mandate. As a matter of fact, a chief executive cannot set and approve his/her own remuneration. That’s scandalous. I wouldn’t like to believe that the ZSE board allowed the chief executive to usurp its legitimate governance brief. Is it possible that the chief executive flagrantly ignored the board-approved remuneration policies? If he did, perhaps the board could escape indictment. It is possible that internal audit processes could have picked the flagrant violation of remuneration stipulations earlier than the external audit, with the external audit providing an independent confirmation of internal findings.
The apparent breakdown of corporate governance at the ZSE brings to the fore the debate on whether corporate governance in Zimbabwe should be enforced through an act of parliament or by way of self-regulation. The seeming failure of regulatory institutions and key stakeholders such as institutional investors to hold boards to account is arming those advocating for a legislated-driven corporate governance enforcement regime. It has been argued that some investors just don’t care about corporate governance issues as long as they keep getting satisfactory returns on their investments. It has also been argued that some senior executives are either too smart or too powerful to be challenged by non-executive directors, owing to deep political connections, information advantage and the existence of conflicted or incompetent non-executive directors.
Primarily, the effectiveness of any corporate governance apparatus rests upon the mechanism chosen to enforce or cajole adherence.
Three schools of thought on how to enforce corporate governance provisions subsist. Two of these sit in opposition, namely the comply-or-else and the comply-or-explain schools. The third stream is the midpoint of the two extremes.
Comply-or-else
Proponents of the comply-or-else approach believe that corporate governance should be enforced entirely through legislation. This school of thought implicitly distrusts the corporate world’s ability to self-regulate.
Comply-or-else first arose in the US following the high-profile failure of corporate governance at the Texas-based energy and utilities conglomerate Enron in 2001. At the centre of the Enron debacle were related party transactions linked to the unethical use of Special Purposes Entities (SPEs) to understate the size of debt on the balance sheet. At the time, it was legally permissible for US companies to treat as an off-balance sheet transaction funds borrowed from the specially-created and legal SPEs. However, to qualify as an SPE, several conditions were attached, two of which involved disqualifying related parties and imposing a limit to the quantum of funds to be borrowed. To get around the limit to be borrowed from an SPE, Enron created over 500 SPEs. But how do you successfully borrow from 500 creditors without raising the eyebrows of pedantic credit bureaus who ordinarily would be alarmed by such reckless serial borrowing. The clever chaps at Enron formed an internal syndicate involving senior managers who created SPEs on behalf of Enron. These friends’ companies would be used as conduits to channel funds from outside to Enron. Of course the friends were financially benefitting from Enron for being used as fronts. The idea was to borrow massively and keep debts off the balance sheet.
In the wake of Enron’s shenanigans, US legislators reacted by crafting the Sarbanes-Oxley Act (Sox), effectively taking the initiative to enforce corporate governance out of the hands of corporates. The experiences of recent corporate governance failures in Zimbabwe involving Caps, RMB and Interfin may not match Enron in terms of financial magnitude, but they all share a portion of the Enron demon. Should we then like the US react by ‘Soxfying’ Zimbabwean corporate governance?
Let’s discuss at brettchulu@consultant.com.

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