Dada Adefolami
Corporate governance is important because it is a system that instills policies and rules for maintaining the cohesiveness of an organization. Corporate governance is meant to hold a company accountable while helping an organization steer clear of financial, legal and ethical pitfalls.
Good governance is an indeterminate term used in the international development literature to describe how public institutions conduct public affairs and manage public resources. Governance is the process of decision-making and the process by which decisions are implemented or not implemented.
corporate governance has been defined as the framework of rules and procedures by which the decisions in an enterprise are made, and how the controllers and held accountable for them.
The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company. Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.
The corporate governance landscape of any country is rooted in its specific political, legal, economic, social and cultural environment.
The resulting variety in regulatory frameworks can pose a challenge to companies and investors, particularly when it comes to making economic decisions.
Looking across Africa markets, and examine local corporate governance requirements for listed companies, and compared these chiefly against the 2015 OECD Principles of Corporate Governance benchmark.
According to World Bank data, six of the 12 fastest-growing economies between 2014 and 2016 were in Africa. With the continent’s population predicted to more than double by 2060, Africa would seem well placed to attract investors, yet the continent draws in only a tiny percentage of the world’s foreign investment.
Alignment with best practice
Since 1999, the OECD Principles have been a driving force in raising the standard of corporate governance globally and Africa has been no exception.
10 out of 15 countries have frameworks in place that align with 80% or more of the 2015 OECD Principles and most legally mandate basic corporate governance requirements such as financial disclosure, shareholders’ rights and the role of the board, supplementing these with non-mandatory guidelines for good practice.
Strengths and weaknesses
African codes surpass many other well-established codes for corporate social responsibility and sustainability reporting.
Frameworks include a broader definition of stakeholders that includes the environment and society, and many mention wider social issues such as human rights, child labour, AIDS and malaria.
However, in the areas of core corporate governance elements that is performance evaluation, risk governance, remuneration structures and board diversity, there is room for improvement.
If market economy is an economy in which decisions regarding investment, production, and distribution are based on market determined supply and demand, and prices of goods and services are determined in a free price system, Therefore Foreign investors want big markets and growth economies – but they also want the peace of mind of a high level of corporate governance.
Achievement
Several markets have moved ahead of OECD Principles but the release of the 2015 Principles and the need to encourage direct investment may call for regulators and policy makers to review their codes and revise their frameworks where necessary.
Striking the right balance between rules and flexibility will differ from country to country but will be of fundamental importance for those where corporate governance is critical to support robust economic growth.
One way to encourage investors is to have robust corporate governance frameworks in place. So how well developed is corporate governance across Africa? The 2015 study Rules and Flexibility for Growth, focuses on 15 African countries, examining their corporate governance requirements against the benchmark of the corporate governance principles set out by the Organization for Economic Co-operation and Development (OECD) for the simplicity and completeness of content, notch of enforceability, and availability of relevant requirements.
Standard
The study found a wide divergence in corporate governance requirements between the 15 African markets, all have a corporate governance code/ equivalent, with most having adopted their first codes in 2000. The standard is relatively high, reflecting the fact that countries have been able to benefit from lessons learned in the evolution of earlier codes elsewhere in the world.
Based on the analysis of local legal frameworks, South Africa came top of the ranking – having adopted the largest number of the OECD’s principles of corporate governance. Kenya, Mauritius, Nigeria and Uganda that completed the top five.
Majority of markets 10 out of 15 have aligned their corporate governance requirements with more than 80% of OECD-related principles. Even in Ethiopia, where no stock exchange currently exists, the fundamentals of a strong corporate governance framework are in place, as well as the adoption of the OECD principles, the researchers also looked at the extent to which countries include requirements seen as leading or better practice. Nigeria is the best performer in this context.
Most markets mandate the basic requirements financial disclosure, shareholders’ rights and the role of the board and supplement them with non-mandatory instruments good practice guidelines and governance codes. An average of 32% of corporate governance requirements are compulsory, while 45% take a ‘comply or explain’ approach, and 23% are voluntary.
The markets that gain the highest scores for clarity and completeness of requirements collate most of them in the form of ‘comply or explain’ instruments. The report suggests that too many prescriptive or mandatory requirements may lead to a compliance-only culture where companies do the basic minimum.
Therefore, relying entirely on a voluntary approach may not create sufficient impetus for companies to adopt even core corporate governance requirements.
Striking the right balance between rules and flexibility is a tricky task for any country, is of fundamental importance for countries where the corporate governance framework is very much evolving.
There was interaction with internationally available principles and with other countries that have adopted corporate governance codes or similar frameworks. However, success in implementing frameworks, whether they have mandatory or voluntary requirements, depends on the effort made by the Government and his agent. Having a corporate governance framework in place is fundamental and only the starting point.’
Pillars Tenets to Follow
The looked at countries’ requirements across four pillars or tenets of corporate governance associated with the OECD principles. Countries tend to have the most well-defined corporate governance requirements in relation to the stakeholder engagement pillar which includes shareholder rights, followed by leadership and culture e.g. role of the board, director independence, nominating committee, then compliance and oversight e.g. disclosures, audit committee and financial integrity. Requirements related to the fourth pillar – strategy and performance e.g. performance evaluation and remuneration structures – are significantly less well defined.
In general, the better-defined areas of corporate governance are mostly quantifiable or tangible in nature structural, or have had more widespread attention over a longer time. They are fundamental tenets of a strong corporate governance framework, and the researchers were encouraged to find that countries are ‘getting the basics right’. Several markets have even moved ahead of OECD principles. For example, the recent King IV Report in South Africa contains elements that go beyond leading and even emerging practice, with board responsibility for governing the technology and information framework including a specific and separate responsibility for governing cybersecurity risk frameworks.
However, purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company. Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.
Finally
Transparency International’s Corruption Perceptions Index shows that Africa undergoes some of the highest levels of corruption in the world. which found no correlation between strong corporate governance requirements and lower levels of corruption. This indicates that adding anti-corruption requirements to corporate governance instruments is not enough in itself to combat entrenched corruption. A coordinated effort by business and government including a zero-tolerance bearing on corruption in government and investment in enforcement is needed to start tackling the problem.
The recently reviewed corporate governance codes. Given the motivation of the OECD 2015 principles and the need to encourage more foreign direct investment, the report suggests that now could be the right time for government regulators to take stock and revise their codes where necessary.
Though many countries have had governance codes for some time, and the experience of implementing them must have created practical learning points. ‘These could be reflected either in a revision of the code or the production of related control, however companies can improve corporate governance practice. The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company. Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.
Corporate governance practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company-these include its shareholders, management, customers, suppliers, financiers, government and the community.
Corporate governance is important because it is a system that instills policies and rules for maintaining the cohesiveness of an organization. Corporate governance is meant to hold a company accountable while helping an organization steer clear of financial, legal and ethical pitfalls.
• Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: surajudada@yahoo.com; 08052043855