Advocate Mureriwa on a Call for Good Corporate Governance in Zimbabwe. free essay sample

MURERIWA ON A CALL FOR GOOD CORPORATE GOVERNANCE IN ZIMBABWE. ADV ISIAH MURERIWA LLB (UP) LLM (UP) (Advocate of the High Court of South Africa) The legal realty is that in Zimbabwe, as in many other economies, those who own companies (shareholders) are different from those who are involved in the day-to-day operations of the companies (managers and directors). This position thus put the managers and directors in a fiduciary relationship vis-a vis the actual owners of companies and providers of capital. The basic duty that managers and directors assume, having accepted this fiduciary relationship implies that managers and directors shall carry out their duties of management and direction of companies in the best interest of their principals with the ultra-most good faith. Unfortunately the past decade, which many would want to label, the dark error in the economic history of Zimbabwe, bore witness to widespread disregard and violations of this fiduciary relationship by several managers and directors. This is very clear from the spate of corporate frauds and scandals that rocked our media during that period. In this paper, based on a presentation I gave at the Mt Carmel Institute’s Workshop on Business Ethics and Corporate Governance, in Harare, 11 – 13th of August 2011, I seek to evoke a debate on the role that the law can or does play in the protection of the actual owners of companies against their at-times misguided and often capricious agencies. In a paper presented to the Mandel Training Centre’s Annual Symposium on the 31 of January 2011, Senior Partner of Scanlen and Holderness, Sternford Moyo started by stating as follows: â€Å"The law defines the environment in which business is conducted. It ensures that players are regulated by pre-determined rules of conduct. It reduces the potential for capricious conduct, defines the limits of power exercisable by those in positions of power and control and furthermore defines the manner in which power and control may be exercised to ensure that decisions by those in authority are just, fair and predictable and I would add, sustainable. He went on to state that; . . . the law ensures the protection of all role players and imposes obligations which ensure a workable co-existence. And concluded by stating that; . . . . business is thus inconceivable without the law. We would all agree with the conclusion reached by Sternford Moyo in the current business environment in Zimbabwe given our recent history dating to the past decade as well as the challenges that the recent decade presented to our business community. We would also agree that what Zimbabwe need at this juncture is a culture of good corporate governance if we are to regain any confidence from the international investing community. Corporate governance is generally used broadly to refer to the rules, processes and or laws by which corporates (businesses) are regulated and controlled. Sir Adrian Cadbury (1992) identified corporate governance as a system by which companies are directed and controlled and where boards of directors are held responsible. In a very business-like definition, LL Tshumba of the Reserve Bank of Zimbabwe quoting from Shleifer, Andrie and Vishny Robert (1997) â€Å"A Survey of Corporate Governance† Journal of Finance, Vol L11 No 2 pages 737 stated that; corporate governance, is therefore rightly often defined as the ways in which suppliers of finance assure themselves that they will receive a fair return on their investments† It is internationally accepted that good corporate governance is key to the integrity, and is central to the health of any economy as it creates business ethos and thereby assures investors (supplier of finance) that they will get a fair return on their i nvestment. Rachel Kyte, the Vice President, Business Advisory Services of the International Finance Corporation wrote: Good corporate governance practices instil in companies the essential vision, processes and structures to make decisions that ensure longer-term sustainability. More than ever we need companies that can be profitable as well as achieving environmental, social and economic value forsociety† Statistics seem to show that good corporate governance has several advantages of which the most notable are; 1. It makes for cheaper debt and access to both local and global sources of capital. 2. It helps operations and improves performance since it ensures quality decision-making, encourages effective succession planning for senior management and enhances the long-term prosperity of companies. 3. It ensures sustainability and increases the likelihood of the enterprise to satisfy the legitimate claims of all stakeholders and fulfil its environmental and social responsibilities and thus the long – term sustainable growth of client companies. In Zimbabwe, statutory law, through a multitude of statutes, governs corporate activity or at least our statutes provide for the governance and control of corporate activity. In addition to statutory law there are recent and applaudable efforts to draft a Nation Code of Good Corporate Governance by among others, the Institute of Directors Zimbabwe (IODZ) which borrows from the principles set out in the Cadbury Report of the United Kingdom and the Mervyn King’s Report of South Africa. It is hoped that such efforts will improve the expertise, status and professionalism of managers and directors in Zimbabwe in the management of Corporate Affairs in Zimbabwe. With the aid of education and training programmes facilitated by the Zimbabwe Leadership Forum (ZIMLEF) and the Standards Association of Zimbabwe (SAZ) it is hoped that meaningful progress will be made in curbing and eradicating fraud, corruption and all forms of corporate decay that often leads to scandals and failures. The gospel of good corporate governance needs be spread not only in private corporations but far and wide to reach parliamentarians and parastatals in the running of their business so as to build a culture and not mere practice of good corporate governance. Support for such initiatives includes learning from comparable best practices like the practices of prominent institutions like the Anglo-American and Delta Corporation. Training is also extended by the Commonwealth Secretariat through its working relations with the Institute of Directors Zimbabwe. As is often stated corporate governance is a tradition and traditions are often difficult to change, but with concerted efforts, one hopes that a meaningful turnaround is indeed possible towards a more responsible corporate citizenry. Our recent history bears testimony to the fact that poor corporate governance at any level is too costly for individual organisations and indeed the economy at large. This is so because an environment in which transparency, fairness, responsibility and accountability are alien will necessarily lead to rampant corrupt practices and hence high risk on investments, high cost of capital and lower returns, inversely leading to the neglect of even the basic corporate social responsibilities. Writing on the the Zimbabwean situation L L Tshumba of the Reserve Bank of Zimbabwe in his paper titled â€Å"Corporate Governance Country Case Experience- Perspectives and Practices: Zimbabwe† stated: â€Å"corporate governance depends on the quality of economic, regulatory, fiscal, institutional and judicial structures, which in turn are influenced by a given country’s political dispensation† He goes on to state that; â€Å"there has been a renewed focus in recent times, on political structures as determinants of the degree of the financial sophistication of a given society. For very personal reasons centralised or autocratic political systems will tend to be intolerant of competition, transparency and accountability and are therefore bound to retard rather than encourage financial development† And concluded by stating that; â€Å"There is therefore a need to develop an environment where stakeholders, be they shareholders, citizens or other interested parties are assured that the â€Å"goings-on† are not detrimental to their own political and financial interests† A member of the Institute of Chartered Accountants Zimbabwe at a seminar held in Kariba on the 24th of June 2011 stressed the point that Zimbabwe has to revise its commercial laws to enable a culture of good corporate governance in the country and in the process to prevent corporate scandals that currently dominates our media. In the same breath Sternford Moyo had mentioned in his presentation to the Mendel Training Centre Annual Symposium (supra) as follows: Our Companies Act is outdated. It does not cover issues one would expect to be covered by a modern companies statute. Inadequate provisions are dedicated to creditor protection. Shareholder protection is not adequate either. Often closely related to poor corporate governance is the problem of related party transactions. Pratip KAR in his presentation titled â€Å"Fighting Abusive Related Party Transactions in Asia, A workshop on Implementation† at the Asian Round Table Conference on Corporate Governance held by the Global Corporate Governance Forum in New Delhi, India on the 25 and 26th of October 2010, referred to what he called â€Å"Related Party Transactions†. He defined such a transaction as: a business deal, single or series of financial contracts (dealings), or an arrangement between two parties who are joined by a special relationship prior to the transaction in question. † In his article (supra) Pratip states that even though related party transactions are fraught of the possibility of abuse and conflicts of interest, they often make tremendous commercial sense and if co mpanies are blanketly prohibited from entering into such transaction, it might militate against the principle of maximizing the shareholder value. He states further and probably more relevant to this paper, that where people’s money is involved, it cannot be expected that the managers watch over it with the same anxious vigilance as they would watch over their own† He however further admitted that such arrangements might allow controlling shareholders or executives of a company to benefit personally at the expense of non-controlling shareholders of the company which often leads to conflicts of interests between the private interests of the individual and his duties to the company which could impair the integrity, independence and the quality of their decisions in the management of the company. That such arrangements are at times quite desirable is without question. Pratip states that in the United States, at one point, all related party transactions had been banned, but such restriction was later seen as overly restrictive and the ban was uplifted. Memory Mafo, (an Associate Legal Practitioner at Scanlen and Holderness Legal Practitioners) in her article in the Scanlen and Holderness Magazine presented to delegates at the Lex Africa Annual General Meeting, held at Harare, Zimbabwe on the 25th of March 2011 states at page 28 that ; These situations (of related party transactions) require the issues of conflict of interest to be fluid rather than rigid. Most business transactions and legal relationships are complex and varied. A strict interpretation of conflict rules would effectively halt a considerable amount of business for both the legal profession and the corporate world† Ms Mafo goes on to state however that: â€Å"traditionally the best way to handle conflict of interest is by avoiding them entirely† and concluded by stating that: The high standards of legal ethics should always be maintained and further developed alongside a fast growing corporate Africa† The Mervyn King’s report as quoted in an article titled â€Å"An overview of Corporate Governance and Accountability in Southern Africa† [http://www. uneca. org/srdc/sa/publications/corporateGovernance-Accountability-SA. pdf] recommends that Boards of directors should observe the highest level of business and professional ethics and, in particular their independence should never be compromised. In the Guidance for Supervisory Board Members of Banks [http://ww. gcgf. org/ifcext/cgf/nsf/attachmentsbytitle/Ukraine_Eng_Guidance_Supervisory_Board_+member_of_+Banks/$FILE? Chairman? -Manual_+Final_Eng. pdf] a conflict of interest is said to exist among others when an office bearer or board member may improperly influence individual judgment when acting on behalf of (the bank). Office bearers and directors are thus cautioned to avoid actual, potential or perceived conflicts of interests. Situations identified as being fraught with the possibility of conflicts of interests includes a situation where a director has any major ownership interest in the business of any counter party or has a consulting or employment relationship with a counterparty to the enterprise or where any person owing a fiduciary duty to the enterprise advocates a transaction between the enterprise and the company, firm or other enterprise in which such person owns stock or serves as an office bearer or director. It needs be noted that the guidelines are not rules of law per se but do provide useful guidance in the crafting of a working code of conduct on corporate governance issues. Where there is potential conflict of interests the following guidelines are suggested; †¢The member having an interest (the conflicted member) must disclose the nature and extent of his interest as required by section 186 (1) of the Companies Act. †¢Such conflicted members shall not be included in the quorum for any resolution concerning the conflicted matter. Conflicted members should not participate or even be present during discussions on the conflicted matter and should volunteer to or may be asked to withdraw from meetings for the duration of any such discussions to facilitate frank and full consideration by the rest of the board on the conflicted matter. †¢A conflicted member may not vote on any resolution concerning the conflicted matters †¢A director having a continued material conflic t of interest or potential of conflict of interest should consider resigning. Given the spate of corporate frauds one wonders if there is a need for legislation designed to manage and regulate corporate governance and the business ethics terrain in Zimbabwe. Research has shown the impact of bad corporate governance on national economies. Examples include the corporate failure of the US energy giant Enron in 2001 (due to widespread accounting frauds and insider trading) and in Japan where the alleged securities fraud in 2006 instigated a stock sell-off resulting in the temporary closure of the Tokyo Stock Exchange. It is to be noted that these scandals were followed by enactments such as the Sarbanes Oxley Act of 2001 in the US and in Japan a financial reporting law known informally as J-SOX, because it was based on the US Sarbanes Oxley Act. [http://allafrica. com/stories/20110524. html] Whether the way forward for Zimbabwe is a statutory enactment to deal with corporate governance issues or not is a subject still to be pursued. It is however clear that the aftermath of the world recession saw the implementation of stricter and tougher regulatory frameworks in the financial services sector of the USA and other European countries. A similar approach seems to be taking root in Zimbabwe. At the Insurance 2010 Conference held at Nyanga, Zimbabwe, Edward Siwela, the Executive Director of the Institute of Directors Zimbabwe, hailed the crafting of the proposed National Code on Corporate Governance and the Future of Corporate Governance in Zimbabwe launched on the 28th of October 2009 in Harare and attended by among others, the Guru on Corporate Governance, Professor Mervyn King. He mentioned that the Code had advantages over mandatory approaches primarily because of ease of dissemination, flexibility of corporate practice and transparency as well as the emphasis on the delivery of shareholder value over the long term. He added that the adoption of good corporate governance reduces the risk of corporate crises and scandals which characterized the Zimbabwe economy in the past decade. Yilmaz Arguden stated that, in the ultimate, good corporate governance is a ulture and climate of; †¢Consistency †¢Responsibility †¢Accountability †¢Fairness †¢Transparency †¢Effectiveness That is deployed throughout the organisation. In an informal discussion I once mentioned that â€Å"fortunately this corporate entity has neither soul nor blood, they can suck all they want†. â€Å"If management is about running the business, governance is about seeing that it’s run properly† [R I Ticker, 1984] [ http://www. spescom. com/content . asp? subID=1]