Bangkok--3 Apr--CIPE Corporate Governance in the African Context Karugor Gatamah March 31, 2008Introduction Corporate governance is not always recognized as an important development tool by people outside the private sector development field. Yet viewing democratic and economic reform from the private sector perspective can show that it is important not just that economic growth occurs, but how it occurs. Corporate governance is what allows businesses to grow and thrive in a way that builds strong frameworks for future growth. For Africa, corporate governance is crucial to building businesses that use entrusted resources efficiently, resulting in the greatest benefit for the majority of the people — maximum value with minimum waste. Corporate governance helps ensure that resources are used efficiently and effectively. Africa is a resource-rich continent. Unfortunately, these resources are often exploited for the benefit of a few individuals rather than the population as a whole. Corporate governance can contribute towards a more equitable distribution of the benefits of growth, making it crucial to Africa’s development. It is good corporate governance that will build trust between Africa’s public and private sectors, and between its leaders and the public, allowing the continent to concentrate on aggregating resources for investment and growth. Corporate governance builds responsible businesses that do not damage the environment or exploit labor. It creates a framework that allows businesses to disclose their profits and pay their taxes and creates viable states with governments that use revenues to address the social needs of the population. From this perspective, reformers in Africa are increasingly beginning to think, "How do we create businesses that are owned by our people that also utilize foreign investment efficiently and effectively? How do we create good corporate government standards that motivate businesses to have the highest productivity?" These reformers recognize that to alleviate poverty, there must be wealth creation; to create responsible wealth in a sustainable manner, there must be good corporate governance.The African Context Unfortunately, the promotion of corporate governance in Africa has not been effectively adapted to the context and needs of the continent. In general, it has been preached to Africa almost exclusively as a way to attract foreign investment, especially through privatization. This has tended to lead Africans to view corporate governance as part of the privatization process of "throwing away the ownership and control" of Africa’s rich natural heritage in exchange for foreign investment — not as something that leads to enhanced productivity by more efficient enterprises for sustainable growth and development. It is for this reason that corporate governance implementation must be framed in the context of social development, economic competitiveness and viability (for states and corporations), transparent accountability, and the development of the tax base. Corporate governance must be related to poverty reduction, increased standards of living, and the transformation of society. African states and citizens must see good corporate governance as well-run businesses, enhanced productivity, transparent disclosure, and the responsible use of resources. The public, as consumers, needs to understand how implementation of good corporate governance results in the production of the best-quality products at the most competitive costs (and thus resulting in consumer benefits). Governments need to appreciate and understand how good corporate governance enhances tax collection. Society as a whole needs to see show how good corporate improves productivity and ensures the efficient allocation of resources, resulting in increased employment opportunities, a better quality of life, and poverty alleviation.State-Owned Enterprises Only 17 countries in Africa have stock exchanges. So, when corporate governance is framed in the context of a capital market, most of the 53 African countries are alienated. This is why, although it is important to ensure that good corporate governance is implemented in all of Africa’s larger companies (whether they are state-, foreign-, or locally-owned), it is particularly important to talk about corporate governance as it relates to state-owned enterprises. In Africa, as elsewhere in the world, it is primarily state-owned enterprises that work in the natural resource sector. These companies exert huge influence over their national economies, and therefore, it is essential that they adopt good corporate governance. However, because state-owned enterprises have been put in the command position in the economy, good corporate governance and growth in this sector would lead to development in other sectors. For example, seeing the positive applications for state-owned companies, in April 2003, Kenya launched its guidelines on corporate governance and state-owned enterprises. Shortly thereafter, the government introduced performance contracting in state-owned enterprises. Today, performance contracting has been introduced into the ministries, and into local administrations. It is mandatory for directors who sit on the boards of state-owned companies to be trained in corporate governance as part of their performance contracts. Furthermore, in public procurement, the government requires transparent disclosure by all involved parties.Family-Owned Enterprises While state-owned enterprises are in the command position over most African economies, family-owned enterprises account for the vast majority of the continent’s business community. In Kenya, there are over 140,000 registered companies. Just over 50 are listed on the stock exchange. Further, out of these 140,000 registered companies, only 5,000 are public companies. That means that there are approximately 135,000 that are either family-owned private companies or small- and medium-sized enterprises (SMEs). Consequently, if corporate governance is not addressed in the context of family-owned companies or SMEs, the message is not reaching the vast majority of the business community. Reaching family-owned companies can be challenging. The Centre for Corporate Governance (CCG) cites an example it uses in its training programs. A grandfather founded and has been quite successfully running the family company since its inception. He is now spending a bit of company money on his second wife. CCG asks, "What are the implications of his actions for corporate governance?" Some participants often respond, "Well, if the second wife is making the old man comfortable and better able to work for the company, what does it matter, then, if he uses some company money to finance something that allows him to better contribute to the company’s success?" This is one of the many real issues of corporate governance in family-owned businesses in Africa. Culturally, it is very difficult for a grandchild in the company to say to the grandfather, "You cannot do that. It is just not done. All the money, assets, and property belong to the company. You must account for every penny." In addition to cultural challenges, succession in family-owned companies and formalized decision-making processes are some of the other issues that must be addressed in building proper corporate governance.Reaching the Broader Business Community through the Capital Base Unfortunately, in many African countries, the application of corporate governance guidelines has been limited to capital markets as a means for attracting foreign investment and, therefore, has a limited reach. (Outside of one or two countries, foreign investment in Africa is still nominal.) Similarly, many people associate the enforcement of corporate governance with stock exchanges. But many companies in Africa don’t list on the stock exchange. The source of capital may instead be cooperatives, the family, or banks. Banks are key to helping companies adopt good governance practices, because eventually, when businesses start to thrive, they all deal with banks or financial institutions of some sort, whether it is in terms of depositing money, transferring funds, or securing loans. Banks thus have a major role to play in promoting corporate governance. There are two aspects of this role: how the banks themselves are governed and how the corporate governance practices of various clients factor into banks’ risk evaluation. First, the implementation of good governance helps banks to develop a long-term vision. Simply put, corporate governance forces banks to properly evaluate clients, and rewards and facilitates long-term development rather than short-term exploitation of random transactions. Banks have a major role to play in the long term because all other sectors ultimately deal with the banking sector. Second, banks can be a major conduit for the adoption of corporate governance practices if they make corporate governance an element of risk management in assessing their clients. While corporate governance is not always easy to enforce, if banks make it a requirement, companies will see its necessity. In many African countries, the source of capital may not be banks — it may be a brother or cooperative. Nevertheless, transparent disclosure and accountability is still important. It need not be disclosure to the public, but disclosure to the brother who is giving the money, disclosure to the cooperative, disclosure to the community. Disclosure builds trust. Trust is key in helping people see the importance of corporate governance. Like effective contract enforcement, corporate governance facilitates new transactions that would otherwise never take place because it develops trust among economic actors. If corporate governance is not made applicable to the banking sector, state-owned enterprises, family-owned enterprises, or even the informal sector, people will continue to assume that corporate governance is only important for someone else and not for them. Yet for society as a whole, corporate governance is crucial to job creation. Well-run companies create more jobs and better products, and can be held accountable for paying their taxes in a timely manner. Unfortunately, in many African countries, many people think that the most important thing is corporate social responsibility, or the philanthropic aspects of corporations. This approach tends to take away from the primary role of business, which is to create sustainable wealth. Making the connection to sustainable wealth is how entrepreneurs in Africa will see that corporate governance is important to them.Beyond Politics Instead of looking at producing sustainable wealth, Africa has long been preoccupied with political drama. The media has tended to be sensational in reporting on politics, with almost no attention to economic issues. Journalists must be educated about the importance of economic issues, so, in turn, they will be able to hold business accountable and contribute to the creation of viable economies. Likewise, the distribution of wealth must be taken out of the sole context of the political, tribal, and ethnic division of the national "cake." An effective media understands corporate governance, disclosure, and the efficient use of resources by the private sector. Similarly, there is excessive focus on corruption in the public sector, without any attention or thought as to who drives corruption in terms of supply. Yet it is obvious that it is the private sector that pays ‘the millions in order to make billions’ and in most cases is tempted to offer bribes. But with transparent disclosure and competition, the possibilities for corruption are reduced. Disclosure is part of corporate governance. The media needs to be asking these questions, holding both the private and public sectors accountable, rather than fixating on the drama of political patronage. In Africa, as elsewhere, a number of companies have politicians or political affiliates on their boards. With proper governance, the role of the director is to act in the best interest of a company. Politicians or political affiliates may instead be tempted to act in the best interest of a particular party. With good corporate governance, politics are left out of business. Transparent disclosure of who is on the board of what company, what relationships exist, and how property is transferred can minimize the influence of politics. In the past, many development organizations have been involved in awareness raising, engaging governments and helping them accept that corporate governance is important at the national political level and at the international level in terms of international standards. In Africa, these standards are the current challenge. While everyone knows the standards exist, the challenge is in creating the capacity of African countries, and in particular, the businesspeople to actually implement the standards. Implementation must not be ‘because the World Bank says so,’ but rather, because it is in the best interest of the continent. Getting people to see how corporate governance applies to the African context is a challenge because even using these words elicit the reaction that corporate governance was conceived in Washington, conveyed through Paris and London, and imposed on the continent by "consultants." It is crucial to convey that corporate governance is something that is useful to Africans, not just something that pleases foreigners and development partners.Moving Forward It is important to engage the continent at all levels — governments, the business community, professional organizations, youth, disadvantaged or marginalized groups, and consumers — in the promotion and implementation of good corporate governance. Of course, Africa is a dynamic and varied market, and across Africa corporate governance must be addressed within very different contexts; certainly work on corporate governance has not been uniform. For example, much has been done with family-owned businesses in North Africa. Unfortunately, in Africa, it is these regional differences that are often highlighted, rather than commonalities or shared concerns. Reformers must help people see that working together toward harmonized standards enhances the potential of the continent and benefits everyone. Working together will help build trust, raise regional investment by Africans, and expand Africa’s domestic markets. Involving the public in demanding the implementation of good corporate governance involves building public awareness and understanding, and then organizing calls for reform. In Kenya, a shareholder association and investor association are currently working to demand corporate governance. CCG is exploring the idea of creating a media association and a student association to promote corporate governance. Involving youth and students will help build a base for future implementation. CCG currently works with a university to offer a diploma in corporate governance, has worked with Kenya’s central bank to put corporate governance in banking and finance master’s degrees, and has developed a master’s program that is offered in public universities. CCG has proposed instituting corporate governance as a common course in all university programs, in order to build understanding that the principles of good governance are essential to all aspects of institutional and political governance. Once there is consensus behind corporate governance, the next challenge is motivating society to demand it. The media can help civil society understand that good corporate governance is not just about making profits. It can help connect well-governed businesses to increased productivity and competitiveness; high quality products; transparent and prompt payment of taxes; efficient, transparent, and accountable use of tax revenues by governments; and — ultimately — the efficient and effective use of national resources for the benefit of society. When corporate governance is only associated with foreign investment, it is difficult for people to see the benefits of good practices for society at large and for the poor. Good corporate governance leads to wealth creation, and viable businesses lead to job creation. Only when people understand these connections will they get excited about corporate governance and be motivated to do something about it.