The selection of directors to the Boards of companies and state-owned enterprises forms a very important part of strengthening corporate governance which, in turn, is expected to promote growth through better performance and increased productivity and improved access to capital.
In the last two decades, largely due to two events of international significance: the Asian Financial Crisis of 1997, which saw the economies of Thailand, Indonesia, South Korea, Malaysia and the Philippines severely affected by the exit of foreign capital after property assets collapsed and the corporate crisis of the United States in the early 2000s, which saw the collapse of two big corporations – Enron Corporation and WorldCom, as well as the ensuing scandals and collapses of other organizations, such as Arthur Andersen, corporate governance has gained monumental importance.
Recent debates in the local media, focusing on specific instances of apparent poor corporate governance practices in local public corporations, have highlighted certain weaknesses in the overall standard of corporate governance in Botswana, which require urgent consideration and redress in order to mitigate the risk of major failures of Enron proportions occurring at a local level.
It may be validly argued that while the role of the private sector in Botswana is generally accepted to be the principal engine of growth such a role ought to be complemented and supported by a more proactive and aggressive leadership stance by the private sector with respect to the particular issue of the development and setting of world class standards for good corporate governance as well as monitoring its implementation.
Both the private and public sectors in Botswana exert significant influence on the way in which companies are run which underscores the necessity for their constructive engagement towards promoting efficiency and probity in the way companies are managed with the aim of creating a leadership that is accountable, responsible and transparent in the exercise of power over the companies which they manage.
Different players exist in the corporate governance sphere in Botswana including sector regulatory bodies such as the Bank of Botswana, Botswana Stock Exchange, Registrar of Companies, Registrar of Insurance, Pensions and Provident Funds, Botswana Public Officers Pension Fund (BPOPF), Non Banking Financial Institutions Regulatory Authority (NBFIRA) and the Botswana Telecommunications Authority.
These sectoral regulators need to play an even greater role in entrenching corporate governance amongst other responsibilities in the institutions they oversee.
Lending and financial institutions, such as National Development Bank, Botswana Savings Bank, CEDA, Venture capital companies etc. also have a significant role to play in strengthening corporate governance through the incorporation in their lending criteria of appropriate conditions requiring borrowers to adhere to minimum corporate governance standards or practices.
The role of public/oversight bodies such as the Attorney General’s Chambers, Directorate of Public Prosecutions, Directorate on Corruption and Economic Crime, the media etc. should also be recognized and enhanced as should be the role of voluntary bodies or associations which promote good corporate governance such as the Directors Institute of Botswana.
All stakeholders should require companies to abide by stringent corporate governance practices as such initiatives will present opportunities to improve risk management, add value to companies and contribute more broadly to promotion of a healthy corporate governance environment in Botswana.
The current global emphasis on effective corporate governance by both private and public companies is borne out of a strong and understandable desire by governments and shareholders to alike to prevent or at the minimum to reduce the risks of corporate failures due to inadequate transparency over the management of some of some of these concerns.
What is Corporate Governance?
Many experts on corporate governance continue to give different interpretations of what corporate governance means. This is not helped by the fact that there are many corporate governance models which differ according to the variety of capitalism in which they are based. The model which the Anglo-American countries, including Botswana, tend to follow is what is called the “Liberal Model.”
It gives priority to the interest of the shareholder. It is this model which this article will attempt to confine its explanation of corporate governance to.
The free encyclopedia (Wikipedia) explains that the Liberal Model of corporate governance encourages radical innovation and cost competition.
In his book “Governance and Risk” (2004) the Managing Director of Standard and Poor’s George Dallas defines corporate governance as the interaction of a company’s management, its Board of Directors and its shareholders to direct and control the firm/company and to ensure that all financial stakeholders (i.e. shareholders and creditors) receive their fair share of the company’s earnings and assets. The definition by the Institute of Directors in Southern Africa is even more concise but equally as powerful. “Corporate Governance is the system by which a company or organization is directed and controlled to enable it to carry out its legal duties,” it explains.
Board of Directors
The driving force in the implementation of corporate governance practices is the Board of Directors. This is the body through which a company acts to achieve its objectives. The King Report on Corporate Governance for South Africa explains that the “Board is the focal of the corporate governance system.” This is because the Board is responsible and accountable for the success or failure of the company to which it gives oversight. The Board gives strategic direction to the company and delegates authority to executive management to implement Board decisions as well as run the day to day affairs of the company.
Within State-owned Enterprises (SOEs) where corporate governance is being deliberately entrenched, the Board derives its authority from the Shareholder Compact which is an agreement between the shareholder and Board as regards performance expectations by the shareholder and the parameters of the Board’s operations and vice versa. The Compact is based on the founding documents such as Statutory Corporations Acts or Memorandum and Articles of Association. The Boards further develop Board Charters which regulate the conduct of the directors.
With this amount of responsibility conferred on directors, it is not surprising that both the local media and some influential members of our society have been interrogating the current system of selecting members of boards of parastatals in Botswana as well as the conduct of some of the directors of private companies.
Good corporate governance requires state owned enterprises to have adequate autonomy to effectively carry out their functions of providing strategic guidance and monitoring of management. Boards of state-owned enterprises are required to act in the interest of the enterprise without undue political influence. At the same time boards of state-owned enterprises must ensure that the enterprises are managed in line with the objectives set out by the Government as the shareholder representative. The major challenge for boards of state-owned enterprises is to balance their autonomy with their responsibility to remain accountable to the Government on behalf of their owners, the taxpayers.
PEEPA’s role in selection of Board Members
As part of its mandate PEEPA has been given the responsibility by Government to advise state-owned enterprises in their board screening and selection process designed to enhance the quality of decision making and conduct of directors on parastatal boards.
PEEPA has adopted best practice guidelines for the selection and screening of candidates to serve on state-owned enterprises which are based on merit and professional ability as provided for in the Privatisation Policy.
The process is intended to ensure that board members of parastatals have the necessary skills as well as knowledge about the role of parastatals that would enable them to contribute fully to the direction of the affairs of the parastatals. Amongst others the Board selection process advocated by PEEPA aims to introduce an objective and transparent basis for identifying suitably qualified candidates thus removing patronage in the selection of Boards. Another objective is to promote merit and accountability to constitute, to constitute Boards with appropriate skills mix of both expertise and experience. The ultimate aim is to have balanced Boards in terms of skills sets which can act in the interest of public entities and monitor management effectively.
While initiative by PEEPA on Board screening is limited to public sector companies, there is no reason why the private sector cannot develop its own programme for institutionalizing corporate governance which includes similar initiatives as the ones undertaken by PEEPA to improve the quality of board composition and management companies.
In particular, we submit that the adoption of a more coordinated, comprehensive corporate governance policy framework with a primary focus on the private sector ought to be the short term focus of efforts to institutionalize corporate governance in Botswana.
PEEPA is of view that while we may differ on the best way to instill and entrench corporate governance in both the private and public sector institutions there is no question that a corporate governance culture is an imperative an a national corporate governance framework (in whatever shape or form) is ling overdue.
*Ramaphane is a senior executive at PEEPA responsible for Performance Monitoring