Tuesday, December 7, 2021

Corporate governance: SOEs fail international best practice test

The failure of corporations in developed major economies in corporate governance practices demonstrates that corporate governance cannot be taken for granted but rather seen as a complex and dynamic phenomenon that demands constant review.

A 2016 research study that explored corporate governance in Botswana with a view to determine the levels of compliance with the Botswana corporate governance by the Botswana Stock Exchange (BSE) listed companies code found that “there is some level of compliance with the key principle although it is difficult to ascertain the quality of the compliance”.

The research study, titled “Corporate Governance in Botswana: Exploring Developments and Compliance” observed that the majority of the companies are listed on the BSE are chapters of international corporations which imply that their corporate governance practices may be influenced in large part by codes from other countries.

According to the study, from a policy perspective the findings of the study underscore the need for clarity in terms of the peculiar circumstances that have informed the new national code that the country adopted.

In other words, it is not very clear on the face of it what the national code brings that is different from what has been in use, namely, the King Code. Unless this is made unequivocally clear, companies may continue to apply the King Code in lieu of the national code. “Going forward, companies should write in their practice corporate governance compliance, disclosure and sanctions thereof”, states the research paper.

The study, which sought to anchor and locate the discussion on corporate governance in Botswana in the post-colonial discourse observed that the development and application of corporate governance should therefore be reflective of the appropriate context.

It is reckoned that corporate governance remains an important phenomenon in wealth creation, management and distribution. As the citadel of wealth creation it also distributes power and influences both economic and social developments in corporate governance.  

It is also argued that systems of governance must be conscious of social dynamics and context. In other words universalism should be circumvented. The mainstream argument holds that markets allow for creation of significant material wealth.

Therefore, the key question is how can governance systems be developed to ensure equity and justice in wealth creation in the contemporary society? Over the longer horizon corporate governance systems that permit skewed wealth accumulation may not be sustainable and need countering.

Even the traditional notion of maximization of shareholder wealth is under attack, with shareholders increasingly getting displaced by the managerial cohort. Recent scandals show how shareholders, lenders and employees experienced losses in the exception of top management.

According to the research study, “better governance systems could be developed to assist regulation and compliance by corporations”. In Sub-Saharan Africa (SSA) it has been argued that “there is no corporate governance”. Going forward, African countries will have to develop or adapt corporate governance models to the peculiarities of their specific economies.

As Africa develops, it needs to critically assess both the Anglo-Saxon as well as the Japanese models and decide how to proceed. These two models are however based on the various strands of capitalism and the other obtaining local factors. Africa would therefore have to consider what is relevant and applicable to its own strand of capitalism or economic system used.

It is further argued that going forward African countries could infuse compliance and enforcement mechanisms into corporate governance system in order to create integrity, and “the fundamental objective would be to avoid poor controls that lead to corporate collapse”.

“Africa needs to adopt or create a system that would prevent diversion of corporate profits and assets for personal gain. Compliance and enforcement should be considered as central part of the mechanism to prevent financial scandals. It would seem self-defeating to invest in a system that could be easily ignored or breached. The building of solid and inclusive corporate governance is the very point at which financial scandals can be prevented”, the research study emphasizes.

Corporate governance compliance is intended to ensure proper conduct of firms and build trust with the outside world. Compliance is considered a reflection of responsible corporate citizenship. Corporate citizenship principle suggests that benefits of compliance go beyond the corporate managers and shareholders and the notion of costs should therefore not constrain its achievement.

To ensure corporate governance compliance, some firms develop comprehensive compliance programmes and go on to indicate how such a programme is enforced and the disclosure of such programmes in the corporate annual reports is vital and any further developments thereof.

The existence of a compliance programme and related disclosures could ensure that transparency is attained and ultimately achievement of corporate citizenship integrity. The compliance programme should have basic elements that it can be judged upon deriving from relevant statutory instruments. Such a programme would form an integral part of the corporate governance system. Codes should therefore emphasize clearer compliance programmes.

Turning to the national code, the research concludes that “the national code makes claims of inclusivity but does not have clear indicators of how it is oriented towards stakeholder model. Many of the items are basically those beneficial to equity stakeholders.

“Non-equity stakeholders including ordinary employees and the society in general are not explicitly indicated. Whilst in general compliance itself might benefit society by keeping the corporation in business and by extension employment and possibility of increased taxes, there has to be some indications of moving beyond the singular bottom line”, the research paper argues.

It is apparent from the findings that most of the listed companies have adopted the new code only in spirit; in practice they continue to rely on other codes particularly the King Code.

In fact a large proportion of the companies investigated make reference to either the King II or King III and a similar trend was observed among FTSE/JSE listed companies although in this case the other codes did not include King II. This behaviour was attributed to strict compliance requirements of foreign regulators.

“The contradiction in our case appears to arise from the fact the Botswana CG Code relied heavily on the King Code in its development. There is no radical departure from the King Code and there is very little in the code that seeks to delineate Botswana’s context.

“The construction of a Botswana context and what differentiates it from other contexts would have been helpful in adapting the King Code and other codes to the Botswana context. Further, the case of how the new code is intended to address this unique context should have been made more explicit.  As a result it would appear that companies are following the King Code because its principles are similar to those of the Botswana national code”, states the research paper.

Yet another 2016 research paper titled “Corporate Governance and Compliance in Botswana: Issues and Challenges” ably demonstrated how the Botswana Unified Revenue Service (BURS) governance structure, and possibly governance structures of other state owned enterprises (SOEs) “do not conform to international best practice corporate governance principles as recommended by the King Code (2002)”.

First, using a checklist to investigate the extent of non-conformance between BURS Act of 2004 and King Code (2002), the paper concluded “that there is a high degree of non-conformance to international best practice corporate governance”.

The paper also concluded that the BURS Act gives the minister “unlimited powers of appointment, dismissal and mundane decisions pertaining to the day to day activities of BURS. Perhaps, governance structures for BURS and also other state owned corporations were not meant to meet international best practice by their architects (parliamentarians)”.

  The paper further asks very pertinent questions: If the state owned corporations were not meant to meet international best practice (as decreed by the architects), do governance standards obtaining in the corporations (SOEs) conform to best practice as per the views of the owners/ principals (electorate) of these corporations?

If not, what remedies are available to the owners/principals of these corporations to ensure adherence to best practice? From an agency theory perspective, the long chain of delegation under a parliamentary democracy about non-convergence of interests between the principals and (owners/electorate) and the agents and or agents of agents in the case of BURS and other SOEs.

Unlike in a public limited corporation, “the principals do not have an opportunity to demand accountability from their direct agents (parliamentarians) annually at the AGM. This only happens once every four or five years depending on the frequency with which elections are held in the country”.

The research report laments that “the architects of BURS Act of 2004 could have drawn from international best practice to craft governance structures which embrace good governance. For instance, the architects could have crafted governance structures which promote independence, transparency, accountability, accountability, responsibility and fairness among others”.

According to the report, the Botswana parliament overlooked these principles in favour of a governance structure which gives unfettered powers to an individual e.g. the Minister of Finance under whose portfolio BURS falls.

“This is surprising given that, in recent years one of the strategies to try and increase private involvement in her economy, Botswana has been on the drive to attract foreign direct investment (FDI) by actively wooing investors through Botswana Investment and Trade Center (BITC) to come and invest in the country. For instance, some of the attributes which had been touted as indicators of Botswana as a safe and suitable destination for investment capital include inter alia: stable economy, low inflation, low tax regimes etc”, the research paper lays out.

It is acknowledged by the researchers that “failure to demonstrate that the country subscribes to international best practice by, for instance, developing Acts modeled along international best practice corporate governance, will defeat the drive to attract FDI.

“Further, governance structures which concentrate power in the hands of a single individual create an unfavourable perception in the minds of investors ultimately leading to a nosedive in the level of confidence investors have about Botswana as a safe and suitable destination for investment capital”.

The research paper recommends that in order to enhance BURS governance structure and possibly governance structures of other SOEs, appointment to BURS board and others could through a select parliamentary committee.

The argument is further expounded upon in that since parliamentarians directly represent voters (owners), “this approach is close to a shareholder-wide vote, often held at AGMs when directors are appointed to company boards”.

In turn, the board must be made to report to the select parliamentary committee and the recommendations “have the potential to grant some level of autonomy to BURS. The recommendation may also motivate BURS employees to effectively discharge their mandate because an increase in revenue will translate into an increase in revenue for BURS and ultimately an increase in resources to carry out organizational objectives”.

Although these recommendations are specifically targeted to BURS which was the subject of investigations in the paper, the researchers recommend that this could be a tangible template for all SOEs in terms of enhancing and ensuring corporate good governance.

In yet another 2017 research study titled “The Slip-Ups of Corporate Governance in Botswana Public Enterprises”, it was found serious lapses of corporate governance on the part of board members in the two corporations under investigation in the case research.

The research used a documentary analysis to unearth some of the problems and challenges faced by public enterprises in Botswana, in the particular instance using the Botswana Development Corporation (BDC) and the Botswana Railways (BR) as case studies.

The research was a result of several cases of mismanagement and corruption that had been reported in most public enterprises in the country despite the adoption of the King Code of Governance as well the Botswana national Code.

Corporate governance gaffes like have happened in big public corporations like BDC where government ended up being the biggest loser when the glass company plant materials were auctioned for a pittance.

The research acknowledged that boards of directors are mandated to ensure proper governance based on principles of corporate governance. They should safeguard that decision making process is independent of government, injecting values of transparency and accountability, and guarantee shareholder (citizens) trust. “If indeed a good system of corporate governance is executed, public enterprises can graduate from relying on government subsidies, and come to be profitable entities”.

However, a challenge remains in running public enterprises like businesses where the tax payers and owners of means of production are treated as customers and spectators. Another challenge that remains before the Public Enterprises Evaluation and Privatization Agency (PEEPA) is to reposition itself so that public enterprises become relevant entities manned by board of directors who are accountable.

The study recommended that board of directors should be empowered to fire chief executive officers where possible. Interference from ministers normally makes boards ineffective as in the case of BR. But typically in the case of BDC, the minister went ahead and fired board of directors’ members who were bold enough to ‘whistle-blow’ on executive management shenanigans.

The paper ultimately recommended that “ministries should not interfere with the operations of the board when their boards are carrying out their oversight role” and that “the boards be given powers to execute and implement their decisions without fearing that they will be fired from the board”.

It is further recommended that board of directors should ensure that there are policies in place that allow them to discharge their oversight role so that they can hold their executive accountable while whistle blowers, be they board members or employees, “should be protected by companies and governing Acts”.

Equally, the public should request for accountability when their hard earned money in the form of taxes are wasted and not properly accounted for.

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