With the exception of certain pockets, corporate governance is underdeveloped throughout the majority of the continent. That’s the bad news. The good news, however, is that the emerging system of regulatory control reflects a mix of universal and distinctly African elements.
According to Ashlin Perumall, senior associate at Baker McKenzie South Africa, Africa’s various countries lie on a continuum of development towards good corporate governance, with no individual country having solved the central issues facing the continent. Yet massive inroads have been made in terms of identifying the appropriate role of governance in developing and emerging markets.
‘Corporate governance has been identified by many countries as crucial to establishing strong economic foundations for growth and development,’ he says.
Adapting and building on the work done by the Organisation for Economic Co-operation and Development (OECD) and the policies for corporate governance it has produced, many African countries have published regulatory governance codes in line with international standards by using such guidelines as a common reference. This is despite concerns that these instruments do not take into account the acute challenges faced in Africa and other emerging markets.
Perumall points out that this is evident in South Africa’s King IV Codes of Corporate Governance; Egypt’s Code of Corporate Governance for Listed Companies; Nigeria’s Code of Best Practices on Corporate Governance (which draws heavily from the South African King codes); and Ghana’s Securities and Exchange Commission’s Corporate Governance Guidelines on Best Practices.
‘The general approach for many African countries is very similar to developments globally, with the focus being on non-binding voluntary codes – a system that supports transparency and disclosure/reporting standards as opposed to direct enforcement, and securities exchanges being the primary actor/driver behind adoption of governance codes,’ says Perumall.
‘However, not all African countries have caught up with the latest international developments, such as integrated thinking and reporting and the move away from tick-box silo reporting; a move towards a sustainable capitals model – namely value creation as the core focus as opposed to profit creation; and a move towards more inclusive capitalism.’
Yet, he says, some efforts have been made in this regard, especially by the King Commission in South Africa and its latest set of codes, published in late 2016.
Loshni Naidoo, integrated reporting project director at the South African Institute of Chartered Accountants (SAICA), also refers to the formation of capitals – a more recent concept by global corporate governance think tanks that pertains to various capital types as stores of value that can be built up or run down over time.
However, the capitals must be maintained if they are to continue to produce a flow of benefits in the future.
‘The International Integrated Reporting Framework introduced the concept, which prompts companies to consider how all of these capitals are used or changed when executing business activities,’ says Naidoo.
Effective integrated reporting – an integral part of corporate governance and also in cross-border business dealings – is often the result of integrated thinking, which requires a holistic view of the system within which the company operates. This implies that the traditional notion of financial objectives being of paramount importance to the exclusion of everything else is no longer good enough.
For instance, an organisation’s financial capital is increased when it makes a profit, and its human capital increases when employees become better trained.
‘A good corporate governance structure will underpin how decisions about utilising the different capitals in relation to one another are made, and good corporate governance provides companies with a base from which all employees – regardless of markets of operations – will execute their responsibilities from a common understanding of what is ethical, appropriate and acceptable,’ says Naidoo.
Corli le Roux, head of sustainability at the Johannesburg Stock Exchange (JSE), points to various tools such as the FTSE/JSE Africa Index Series (which replaced the JSE’s SRI Index) that promote good corporate governance and monitor compliance of listed entities on the exchange. ‘Certain sub-indices of the FTSE/JSE Africa Index Series do cover relevant aspects relating to good corporate governance in Africa.
‘The various ratings are used as a benchmark to monitor and guide certain listed companies – known as constituents once they’re participating in the various indices – degree of compliance with good corporate governance standards. The indices are relevant when it comes to monitoring transparency through integrated reporting, board composition, risk management and anti-corruption measures,’ says Le Roux.
‘Africa must understand that the perception among many foreign investors that the continent is rife with corruption puts the brakes on money flows onto the continent. These investors flag risk as a very significant factor in contemplating investment destinations around the world, and Africa might lose out without embracing good corporate governance practices.’
Deepa Vallabh, director of corporate and commercial at Cliffe Dekker Hofmeyr, supports this, adding that while many regions in Africa have the required policies and codes in place, implementation remains a major challenge.
‘The trick is to get African businesses to go a step further and make sure the rules on the statute books are applied and carried out. South Africa has had years of being at the forefront of corporate governance development and most of our companies and organisations subscribe to the King IV Code. Members of the OECD – a forum of 24 market economies worldwide that promote economic growth, prosperity and sustainable investment – also work with non-member countries in the sub-Sahara, and this helps to foster greater awareness in that region,’ she says.
‘A challenge in Nigeria is that many businesses are family-run and often have cross-border interests. This makes it more difficult to monitor compliance to and performance in corporate governance. The only way to fight corruption effectively is to do it from within. The business itself must be the driving force.’
Vallabh adds that laws on how business must be conducted make provision for company directors and board members to be held liable in a personal capacity if they are found guilty of corrupt activities or even knowing of corrupt activities within their organisations and failing to address it. ‘This must serve to act as a major wake-up call for investors looking at Africa, and for Africa to get its house in order.’
Meanwhile, Naidoo explains that the use of King IV and the International Integrated Reporting Framework is not about strict application, in other words ticking the boxes on a checklist. ‘It’s about understanding what these principles and concepts are trying to achieve. And once there is this understanding, it’s about adopting the principles that are appropriate to that company – also in the African context,’ she says, adding that SAICA will continue to raise awareness on King IV with its members in Southern Africa.
‘We will be launching a number of projects that focus on elevating the conversation on integrated reporting, integrated thinking and sustainable development.’
However, in facing calls for Africa to catch up with the rest of the world, Perumall outlines ‘unique’ challenges that he says stem from the same socio-economic and political difficulties that affect African foreign direct investment. ‘African institutions for corporate governance are under-resourced, lack true independence and shareholder activism, and awareness is limited,’ he says.
‘Many international thresholds, such as those for environment and climate change, unemployment and labour and risk management, also become difficult in application. In addition, underdeveloped political systems and public governance also hamper the emphasis placed on the governance of private companies. Coupled with restricted access to finance, regulatory bureaucracy and corruption, this makes the enforcement of voluntary codes inefficient in resolving leadership gaps and long-term corporate planning.’
Perumall says major international influencers such as the World Bank, International Finance Corporation and UN have played a significant role in bringing about awareness of the need for better corporate governance as a means to resolve difficulties faced by African countries.
‘Such institutions have uniformly highlighted the role of better corporate governance as part of national and regional growth objectives. In addition, research centres such as the African Corporate Governance Network have done a great deal to gather information and act as a resource for African institutes of directors in sharing information of successes and challenges faced as well as strategies and approaches, all aiding the creation of a unique African perspective of corporate governance.’
