Government’s pivotal role in good corporate governance

companies on WHILE their own can adapt to changes in economic trends, there is need for Government intervention from time to time to strengthen corporate governance standards.

THIS improves economic efficiency, growth and stability as well as encouraging investments in the economy. In pursuit of Vision 2030, Zimbabwe needs to maintain a reputation of upholding the best practices and standards in corporate governance, both in the public and private sectors.

Such practices have higher chances of attracting both domestic and foreign direct investment needed for driving economic growth and development.

The Government (like any others elsewhere in Africa) plays a pivotal role in promoting good governance.

There is empirical evidence that shows a positive correlation between economic development and good governance.

Corporate entities, in both the private and public sectors, play a critical role in our economy. That being the case, how corporate entities are governed, directed and controlled inevitably becomes an issue which attracts the attention of governments, regulators, investors and other stakeholders such as consumers.

Constitution

The supreme law in Zimbabwe, the Constitution under Chapter 9 focuses on Good Governance

The Constitution recognises the importance of good governance and provides that the state is required to adopt and implement policies and legislation to promote efficiency, competence, accountability, transparency, personal integrity and financial probity in all institutions and agencies of Government, at every levels.

Corruption

Most of the corruption scandals that have occurred in Zimbabwe, in both the private and public sectors, over the last decade were largely a result of failure to adhere to good corporate governance tenets.

The latest 2018 Auditor General’s Report revealed serious weaknesses in the governance of public entities.

This resulted in corruption manifesting itself through wanton looting of public resources worth millions of dollars, thus draining the country of critical resources meant for its development and provision of social services to the vulnerable and less privileged members of society.

Readers will also recall the failure to adhere to good corporate governance standards also contributed to the collapse of a number of banks during the period between 2003 and 2007, with disastrous consequences to the economy.

The Government has been partly blamed for these corporate scandals and upsurge in corruption because of weak supervision and inadequate laws and regulations controlling the activities of companies.

Global Trends

Global trends have shown that if companies, in public and private sectors, are allowed to operate without adequate regulation and supervision from governments and regulatory authorities, they can cause systemic failures with serious consequences to national economies.

The recent global recession of 2008 to 2010 was triggered by the collapse of banks and other financial institutions in the USA and Europe, who had been left to operate by themselves with minimum government regulation.

Across the globe government intervention in corporate governance matters, especially in the private sector, were viewed as unnecessary intervention in the running of private businesses. There was a push for self-regulation or little regulation.

This approach however proved disastrous in the end and plunged the world into an economic recession.

The lesson that we learn from the global recession is that, if companies are left to themselves with inadequate regulation and supervision, they are prone to bouts of instability which can easily cause economies to collapse.

This can however be avoided if the regulatory framework is tight and effective at national level.

The USA, made bold steps in regulating the governance of companies following the Enron debacle in 2000.

The Sarbanes Oxley Act (SOX) of 2002 is a good example of US government involvement in regulating corporate governance standards in companies.

The SOX Act is something that was unthinkable for a US government to introduce prior to the Enron corporate scandal.

Following the US government’s unprecedented regulation of corporate governance standards in companies, most governments across the world did the same in an effort to curb corruption and instil best practices and standards in corporate governance.

Lead by example

We cannot look at corporate governance in isolation from national governance.

National governance sets the right political tone; the so called ‘Tone from the Top’.

Good corporate governance in companies can only thrive in an environment where the government itself fosters a culture of good governance characterised by transparency and accountability.

Good corporate governance requires the government to create an enabling environment conducive to the conduct of business.

The Government should create a stable political, social and economic system, which allows businesses to flourish and grow.

In addition, the Government should put in place appropriate legal and institutional frameworks that promote good corporate governance.

Regulation

It is the role of the Government to put in place regulations and laws to govern the conduct of companies in order to maintain a stable economy.

Economies that operate without adequate government regulation and oversight are prone to bouts of instability that leads to chaos and collapse of national economies.

Stock and capital markets for example, require strict and rigorous regulation by the Securities and Exchange Commission of Zimbabwe (SECZ) in order to maintain investor confidence in the integrity of such markets.

Investors can only invest in public companies if they are managed and governed in a transparent and efficient manner and also if the security of their investments is safeguarded.

Corporate scandals, many of which are attributed to lapses in good corporate governance, scare away both domestic and foreign investors.

This adversely affects economic stability and growth.

The Government, through various legislation, has made bold steps to introduce laws

Public Entities Corporate Governance Act

Public Entities Corporate Governance Act is seen as a milestone in fostering good corporate governance in parastatals, state owned enterprises, public entities, constitutional commissions and other commercial entities controlled by Government.

This Act should be used as a tool for enhancing corporate governance in public entities to curb corruption.

If this Act is applied in spirit and intent, most of the issues highlighted in the Auditor General’s 2018 report will be addressed overnight.

Political will to implement the provisions of the Public Entities Corporate Governance Act is critical, going forward, if there is going to be a significant improvement in the governance of public entities.

The Government needs to urgently restore public confidence in public entities through strengthening of their governance structures to ensure transparency and accountability, stopping malpractices and abuse of public resources as well as taking appropriate disciplinary action, including prosecution of offenders, to deter corruption.

The Companies Act

The review of the Companies Act (Chapter 24:03) needs to be expedited and a new Companies Act should be promulgated sooner than later to ensure that it covers issues relating to corporate governance in companies.

The current Companies Act is silent on corporate governance and this is retrogressive.

The South African government recently reviewed its companies law and the new regulation now incorporate specific provisions on corporate governance.

Amendments to the Companies Act, currently before Parliament, borrow heavily from the South African Companies Act on specific provisions relating to corporate governance; and this is a welcome and progressive development.

Excessive Regulation

While Government legislative interventions in corporate governance are welcome, too much regulation, however, may have adverse effects.

Excessive regulation at times does not achieve its intended goal.

It should be noted that there are also costs to compliance with regulations.

The costs of excessive regulation, through compliance, should not outweigh the intended benefits.

In Zimbabwe we need to create a balance between prescribed (compulsory) and self-regulation (voluntary practices) as a way of addressing good standards of corporate behaviour.

Additionally, we need laws that are enforceable and promote fair business practices and good corporate governance.

The Government should continuously engage with all stakeholders in Zimbabwe to ensure that we have a sound legal framework that promotes good corporate governance in both the public and private sectors in order to curb corruption which has become very prevalent in Zimbabwe and is having adverse effects on the advancement of Zimbabwe’s economic development agenda in pursuit of Vision 2030.