The ‘mice and monkeys’ of rising corporate misgovernance
An audit last year of 15 major local companies and parastatals by the Botswana Accountancy Oversight Authority (BAOA) found that apart from one of them, all failed their corporate governance reviews. Staff Writer, MBONGENI MGUNI reports
In unusually frank remarks two years ago, Bank of Botswana governor, Moses Pelaelo told a roomful of captains of industry and fiscal authorities that the financial services sector was experiencing rising personal greed and governance failures, which had the potential of undermining public confidence in financial markets.
He later elaborated on his statements in response to Mmegi’s questions.
“We need to get rid of personal greed.
“We need to get these people out of the system. Trading in financial services is a huge fiduciary responsibility.
“If insiders abuse and chow away this money then what?“How do we allow mice to look after seeds and monkeys to look after bananas?”
While the governor at the time was speaking specifically about the financial services sector, a large part of which is supervised by the Bank of Botswana, ‘mice and monkeys’ are spread across the corporate sector in the country, according to the findings of various regulators and their reviews.
Several high profile corporate governance scandals have shaken the country cost investors and ordinary Batswana millions of pula and sullied the country’s well-curated image.
However, far from the headlines and in less prominent companies, governance scandals do take place as well, involving corruption, unethical conduct and a litany of other failures sometimes done in complicity with the auditors who are supposed to be the watchdogs.
Duncan Majinda, the CEO of the Botswana Accountancy Oversight Authority (BAOA), has encountered all manner of corporate misgovernance as part of the regulator’s cyclical reviews.
The BAOA is the oversight body of the accounting and auditing profession in Botswana, regulating the activities of auditors and regulating the financial reporting of Public Interest Entities and the corporate sector. Public Interest Entities (PIE) are major firms listed on the Botswana Stock Exchange, licensed by the Non-Bank Financial Institutions Regulatory Authority or the Bank of Botswana, parastatals and others deemed significant in terms of their presence in the country. PIEs can be firms that have revenues of more than P200 million per year, more than 200 employees or assets exceeding P200 million.
Last year, the BAOA handed down the first fines in its 11 years to several audit firms and a PIE, after noting that the ‘developmental approach’ it had taken to regulating the accounting and auditing profession had fallen short.
Recently when drilling mentees of the Botswana Stock Exchange’s (BSE) Tshipidi Mentorship Programme who are being handheld towards a listing on the exchange, Majinda echoed Pelaelo’s concerns about the ‘mice and monkeys’.
“The three main causes are greed, greed and greed,” he said.
Majinda also added “undue personal enrichment, conflicts of interest and poor oversight to the list”.
According to the CEO, the main signs of problem entities with regards to corporate governance failures including having an acting CEO or no CEO for prolonged periods, entities without boards or full boards over time, persistently delayed finalisation of financial statements, poor results from auditors and regulators, high staff turnover at management level and modified audit opinion. When these indicators are present, they lend themselves to abuse by board members and executives, to the detriment of shareholders, ordinary staff and beneficiaries of the business. Frequently, local corporates concentrate power on a single individual such as when the CEO is also the board chair, succession plans are non-existent for top executives, no guidelines exist for executive remuneration and other organisational risks go unmitigated.
Last year, the BAOA reviewed 15 entities, comprising three BSE-listed companies, three specified as significant by the Finance Minister, five state-owned entities, two supervised by the Non-Bank Financial Institutions Regulatory Authority and two supervised by the BoB.
All but the bank supervised by the BoB failed the review, which was based on the King III code, a global governance guideline issued in 2009 and regarded as ‘bare minimum’. The most progressive corporate entities in Botswana have migrated to King IV, which was issued in 2016.
According to the BAOA’s findings, seven of the entities had no statement of compliance to a corporate governance code such as King III, while 10 had no effective monitoring of ethics.
Eight failed the question of electing a board chair, who is an independent non-executive director and ensuring the CEO of the company is not also the board chair.
Eleven of the 15 entities had no documented succession plans for the role of the board chair, CEO and senior executives, while nine had no disclosure of the assessment of the independence of the independent non-executive directors.In nine entities, shareholders had not approved the company’s remuneration policy before implementation, while in 10 entities, the policies and disclosures of remuneration of directors and senior executives were not according to recommended best practice.
Of the 15 reviewed firms, stateowned entities had the most corporate governance failures, a finding that raises troubling questions about public finance management and accountability, particularly in a period where the budget is facing mounting deficits.
State-owned entities, also known as parastatals, particularly exhibit many of the problem signs of corporate misgovernance, such as having an acting CEO or no CEO for prolonged periods, operating without boards or full boards over time, persistently delayed finalisation of financial statements and others. In fact, by some estimates, there are up to 12 acting CEOs across the country’s parastatals.
“Generally, it’s a concern if you have a company or entity that goes without a substantive CEO for more than three years because you ask what is going on,” Majinda told Mmegi.
“The position of acting CEO comes with uncertainty because you do not know what the future holds and you cannot take certain decisions. “It’s like being the acting coach of a team. You have to make do with what you have and you cannot buy and sell players.”
The BAOA, empowered by the amended Financial Reporting Act passed last year and the accompanying regulations, is taking a tougher stance on corporate governance of the entities under its watch.
It is expected that this year, more violations will be referred to the sanctions committee, particularly as trends have shown that governance culprits are often guilty of repeating the same violations over successive review periods.
Together with the BoB and other regulators, the BAOA hopes to begin tackling corporate misgovernance one ‘mouse and monkey’ at a time.