ZimCode unpacked...

THE Zimbabwe corporate governance code (ZIMCODE 2014) was introduced in April 2015 in an effort to incorporate corporate governance in Zimbabwe and improve the performance of organisations.

It has nine chapters and each chapter has a preamble, principles and recommendations. The preamble summarizes key legal issues relevant to the governance element whilst principles ensure that the country is attractive for both local and foreign direct investment. There are also recommendations that are derived from the principles. ZimCode recognizes law as the foundational source of corporate governance on which voluntary codes are built. The ZimCode is applied to all business entities. Sectors that require specific codes on corporate governance should make sure that such codes derive their main principles from the ZimCode.

Notable highlights of the ZimCode include the following:

Multiple directorship is discouraged

Board chairman limits

Corporate power should not be concentrated in one person

The overarching role of the board of directors Conflict of interest

Executive remuneration

Corporate disclosure

Conflict prevention

The ZimCode is driven by the desire to embrace good corporate governance practices in Zimbabwe. It takes into account the Zimbabwe’s unique socio-economic and political environment and recognizes that, ‘one size does not fit all’.

The ZimCode aims to minimise corporate collapses and instil discipline within the business sector by establishing minimum standards for corporate leadership. It raises the bar on corporate governance above legal stipulations on the concept.

There are various approaches to corporate governance codes in the world. Some countries such as the USA and India use the ‘comply or else’ approach to corporate governance. The European Union, the UK, Kenya and other countries use the ‘comply or explain’ approach whilst Zimbabwe uses the ‘apply or explain’ approach to corporate governance codes. However, there is a general concern from the public over the feasibility of the ‘apply or explain’ approach considering the Zimbabwean context. They want to know if the ZimCode has any ‘teeth’ or if it is another ‘toothless bulldog’. In order to address these concerns there is need to analyse the various corporate governance codes in detail.

The ‘comply or else’ is a mandatory approach to corporate governance. It is often described as a ‘one-size fits-all’ approach since ‘uniform standards’ are prescribed for all companies. Regulators prescribe a set of rules which all companies are required to comply with.

These rules are generally introduced through legal statutes. If a company does not comply with the rules then that company is liable to be penalised by the regulator. Penalties could be in the form of fines levied on the corporation or its directors as well as imprisonment of its officers. The harsh penalties and mandatory compliance system is what encourages many people to quickly conclude that this approach is what Zimbabwe needs.

Nevertheless, the ‘comply or else’ approach does not necessarily promote good corporate culture as evidenced by research which shows that most mandatory systems often lead to ‘box ticking’ behaviour. Companies pretend to embrace good corporate governance when they fear penalties but their behaviour does not cultivate a genuine adherence to good corporate practices. They also tend to go back to their ‘comfort zones’ once they feel that regulators are not in sight. In the long run no one takes ownership and responsibility of corporate governance and that becomes the entity’s culture. In addition, reality has also shown that one size does not always fit all and considering the diversities in our economic sector, it leaves a lot to be desired.

The shortfalls of mandatory regulations made it necessary for ZimCode to opt for a more rewarding approach to corporate governance. The ‘apply or explain’ approach is a reformulated version of the ‘comply or explain’ approach. It is a soft regulation which encourages individuals and corporates to take responsibility and ownership of corporate governance. Entities are given a set of standards to follow, but they’re not mandated to comply with everything. They have the liberty to choose principles that apply to their entities.

However, they are expected to explain and be able to justify the reasons behind their choices. This gives flexibility to companies to apply corporate governance principles without being compelled to do so. Under this ‘apply or explain’ approach, explaining is equal to compliance as entities are required to provide satisfactory explanations on what has actually been done to implement the principles of the ‘ZimCode’ and to give adequate reasons for not applying. Therefore this approach is equal to indirect cohesion.

It is more practical to go with the ‘apply or explain’ approach because of its flexibility. The ZimCode recognises that gradual change could yield better results than radical approaches that can face much resistance which also promotes ‘box ticking’ practices. The ‘apply or explain’ approach has ‘teeth’ since companies have to provide adequate explanations for not implementing certain principles; therefore it’s not just about giving any explanation.

Corporate governance has gained so much momentum among shareholders, investors and the government such that companies that do not practice good corporate governance risk losing credibility in the eyes of its stakeholders. In the wake of shareholder activism and empowered stakeholders, the risk of not applying sound corporate governance principles is much higher.

It is therefore important for every company to do a reality check. That means looking at what the company has against what ZimCode proposes i.e. the size and depth of the gaps. Once the data is at hand, a practical programme should be put in place to fill the gaps. This then enables each entity to provide a satisfactory explanation on what they have done to fill the gap as well as their future plans. Since ZimCode is not prescriptive, companies can start from where they are until they reach the desired goal.

Ownership and Control issues have led to disagreements in many companies. It has been noted that concentration of power in one person often leads to corporate failures. The ZimCode proposes a balance of power among the three tripod of corporate governance — shareholders, management and board of directors.