Launching Corporate Governance in Africa with an emphasis on Kenya
Key development challenges facing Africa
All over the world, countries are struggling to expand their economies and improve living standards. This struggle is particularly poignant in Africa, which has, for a long time, been mired in declining economic performance, rising unemployment, deteriorating national
infrastructure, inequality and increasing and abject poverty.
Persistent internal conflicts and strife as well as external aggression have forced the poorest region in the world to divert such proportions of its resources that the very survival of increasing numbers of African countries may be at risk. Without durable peace and the security of life and property both within and beyond national borders, it is not possible for citizens, economic actors and governments alike to plan and implement the necessary activities that are required so urgently to arrest the protracted decline and stagnation in the region.
Another problem facing Africa is the lack of political commitment and crisis of legitimacy largely due to the concentration of political and economic power as well as wealth in the hands of a small, privileged and entrenched political and economic elite. This scenario has bred mistrust and suspicion amongst the populace. The result is that people are unwilling to pool their resources together to build viable enterprises thereby constraining growth and expansion.
The lack of infrastructure and social capacity for development also hinder economic development and growth in Africa. Physical infrastructure including transport and communication facilities is either non-existent or decayed. People are not meaningfully involved in formulation and implementation of development plans. Consequently, they do not consider themselves as having a stake in the creation of wealth. This has, in turn, bred a culture of dependence where everybody fights for a piece of the shrinking national wealth instead of seeking to generate wealth.
Addressing the challenges
To address these issues effectively, there is an urgent need to focus on public economic policy and to uphold the virtues of a pluralistic society. The government must play its role and provide physical infrastructure, an effective legal and policy framework and the social capacity for development. It must ensure security and stability by mobilizing the citizenry and ensuring their effective involvement in the development process. This involvement must not be a mere illusion. People must feel that they have a real influence over the production and distribution of wealth. This will engender trust and encourage not just the consumption but also the creation of wealth.
It is important to note, however, that an enabling environment cannot be created by the government alone. Creating an enabling environment calls for the establishment of effective partnerships between the public sector, the private sector and civil society that will enhance the spirit of participatory development and increase citizen engagement in creating a secure and stable environment in which corporations can grow and thrive.
The role of NEPAD
One of the key strategic thrusts of the New Partnership for Africa’s Development (NEPAD) is the improvement of economic and corporate governance. The leaders have repeatedly underscored the importance of good corporate governance in the sustainable development of Africa.
Why the interest in corporate governance?
It has become increasingly evident that our continued prosperity as nations, as communities, and even as dignified individuals, is closely linked with our ability to create, strengthen and maintain profitable, competitive and sustainable enterprises. The viable, competitive and sustainable modern enterprise requires an organization of basic resources (capital, material and human) concentrated in large aggregations giving the men and women entrusted to run those enterprises power over people, resources etc such that their decisions have great impact upon the society, the very lives of entire communities and can shape the future of nations.
Why the focus on directors?
To achieve their objectives and effectively discharge their responsibilities, corporations must have quality and effective leadership which is responsive, transparent and accountable and which has the focused intelligence to acquire and apply knowledge and know-how for the production and creation of wealth. Good corporate governance is thus the lifeblood of a prosperous society. In targeting directors, corporate governance focuses on their competitive performance and the importance of their abiding by the highest standards of fiduciary management in order to assure wealth creation and the long-term sustainability of a company. Consequently, corporate governance seeks to promote: Leadership for efficiency and effectiveness: Leadership for improved strategic and operational guidance of corporations to ensure efficient use of entrusted resources and competitiveness in the liberalized global market. Leadership for probity: Leadership that is honest, trustworthy and with integrity that commands respect and credibility and thus can be relied upon to use resources efficiently and effectively. Leadership with responsibility: Leadership that takes its responsibility to the various stakeholders seriously and which is responsive to the needs of stakeholders and the community. Leadership that is transparent and accountable: Leadership that has nothing to hide, and which exercises power transparently. Leadership with the focused intelligence to navigate the knowledge economy. The object of this focus is to ensure that directors clearly understand their role and responsibility. This is done through training; awareness raising and advocacy; development of education in corporate governance; and research to identify and replicate good governance practices while eliminating bad practices. If Africa is to rise to the challenge and claim the 21st Century, there is an urgent need to build capacity to step up these efforts and further to coordinate all the relevant initiatives, donor assistance and corporate governance programmes so as to ensure a common approach and the most efficient use of resources. Challenges to promoting good corporate governance in Africa As outlined earlier, vast developmental needs exist in Africa which require community mobilization, citizen engagement and participation and the accelerated creation of wealth within an environment where all stakeholders are convinced of fairness, accountability, transparency and responsibility. Africa is characterized by a myriad of corporations but very few listed companies. The vast majority comprises family or small private companies, state-owned corporations, co-operatives and co-operative societies as well as other community-based organizations not to mention the many informal sector undertakings. Regulatory and supervisory systems are generally weak. History and politics have combined to create a privileged few that resist efforts to promote good corporate governance. These peculiarities call for the introduction of the principles of corporate governance in such a manner that they do not disadvantage or be seen to create trade barriers for any class of corporations. They also underscore the importance of ownership of the standards of governance which must be seen as African standards, developed, formulated and ratified by Africans for the well being of Africa and not imposed upon Africa from elsewhere. Hence, there is a need to develop systems for monitoring and evaluating compliance with good corporate governance practices and strengthening the incentives for good corporate governance. This demands that at least in the short term, society be prepared to recognize, acknowledge and reward good corporate governance. There is also a need to develop and improve institutions that have the capacity to implement and enforce best practices including regulators particularly in the financial sector and self-regulatory organizations. Finally there is a need to emphasize the importance of effective risk management driven by boards of directors rather than by regulatory authorities, including; ÿ Establish well-regulated, well-functioning and competitive capital and financial markets that provide a disciplinary mechanism; ÿ Update and strengthen the legal, judicial and tax systems; ÿ Build capacity to upgrade the capabilities of the existing leaders of business through advocacy, awareness raising and training; ÿ Prepare a cadre of potential business leaders by introducing the subject of corporate governance into education programs at all levels; ÿ Promote greater public and community involvement in promoting, demanding and enforcing good corporate governance; ÿ Promote inclusive partnerships for sustainable wealth creation, that involve both the public and private sectors as well as the civil society; and
Promote community understanding and acceptance of the viable business enterprise as the organ of society that creates and produces wealth, generates employment and hence contributes to the alleviation of poverty. Strengthening corporate governance in Africa: The way forward It is in this context that the private sector in Africa, in consultation with development partners, regulatory authorities and other interested parties established in July 2001, the Pan African Consultative Forum on corporate governance with a mandate to inter alia:
- Coordinate corporate governance initiatives in Africa and facilitate agreement on minimum principles of best practice that are compatible with international standards.
- Support the establishment of national initiatives on corporate governance where they do not exist and help build capacity to implement good corporate governance practices.
- Facilitate the exchange of information and experiences and promote joint programmes and research as would lead to optimal use of limited resources and establishment of an interactive Pan African Corporate Governance web site. The political leadership in Africa under NEPAD has also recognized the importance of putting in place the necessary policy and regulatory frameworks for private sector-led growth. They have already agreed to promote concrete and time-bound programs aimed at enhancing the quality of economic and public financial management as well as corporate governance, and put in place a task force made up of ministries of finance and central banks to review economic and corporate governance in Africa and make recommendations on appropriate standards and codes of best practice. They also resolved to mobilize resources for capacity building to enable all countries to implement and comply with mutually agreed minimum standards and codes of best practice or conduct.
KENYA’S APPROACH TO PROMOTING CORPORATE GOVERNANCE
The Private Sector Corporate Governance Trust (PSCGT) is an independent, not-forprofit public trust established in 1999 by the private sector in partnership with other interested stakeholders in Kenya to address the concerns of corporate governance. The Trust is affiliated with the Commonwealth Association for Corporate Governance and acts as the Interim Secretariat to the Pan African Consultative Forum for Corporate Governance. The Trust works to help build appropriate institutions and national capacity to support the implementation, compliance and enforcement of good corporate governance practices and evaluation mechanisms in Kenya.
Build national capacity
PSCGT works to build national capacity to implement and apply the principles of corporate governance through:
- Training and Education – To build national capacity to implement and apply good corporate governance practices by facilitating an increased range of training opportunities for directors and potential directors and by exposing and educating as many people as possible on good corporate governance principles and practices;
- Research and Development – To contribute to the continued improvement and refinement of the principles of good corporate governance by studying, documenting and understanding how current systems operate, the obstacles to good governance and the potential for improvement.
- Monitoring and Evaluation – To develop criteria, mechanisms and systems to monitor and evaluate the extent to which companies in Kenya embrace, apply and implement good corporate governance principles and practices and to assess the impact that this has on improving national efficiency and competitiveness, enhancing wealth production, and generating employment.
- Advocacy and communications programmes – To sensitise, motivate and influence policy makers, corporate directors and community leaders to embrace and promote good corporate governance principles; to motivate the participation and involvement of the community in actively demanding good economic governance for sustainable wealth creation, increased employment opportunities and so on through efficient, responsible, integrity-based leadership that is transparent and accountable in all fields of human endeavour; and to involve the community in developing a national framework of values, ethics and ethos for good corporate governance.
- Knowledge Management – To establish a resource center and databank on corporate governance, publicizing and disseminating research results and studies showing the extent to which bad governance practices and corruption jeopardize national economic performance, the quality of life of the community and employment opportunities, and disseminating information to promote policy dialogue on good corporate governance.
As Gopalsamy notes in his book Corporate Governance: The New Paradigm, more than ever before, corporations are required to gear up to exploit the global market opportunities as well as defend and increase their domestic shares in the liberalized environment. The various measures of liberalization have meant greater reliance on market forces. The globalization moves call for a new type of business enterprise; one with a global mindset, world business vision and strategic freedom that is highly networked. Globalization is hence very much a reality. Unfortunately, so is the increasing marginalisation of Africa. In a 1991 paper titled Africa and the World: Africa on its own Ndegwa observes that in the case of Africa, especially Sub-Saharan Africa, there is no doubt whatsoever that the process of marginalisation of its countries in the world economy is now active and proceeding apace. He goes further to state that this marginalisation which is negative, unfortunate and not in the interest of the international community continues relentlessly and on certain assumptions seems set to accelerate during the 1990s. One consequence of marginalization is deepening poverty in what is already by far the poorest region in the world; this is manifested in widespread unemployment, political instability and other economic and social hardships. This situation makes the adoption of internationally recognized good corporate governance principles both urgent and imperative. In this context, corporate governance and social responsibility should become the philosophy of business enterprises in, among other things, setting standards of quality and integrity; respecting the physical environment by using and managing all resources including air, water and forests sustainably; recognizing the dignity and worth of all their employees and the people in their communities; and innovating to meet unfulfilled needs of the society. In summary, corporations must fulfill their social obligation by doing the things they are in business to do and doing them well. This will in turn build public confidence in corporations such that not only will local investors invest in them, effectively putting a stop to outflows of funds from Africa, but that they will be able to hold their own in the global financial markets. As Mervyn King, Chairman of the King Committee rightly observes, ‘We as Africans have to accept willingly or unwillingly that we are members of a borderless world. Capital flows do not have regard for the differences of corporations and trading entities and where they trade.’ Although there may be differing views on what constitutes good governance, some of which are culturally determined, there have been developed a core of principles that transcend borders and which are viewed as representing the moral consensus of the international community of nations. Africa must see corporate governance as vital to its economic and social development so as not to be left behind in today’s increasingly global markets. What this means is that Africa must meet global standards of good corporate governance practices if it is to exploit the opportunities in the liberalized global market, be and remain competitive and achieve sustainable development for the differences of corporations and trading entities and where they trade.’
Although there may be differing views on what constitutes good governance, some of which are culturally determined, there have been developed a core of principles that transcend borders and which are viewed as representing the moral consensus of the international community of nations. Africa must see corporate governance as vital to its economic and social development so as not to be left behind in today’s increasingly global markets. What this means is that Africa must meet global standards of good corporate governance practices if it is to exploit the opportunities in the liberalized global market, be and remain competitive and achieve sustainable development.