BACKGROUND PAPER. 1. Introduction and background

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1 BACKGROUND PAPER 1. Introduction and background 1.1 Corporate governance has become an issue of global significance. The improvement of corporate governance practices is widely recognised as one of the essential elements in strengthening the foundation for the long-term economic performance of countries and corporations. Following the financial crises in the latter part of the 1990s, the issue of corporate governance has risen to the head of the international agenda as an important component of the global financial architecture. 1.2 The globalisation of the market place within this context has ushered in an era where the traditional dimensions of corporate governance defined within local laws, regulations and national priorities are becoming increasingly challenged by circumstances and events having an international impact The stream of interest in corporate governance has converged with increasing interest in associated issues of competitiveness, corporate citizenship, and social and environmental responsibility. It has also been linked to the broader issues of national governance and action against corruption at all levels of society within the economic framework of countries. 1.4 What has emerged is that macro-economic difficulties can be exacerbated by a systemic failure of corporate governance stemming from weak legal and regulatory systems, inconsistent accounting and auditing standards, poor banking regulation and practices, improperly regulated markets, ineffective oversight by corporate boards and scant recognition for the rights of minority shareholders. Factors leading to these circumstances, however, tend to occur where there is already a reasonably developed or emergent private sector. 1 CACG Guidelines Principles for Corporate Governance in the Commonwealth, at page 1, published in November 1999 by the Commonwealth Association for Corporate Governance and adopted by the Commonwealth Heads of Government

2 1.5 Africa, on the other hand, is substantially dominated by economies in transition with a smattering of emerging markets. This was presaged by the economic reform embarked upon by many African countries in the course of the 1980s, usually driven by economic structural adjustment programmes. The development of a significant private sector on the African continent is still very much in its infancy, compared to the size of the private sector in most advanced countries and the more developed emerging markets. An important consideration is the preponderance of community-owned commercial enterprises that have either profit motives or socially-orientated objectives, but in a strict sense are not conventionally considered part of the formal business sector, and the predominance of state owned or controlled enterprises. 1.6 Because of the transitional state of African economies and political systems, many African countries are ill-equipped to implement the market-based corporate governance systems that have evolved over centuries in developed market economies. There are numerous reasons for these constraints, but some of the more relevant are: A concentrated ownership structure in the corporate sector, mainly dominated by family-owned or very closely-held enterprises often with political connotations; Closely interlocking relationships between government and the financial sector; Weak legal and judiciary systems; Absent or underdeveloped institutional capacity; and Limited human resource skills and capabilities. 1.7 This is compounded by the challenges for regulatory reform in transitional economic systems which tends to be slower than desirable resulting in: disclosure requirements and legal protections for shareholders that are seldom up to acceptable international standards; outdated contract and bankruptcy laws which impede efficient operation and orderly exit; enforcement of existing laws which is both unpredictable and often selective; and a number of other equally cogent issues that present difficulties in attracting international capital necessary for economic development and growth. 2

3 1.8 Reform of corporate governance systems on the African continent has also proven to be politically difficult at times in terms of rent-seeking practices and security of tenure of property. 1.9 The globalisation and liberalisation of the economy has, within this scenario, provided both challenges and opportunities for African economies. There is now a desire and resolve to make Africa a player, not just a spectator, in the emerging international economic order. Africa has in the past mostly been a receiver and rarely a contributor. For Africa, therefore, the need to improve the state of corporate governance is critical in order for it to play an essential role in issues of international financial and economic policy. 2. Corporate Governance and Africa 2.1 With the advent of the global economy over the last decade, investment capital is far more mobile as investors seek more diverse investment opportunities with concomitant levels of internationally-acceptable profitability and business conduct. Accompanying this, is also the increasing mobility of business enterprise to trade and operate across national boundaries and thus encountering a daunting variety of legislation, regulation and economic systems governing their conduct. In order to meet these challenges, corporations must be flexible and responsive to the competitive environment in which they operate in order to survive and thrive. This market-based perspective, however, does not in itself exclude a role for government and public policy makers. 2.2 Policy makers and regulatory authorities have a distinct and important responsibility for shaping the regulatory framework, compatible with national and social priorities that is both permissive and enabling within concise and consistent legal structures. Against this, global investors and multilateral international agencies are insisting on high standards of corporate governance and business practice in enterprises in which they engage and/or invest. Often this exceeds the requirements of existing national legislation and regulation. 3

4 2.3 With the recognition that the proper governance of companies has become as crucial to the world economy as the proper governance of countries 2, it is imperative not only to develop private sector enterprise on the African continent but to ensure that its existing corporations and other forms of commercial enterprise are well-governed and managed in order to attract investment, create jobs and wealth to remain viable, sustainable and competitive in the pervasive global market place. Hence, the challenge must surely be to stimulate more credible systems of governance and regulation in the emerging and transitional economies of Africa sufficient to allow them to take their place as meaningful participants in the global economy. 2.4 Corporate governance seeks to create corporations that are governed transparently and with integrity, and which are accountable and responsible. This is based on the premise that business enterprises practising good corporate governance have a better chance of success than those which do not. Empirical research undertaken recently tends to reinforce this view. 2.5 The development of good governance, whether at the public policy level dealing with national priorities, or at the regulatory level dealing with issues of supervision of laws and regulations, or at the corporate level in regard to the conduct of business and commercial enterprises, all contribute to the positive development and growth of economies. Africa is no exception. 2.6 While the issues and challenges that corporate governance has to contend with are primarily similar across the globe, there are nonetheless unique and subtle differences between continents, regions and even between countries. This is often borne out of geographical position, historical circumstances, national and cultural characteristics, and other events or circumstances which warrant careful consideration. Africa is a continent which features almost all these facets. 2.7 However, it remains an inestimable fact that better corporate governance is essential to the development of a successful economic framework for Africa which can result only from a sustained effort to improve the regulatory and legislative framework, the institutional capacity for its implementation and, most importantly, private sector practices and perceptions as pertain locally and internationally. 2.8 Corporate governance in Africa has been led by the King Report on Corporate Governance issued in South Africa in 1994, which embraces not only the conventional issues surrounding corporate governance but delved into a number of social and transformation issues extremely relevant in the African context. 2 Statement given by James D. Wolfensohn, President of the World Bank, c

5 More recently there has been a rise in corporate governance initiatives across the African continent, notably that initiated by the Commonwealth Association for Corporate Governance ( CACG ) in African countries affiliated to the Commonwealth but also other agencies concerned with the promotion of good corporate governance practices such as the African Capital Markets Forum ( ACMF ). The development of the Principles for Corporate Governance in Kenya by the Private Sector Corporate Governance Trust ( PSCGT ), a privately-funded initiative, is a commendable example. However, these efforts remain disparate and fragmented. 3. Consultative Forum on Corporate Governance in Africa 3.1 A consultative meeting on corporate governance in Africa was held in Nairobi, Kenya on Monday 30 October This meeting brought together specialists in corporate governance from 14 countries in Central, East, South and West Africa and Pan-African organisations such as the UN Economic Commission for Africa ( UNECA ) and the ACMF with the purpose of reviewing progress in corporate governance in all parts of Africa and of promoting greater links amongst all countries and regions of the continent. 3.2 The meeting addressed, inter alia, the following issues: What international, regional or national initiatives are underway to access and address corporate governance in Africa? What principles, standards and practices developed and accepted internationally should be adopted and/or modified to guide corporate governance in Africa? How do experiences compare between the various regions in Africa that have adopted the different corporate governance practices? What possibilities exist for harmonising implementation of good corporate governance in the various regions of Africa? 3.3 The main conclusions were that: There is a need for enhanced co-operation within Africa in the promotion of good corporate governance practices and standards. African countries should consider, as far as it is feasible in practical terms, a harmonised development of corporate governance on the continent. 5

6 There is a need to build national and regional capacities for corporate governance and efforts should be made to seek the involvement and co-operation of regional organisations such as COMESA (Common Market for Eastern and Southern Africa), EAC (East African Community), ECOWAS (Economic Community of West African States), SADC (Southern African Development Community), etc. The promotion of good corporate governance should be advanced to reflect African ownership and direction, taking into consideration the needs of the continent and as appropriate to the prevailing circumstances of the individual countries while maintaining and upholding international standards. Following on the initiatives taken by the World Bank/OECD in holding Roundtable discussions to promote corporate governance in Asia, Eurasia and Latin America, it was considered appropriate to institute a similar initiative in the form of a Pan-African Consultative Forum on Corporate Governance to be held in Johannesburg, South Africa from Monday 16 July through Wednesday 18 July The meeting nominated and requested UNECA, ACMF, PSCGT and the CACG to work together to promote good corporate governance in Africa and to prepare for the July 2001 Forum in consultation with the abovenamed development partners. The Africa Capacity Building Foundation, an important constituent in this initiative, has since joined the aforementioned mandated bodies as an integral component of the initiative. 3.5 At this present time, planning has focused on identification of key reference material and sources of data in respect of the status of corporate governance in Africa and planning around the logistics of the event itself. 3.6 It is planned to bring together prominent international specialists on corporate governance and global investors with representatives from across the full spectrum of the African continent and international development partners and agencies. This will be organised by the principal African partners in this initiative. 3.7 Key issues identified for consideration and discussion at the Forum will include: The state of corporate governance in Africa what international, regional or national initiatives are underway to assess and address corporate governance in Africa? The importance of good corporate governance for Africa in creating competitive and responsible business enterprises both in the public and private sectors in a liberalised and borderless global market. 6

7 The critical issues relevant to promotion of good corporate governance in Africa such as the role of the State (privatisation reforms; corruption and bribery; development and state of professionalism e.g. accountancy, law, corporate secretarial practice, etc); state of capital financial markets; historical developments; cultural diversity and colonial heritage; etc. The impediments fundamental to development of good corporate governance in Africa, that is both economic and social. In particular, what is unique or peculiar to Africa that suggests or dictates a different approach to corporate governance to the western model? The principles, standards and practices developed and accepted internationally which should be considered in guiding corporate governance in Africa. Are the existing models offered by the CACG and OECD, for example, entirely appropriate to Africa? To this extent, perhaps the approach needs to go well beyond the formal capital marketbased systems to the less formal, entrepreneurial systems prominent in African countries. How to plan the way forward in promoting good corporate governance in Africa: Is it possible to agree on broad continental principles of good corporate governance? Should the implementation be co-ordinated on a regional basis with regular continental consultation? What institutional agency will take responsibility and be accountable for co-ordinating the initiative? 3.8 It is envisaged that this event should result in a number of generic action plans at the national, regional and Pan-African levels with defined milestones for achievement. This may necessitate focused follow-up discussions involving the Forum on a basis to be agreed at the event in July Desirably, this initiative should be harnessed and co-ordinated with regional political initiatives to harmonise trade, commercial, legal and other structures in Africa. This would constitute part of the discussions at the July event. 7

8 4. Objectives of the Corporate Governance Initiative for Africa 4.1 Primarily, the Forum is to raise awareness of the need to build consensus for the support of local, regional and global initiatives in corporate governance as they affect Africa in order to bring about a coalition for economic reform that will strengthen financial and economic systems in Africa as part of the international infrastructure. 4.2 Establish a platform for international dialogue on corporate governance in Africa, structured around an agenda with broad public and private sector support and expertise in Africa, in order to lend important support to regional and country efforts to effect political and economic reform in mobilising domestic and international resources for development. 4.3 Mobilise international expertise in a concerted, co-ordinated and timely manner to identify, disseminate, discuss and promote global best practices in corporate governance in a way which can be sensibly and constructively applied in Africa in building on that international experience. 4.4 Develop and promote mechanisms for the co-ordination and exchange of information on corporate governance and initiatives in Africa through sharing of ideas and experiences between the various organisations and international agencies active in this field on the continent. This could be usefully achieved by the establishment of a central information depositary for example. 4.5 Facilitate mechanisms to co-ordinate and promote training, research and development in corporate governance and its effective dissemination across the continent of Africa. Clearly at issue here would be the identification and utilisation of existing institutional capacity that already exists on the continent and which could be usefully deployed in the promotion of good corporate governance in Africa. 8