Do you agree that corporate governance can prevent corporate failure in Zimbabwe? Justify your answer.
This essay seeks to advance the view that Corporate Governance can prevent Corporate Failure in Zimbabwe. Justification will be given basing on an analysis of some Zimbabwean Companies which recently failed. Definition of Corporate Governance and benefits thereof will be given, Corporate failure will be defined and its causes not forgetting literature review on relationship between Corporate governance and Corporate Perfomance. A recommendation and conclusion will then sum up the essay.
Zimbabwe does not have a legislated national code of corporate governance such as the King Code, Cadbury Code or Sarbanes Oxley Act although efforts are currently underway to introduce such a code of corporate governance in Zimbabwe (Deloitte and Touche, 2012). At present, corporate governance practices in Zimbabwe are regulated by the Companies Act (Chapter 24:03) and Zimbabwe Stock Exchange Act (Chapter 24:18), Public Finance Management Act (Chapter 22:19) as well as the rules of various professional bodies such as the Institute of Directors of Zimbabwe. The ZSE has adopted listing rules based on those of the London Stock Exchange and the Johannesburg Stock Exchange. The IODZ has been effective in enforcing corporate governance standards as derived from the United Kingdom Cadbury Report and the South African King Report.
Corporate governance is the system by which an organization makes and implements decisions in pursuit of its objectives. Crowther and Seifi (2011) defined corporate governance as an environment of trust, ethics, moral values and confidence, as a synergic effort of all the constituent parts ie the stakeholders, including government, the general public, professionals, service providers, and the corporate sector. King Report (2010) notes that the term governance came from the Latin word gubernare meaning to steer, thus corporate governance entails the manner of directing and controlling the affairs of a business enterprise. Thus, for business to be ethically sound, it should implement multi-faceted forms of corporate governance that may among other things involve internal and external stakeholders up to voluntary corporate governance responsibilities King (2010). It may also be defined as structures and processes used to direct and manage the business and affairs of an institution with the objective of ensuring its existence and enhancing shareholder value. The process and structure define the division of power and establish mechanisms for achieving accountability between board of directors, management and shareholders, while protecting the interests of depositors and taking into account the effects on other stakeholders, such as creditors, employees, customers and the community (Dhliwayo, 2004). According to Mukute and Marange (2006), corporate governance is the system by which organizations are directed, controlled and held to account. It focuses on policy, systems and direction, which is the primary role of the Board. Corporate governance also includes the organizational compliance with relevant laws and regulations and conformance to ethics, standards and codes of best practices.
Good corporate governance practice
A central theme common in all the regulations across different jurisdictions is recognition of the need to embrace a value system with potential for a holistic achievement of societal goals. Having laws and regulations may never suffice without a corresponding willingness to act ethically. Ethics go beyond compliance with laws and regulations, it encompasses a tendency to just act right. It implies a recognition and acceptance aligned with a desire to abide by the spirit of laws/regulations. Several concepts apply to sound corporate governance, but best practice can be achieved where there is:
i) Transparency, openness and honesty indicates the willingness to make available to individuals, groups and all interested parties, information that makes clear the position and performance of the company in a timely fashion.
ii) Independence indicates the extent to which procedures and structures are in place so as to minimize or avoid completely potential conflicts of interest that arise, of particular relevance to non-executive directors and professional advisers.
iii) Accountability which talks of the directorsâ€™ responsibility to account to shareholders for the decisions they make over a given period.
iv) Fairness that values equal consideration of all shareholders.
v) Ethical conduct with regard to behaviour that is in accordance with a written or unwritten code of ethics and a set of moral values. It is pertinent to observe that personal and business ethics underlie all the regulations and codifications in corporate governance. It should be emphasized that laws and regulations alone can never suffice to guarantee fair practices. Individuals in positions of influence and authority have to want to apply fair practice and abide by the rules.
Robust though these laws and guidelines are, they are not without limitations and this was aptly captured. Indeed, it seems that there is almost a belief that complying with the Code itself constitutes good governance. The Code, however, is of necessity limited to being a guide only in general terms to principles, structure and processes. It cannot guarantee effective board behaviour because the range of situations in which it is applicable is much too great for it to attempt to mandate behaviour more specifically than it does. Boards therefore have a lot of room within the framework of the Code to decide for themselves how they should act (Deloite 2012).
Benefits of Corporate Governance
i) Elimination of the risk of misleading or false financial reporting
ii) Prevention of domination of companies by an individual
iii) Strong reputation and therefore lesser likelihood of exposure to reputational risk
iv) Higher probability of achievement of commercial success, good governance and good leadership in management often go together.
Furthermore, good governance encourages investors to hold shares in the companies for the longer term. Companies often benefit from having shareholders who have an interest in the longer-term prospects. Presence of an effective system of corporate governance, in a company and across an economy helps in provision of confidence which assists in proper functioning of an economy. It is important for the efficient functioning of market economies and it ensures that they function in the best interests of the wider society, and not just those with power and wealth.
Corporate failure refers to companies folding operations following its inability to make profit or bring in enough revenue to cover its expenses. This can occur as a result of poor management skills, poor corporate governance, and inability to compete or even insufficient marketing. Lack of proactive approach by the regulatory authorities appeared to have encouraged poor corporate governance practices and that the failure by the Board of Directors to adapt to the demands of a changing competitive environment affected adherence to the principles of good corporate governance.
The following are some common causes of Corporate Failure:_
i) Investors not kept informed about the goings on in the company.
ii) Publishing of misleading financial statements.
iii) External auditors failing to detect the warning signs.
iv) Unethical behavior by powerful company chiefs.
v) Board fails to avoid domineering individuals from acting improperly
vi) Poor financial controls.
vii) Absence of Governance Structures
viii) Lack of Succession Planning
ix) Technical incompetence of Board and Management
x) Boardroom squabbles among Directors
xi) Squabbles among staff and management
xii) Lack of robust risk management system
xiii) Corruption / Greed
xiv) Ineffectiveness or absence of Boards.
Several studies came up with inconclusive results when it comes to the relationships between corporate governance and corporate performance. Adams and Ferreira (2009) found no relationship between having independent directors and firm performance; however, Kaplan and Minton (1995) found that poor corporate performance is associated with the appointment of an outside director. There is no relationship between performance and governance if management are given few shares by the company as witnessed by Kang & Shivdasani, (1995) who argued that equity ownership by management if small is the same as the agency costs. When management are given shares of the company, they tend to direct the operation in the interest of shareholders of wealth maximisation the same as before given those small shares Denis & McConnell, (2003). After using ordinary least squares regression, Murali & Welch (1989) examined the forces that may affect ownership structure of 511 large U.S. companies, which were â€œvalue-maximizing size,â€ â€œcontrol potentialâ€ and â€œsystematic regulationâ€. They found no significant relationship between corporate governance variables and corporate performance. Contrary to this, various studies also found positive relationships between corporate governance and corporate performance, director structures and corporate performance as well as corporate performance and financial disclosure. Based on the literature, in the case of banks Grove et al. (2011) pointed out that the extent of competence of the board structure is positively associated with financial performance (investors will long in a portfolio of well governed firms and short in a portfolio of poorly governed firms). A similar study conducted in the Middle East and North Africa shows that there is a positive relationship between corporate governance and bank performance Enobakhare, (2010). Therefore the majority of current existing studies have shown a positive relationship between corporate governance variables and corporates profitability or efficiency. This highlighted how board size, board composition, board committees, board diversity, and management behavior impact company performance De Andres & Vallelado, (2008). Based on the debate above its worth to investigate the impact of corporate governance on corporate performance with the focus on Zimbabwe.
AN ANALYSIS OF COMPANIES THAT FAILED IN ZIMBABWE
The company closed shop citing untainable political environment as the main cause. They claimed that seizure of Mazoe citrus Estate the groupâ€™s prime land asset blocked external lines of credit to the firm as it emerged traditional fananciers Industrial Development Corporation South Africa feared their investment were at risk as company struggles for survival. While it is true that Interfreshâ€™s strategic situation was worsening, it can be argued that management failed to see opportunities to innovate or diversify. The core business of Interfresh was farming, processing and exporting fresh produce. Management should have just shifted focus from controlling the entire value chain and concentrated on buying and processing the fresh product. Though the structure could have been significantly altered the company may have been saved. Corporate governance practices talks of a strong Board of Directors with sound and diverse skills. It appears no skills were applied in saving this entity hence its closure. Tobacco processing companies embraced the land reform and supported the new farmers and they are still operational.
Cold Storage Commission
Cold Storage Commision was into buying cattle from white commercial farmers and exporting beef to European community. As land reallocation came in, the new farmers were inexperienced and could not produce as per CSC requirement. Outbreak of foot and mouth disease resulted in suspension of beef export to the EU. CSC should have been swift to give training and support to these new farmers, instead CSC concentrated on buying the few remaining commercial farmers cattle until they ran out. Beef exports were then suspended, CSC found itself with virtually no market. CSC could not take advantage of the Zimbabwean urban population which was increasing tremendously so it could expand into. Currently the Zimbabwe urban community is consuming more beef than it was prior to the year 2000. If there was innovation and strategic foresight, CSC could have been the main supplier of meat to these communities today. Again ineffective corporate governance practices failed CSC.
National Railways of Zimbabwe is another company which is still operational but has virtually collapsed owing to lack of innovation and creativity of the Board. Zimbabwe by now should have the bullet train connecting Bulawayo and Mutare through Gweru, Kwekwe and Harare but for the NRZ lack of innovative ideas it is still a pipe dream. The collapses of CSC which was the major source of revenue to NRZ in transportation of cattle to abattoirs throughout the country left NRZ almost a collapsed entity. Its survival is heavy reliance on government as it is a strategic business. With hindsight on innovation and creativity NRZ should have shifted and focused more on passenger transport. Its dare state is as a result of poor corporate governance practices.
Supplier of white sugar in Zimbabwe over decades has virtually collapsed owing to strategic drift. Johnson (1998) devised the term strategic drift as a warning to those who champion the idea of strategy emerging as a series of logical, incremental steps. He argued that this limits the rate of change to the speed at which management might feel comfortable, which has many advantages especially in implementation, however it might be inappropriate in dynamic environment. The firmâ€™s incrementalist approach is not enough to keep its advantage given rate of dynamism in the market place. Johnson\'s believes that failure to increase tempo of change is embedded in culture as opposed to technical. It may be more to do with the management relaxing in their comfort zone and fear of taking on additional challenges. Zimbabwe Sugar Refineries who prided themselves as manufacturers of white sugar only suffered when Triangle Sugar Corporation bought Anglo Americanâ€™s 50.35% stake in Zimbabwean sugar firm Hippo Valley Estates which means that ZSR is now buying its sugar from Tongaat which is also supplying sugar to the local market. How can a company survive if its competitor is the supplier of its raw materials. Failure to adapt to changing circumstances led to the collapse of Zimbabwe Sugar refineries.
Collapsed Zimbabwean Banks
About 20 banking institutions have closed since 2000. The notable casualties include Trust, Genesis, Royal, Barbican, Renaissance, CFX, Time banks, Interfin Banking Corporation and Tetrad which is currently under curatorship. Other notable casualties include United Merchant Bank, Universal Merchant Bank, First National Building Society and Zimbabwe Building Society, which was rescued by the central bank and eventually bought by FBC Holdings. According to the RBZ deputy governor Dhliwayo (2010), lack of separation of power between ownership and management provided fertile ground for a total breakdown in corporate governance and internal controls which led to the collapse of most banks. All failures were in some way associated with board failures. Dhliwayo (2010) talked of ceremonial boards that only performed a compliance role which compounded challenges of these struggling institutions by rubber-stamping leaders decisions without interrogating them. Another corporate sin was that of self-interest where executive directors indulged in self-seeking activities unrestrained by their independent non-executive directors on the board. The major causes of corporate scandals were circling around poor oversight and lack of proper monitoring of the CEO and executive directors by the board leading to corporate governance breaches. Even though board structures were in place in the organisations, the board of directors failed to monitor management. There was over investment in illiquid assets such that when liquid cash was needed it couldnâ€™t be availed leading to technical insolvency a case that brought down Trust Bank. ENG Capital also fell the same way as the company engaged in illicit financial deals where they used depositorâ€™s money for speculative purposes ie they bought shares hoping they will double but thatâ€™s when the capital market crushed. ENG also used short term financing to finance long term deals which then backfired when the money couldnâ€™t be availed upon request and thatâ€™s technical insolvency. Insider loans also contributed to the collapse of United Merchant Bank, this was attributed to poor corporate governance structures and it is prevalent with owner managed business, where the owner does not follow procedure but gives out money on the basis of whom they know as opposed to merit. If the UMB Board was effective, the actions of the owner could have been stopped and depositorâ€™s money would have been protected. The Board did not exercise due care and integrity in their approach to business. Financial institution failures has led to the proposal to form a parliamentary committee to deal with corruption, scandals and misdemeanors perpetrated by those in fiduciary positions (The Herald of 3 March of 2014).
Reserve Bank of Zimbabwe
The central bank of any country is charged with monetary policy issues of the land. It is run in some way by a Board that is appointed by Government with the man in charge being the Governor. His role is to just spearhead operations according to laid down policies and procedures and to some extent may come up with policies but that is a collective arrangement. In Zimbabwe during the Gideon Gono era we have seen inflation at its highest point in history of Zimbabwe owing to printing of money. It was alleged that the then Governor had too much power which he used at the detriment of the nation. The Parliamentary Portfolio Committee on Budget and Finance (2006) noted that the management of the national foreign currency resources was done by one man ie the Governor. One of the issues that Corporate Governance wants to address is avoiding a domineering member in the board. According to IMF report the ex-Governor was responsible for compounding Zimbabweâ€™s crisis through quasi-fiscal activities that have seen the RBZ pump millions into financing newly resettled black farmers, most of them Zanu (PF) supporters. Under his leadership, the Reserve Bank took on many tasks not related to central banking which included buying government cars, supplying farm equipment and fertilizer, setting up and supplying Peopleâ€™s Shops selling cheap goods, foreign currency shops set ups, supplying drugs to state hospitals, drilling of bore holes for clean water in the cholera crisis and a biofuels project you name it. The then Governor provided foreign currency to purchase combine harvesters, tractors, motorcycles, generators and small farming implements that were handed for free to resettled farmers in return for votes. All these quasi-fiscal activities by the Central bank did not benefit the nation at all. The question now is where was the Board, did they apply any corporate governance, the answer is no. Companies lost their hard earned money which was taken over by Central bank in violation of corporate governance which insists on transparency in handling the affairs of the company. Meanwhile as attention is focused on quasi-fiscal activities the Financial service sector is collapsing owing to lack of supervision as the central bank diverted from its core business. This has created an atmosphere of mistrust in the minds of citizens such that anything that the Central Bank announces is treated with caution like the proposed introduction of bond notes which citizens see as an indirect way of introducing the Zimdollar. The citizens cannot be blamed for that because of the old adage that says ones bitten twice shy.
Currently many country leaders all over the world has increased concern over corporate governance due to increased cases of frauds, insider trading, agency conflicts among other corporate saga (Enobakhare, 2010). Zimbabwe is not spared either, it has to re address corporate governance issues to avoid future corporate failures which impact on government income through lost taxes and the general welfare of the Zimbabweans. The corporate governance code has to be adhered to. The idea of variations of code application may act as a loophole, Corporates should just comply with the code note to be given an option to explain. The code thatâ€™s being developed for Zimbabwe should emphasizes on placing criminal liability on irresponsible Board of Directors so that when they act with due care and diligence. Furthermore the activities of the Board has to be monitored ie each Entity should be subjected to some regulatory framework that can be monitored from time to time. Furthermore special attention has to be of the following:
Board Composition: - There is need to increase the board composition and board diversity so as to enhance investorâ€™s confidence with the companies due to increase of independency of the board. This would tend to attract more potential investors since investors favour a company with more independent non-executive directors than executive directors.
Compliance with Regulation:- Companies to fully comply with corporate governance requirements and best practices to failures. Non-compliance fines by government, so that corporates will be forced to comply with the corporate governance requirements whether listed or not.
National Corporate Governance Policy:- Development of national corporate governance policy, which will make governance equality among Zimbabwe Stock Exchange (ZSE) registered and non-registered companies in the country. Without such a policy framework, monitoring and assessment of companyâ€™s corporate governance will be limited to only internal organization appraisals. This would help regulators to enforce regulation and supervision on an equal platform to all companies, failures of corporates affect government, as many people will be jobless and loss of income from taxes.
Macroeconomic Stability:- Stabilization of the macroeconomic situation will increase corporates performance. Addressing of economic fundamentals will reduce corporates failure as companies will not continue unethical practices in order to survive.
Attracting Investors:- Investors now target companies with good corporate governance practices. Formulation and implementation of good corporate governance practices and performance help preserving shareholder value and address stakeholder issues.
Separation of Ownership and Control:- There is a need for the regulatory to enforce corporate governance practices in the companies, separation of ownership and control. This avoids domineering of board by individuals, achieves independency and transparency through the decision making that supports any individual interests. Regulatory framework increases company supervision hence enhances sustainability. Competency of Corporates in general will be improved.
Improving the Fiduciary Duties of the Directors:- The directors should practice due care and diligence on their undertakings. Directors should be responsible and accountable. All directors activities should be disclosed through audited financial statements. This help in customer retention and investor confidence.
Reliance on the Financial Audit:- The audit product simply must get better in order to remain relevant and essential in todayâ€™s business world. Some of the recent corporate scandals are another example of where the audit procedures did not discover and disclose essential financial information. For example Lehman Brothers, World Com and Enron bankruptcies where each had been given a clean opinion on their most recent financial statements and were out of business before one year had passed.
Adopting to Changing Business Environment;- Business environment has become so dynamic and it is difficult to predict due to complexity brought about by globalization. This calls for a senior executive to adapt in their roles like never before. Individuals have to set the vision of the company bringing the managements along to remain relevant in this new environment. Those who embrace innovation and creativity survive as they are able to grab opportunities as they fall due.
Corporate governance has an impact on the performance of companies in general, since it helps to restore back investors confidence, which was eroded out by corporate failures for example; Interfresh, CSC, NRZ, Zimbabwe Sugar Refineries, several collapsed banks and the Central Bank itself. The evidence is not clear-cut but intuitively there would appear to be a positive correlation between good corporate governance practice and corporate performance. A good working relationship between the board of directors, management and other stakeholders in a given firm would result in increased efficiency, throughput and profits. Analysts and markets would view these results favourably with resultant higher stock prices. However, in times of corporate governance crises, performance of corporates would be affected and would be reflected in falling stock prices and other measures of corporate performance hence corporate failure.
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