This article was first published in the March 2014 International edition of Accounting and Business magazine.
A salutary lesson for the Western world since the financial meltdown in 2008 is that there is no easy formula for ensuring economic growth. Despite the resilience of US and European institutions, markets and skills, restarting the economic engine has proved sluggish. Africa’s economies, though, have been faring better, and the World Bank’s International Finance Corporation (IFC) has launched a corporate governance network to help make African growth more sustainable.
The October 2013 launch in Mauritius came none too soon. Africa has taken off as a destination for foreign direct investment (FDI). The continent’s economy has more than trebled in size since 2002. Sub-Saharan growth has been even more impressive, increasing over three-and-a-half times in the period to a forecast US$1,415bn in 2013. FDI into sub-Saharan Africa grew at an impressive compound rate of 22.3% between 2007 and 2012. For all African countries, it increased by 5% to US$50bn in 2012 as global FDI fell by 18%, according to the UN Conference on Trade and Development (UNCTAD) annual survey of investment trends.
The IFC’s African Corporate Governance Network (ACGN) aims to encourage best practice and capacity building in corporate governance among public and private institutions. It will seek to guide this growth by making its expertise available for the network, helping members ‘access global experience and information that can be disseminated across the continent’, says Chinyere Almona, IFC head of corporate governance for Africa. ‘We see the support as a partnership in which ACGN is able to access IFC information and experience, while ACGN provides a forum for continent-wide discussion on corporate governance and a network of institutes with whom IFC can partner locally.’
This work is part of the IFC’s DNA, given that the organisation is the largest global development institution focused exclusively on the private sector. Working with private enterprises in more than 100 countries, it uses its capital, expertise and influence to help eliminate extreme poverty and promote shared prosperity. In the 2013 financial year, IFC’s investments hit an all-time high of nearly US$25bn, leveraging private sector contributions.
Improved corporate governance will underpin such investment, but will require more trained financial and accounting professionals to be deployed in Africa.
The IFC is confident that Africa can be self-sufficient in such resources. Almona says that the financial support sector is growing to match the speed of African economic development, which in some cases – such as Sierra Leone (real GDP annual growth rate 19.8%) and Niger (11.2%) – is among the fastest-growing in the world.
The network has so far been financed by the IFC, Standard Bank, ACCA and the NEPAD Business Foundation (the business arm of the New Partnership for Africa’s Development). It will be looking for additional sponsors going forward.
The initiative is sure to find favour with the Organisation for Economic Cooperation and Development (OECD), whose 2012 report Corporate governance, value creation and growth: The bridge between finance and enterprise concluded that a robust framework of corporate governance rules and regulations gives investors confidence and entrepreneurs the incentive to develop their businesses. The OECD report emphasises that developing and emerging markets, in particular, benefit from strong governance as companies gain better access to the external capital required for economic growth.
In Africa, however, external solutions without local buy-in have poor success rates. So the enthusiastic reception for the network from NEPAD, which is the African Union’s planning and coordinating technical body, is encouraging.
Derek Browne, chief operating officer of the NEPAD Business Foundation, says that corporate governance plays a ‘crucial role in assuring investors that there are good management teams who act ethically and in the best interests of stakeholders. This is important when we try to court more capital for business.’
Michael Lalor, lead partner at EY’s Africa Business Centre, says there is no doubt that political governance throughout the continent has improved dramatically since the Cold War and the end of apartheid in South Africa. ‘There is a virtuous circle at work here that is reflected in increased FDI flows, improved governance – both political and corporate – and improved economic performance,’ he adds.
Daniel Malan, director of the Centre for Corporate Governance at South Africa’s University of Stellenbosch, hails the new network initiative as ‘incredibly important’ for Africa. ‘There are studies showing that institutional investors are willing to pay a premium to invest in well-governed entities.’
However, Lalor warns: ‘Corporate governance can never be disentangled entirely from political governance. For decades, the first thoughts entering the mind of a potential foreign investor into Africa were political and risk instability, which is why analytical instruments like the Ibrahim Index of African Governance are so important and critical investment bellwethers.’
Meanwhile, Lyal White, director of the Centre for Dynamic Markets at the Gordon Institute of Business Science in Johannesburg, cautions that while supranational initiatives such as the network have the benefit of encouraging institutional congruence in emerging economies, expectations should be realistic. ‘The upside is that such accords build in additional layers of protection,’ he says. ‘The downside is that they can impede the efficiency of markets. The perimeters of commerce are not as clearly defined in Africa as they are in Europe. Business is done differently here and the high returns being delivered are because these are frontier economies where players have to be nimble and innovative, which is not the same as being corrupt or unethical.’
What’s more, he points out, there are 54 states in Africa and each market is different from the others, ‘which makes the imposition of too rigid templates problematic’. He adds: ‘Good governance doesn’t happen at the flick of a switch, and it cuts both ways. Multinationals need to be sensitive to a history of real and perceived exploitation and more than anywhere else in the world they need to take a long view and build strong, symbiotic relationships of trust with local communities and African governments.’
Need for transparency
In a similar vein, Lalor says that ‘although corporate governance is not only a prescriptive game of numbers’, multinationals need to provide detailed, transparent accounts – for example, avoiding lumping entire regions together, as is often the case.
Paul Moxey, head of corporate governance and risk management at ACCA, says people should view the purpose of governance as being about ensuring that companies create sustainable long-term value. ‘If you accept this then it follows that good governance is essential to sustainable economic growth.’ He warns, though, that good governance is about more than mere compliance with most codes; it is about creating the accountability so that boards and companies focus on value creation.
A European former economic attaché to Nigeria, who does not want to be named, says the network is likely to narrow not only the perceptions gap between Western and African economies, but the gap within Africa as well: ‘South Africa has one of the most transparent and robust financial systems in the world, but within the continent, Mauritius and Kenya are gaining rapidly in reputation. Zimbabwe, however, is a disaster. It is the nature of such best practice networks that they stimulate internal competition and benchmarking.’
William Saunderson-Meyer, journalist based in Pietermaritzburg, South Africa