Foreign investors want big markets and growth economies - but they also want the peace of mind of a high level of corporate governance. So how does Africa fare?
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This article was first published in the July/August 2017 Africa edition of Accounting and Business magazine.
According to World Bank data, six of the 12 fastest-growing economies between 2014 and 2016 were in Africa. With the continent’s population predicted to more than double by 2060, Africa would seem well placed to attract investors, yet the continent draws in only a tiny percentage of the world’s foreign investment.
One way to encourage investors is to have robust corporate governance frameworks in place. So how well developed is corporate governance across Africa? The second phase of a recent study by KPMG and ACCA, Balancing Rules and Flexibility for Growth, focuses on 15 African countries, examining their corporate governance requirements against the benchmark of the corporate governance principles set out by the Organisation for Economic Co-operation and Development (OECD) in 2015, looking at clarity and completeness of content, degree of enforceability, and availability of relevant requirements.
Although the study found a wide divergence in corporate governance requirements between the 15 African markets, all have a corporate governance code (or equivalent), with most having adopted their first codes since 2000. The standard is relatively high, reflecting the fact that countries have been able to benefit from lessons learned in the evolution of earlier codes elsewhere in the world.
Based on the analysis of local legal frameworks, South Africa came top of the ranking – having adopted the largest number of the OECD’s principles of corporate governance. Kenya, Mauritius, Nigeria and Uganda completed the top five.
Overall, a majority of markets (10 out of 15) have aligned their corporate governance requirements with more than 80% of OECD-related principles. Even in Ethiopia, where no stock exchange currently exists, the fundamentals of a strong corporate governance framework are in place.
As well as the adoption of the OECD principles, the researchers also looked at the extent to which countries include requirements seen as leading or better practice. Nigeria is the best performer in this context.
Most markets mandate the basic requirements (financial disclosure, shareholders’ rights and the role of the board) and supplement them with non-mandatory instruments (good practice guidelines and governance codes). An average of 32% of corporate governance requirements are compulsory, while 45% take a ‘comply or explain’ approach, and 23% are voluntary.
The markets that gain the highest scores for clarity and completeness of requirements codify most of them in the form of ‘comply or explain’ instruments. The report suggests that too many prescriptive or mandatory requirements may lead to a compliance-only culture where companies do the bare minimum.
However, relying entirely on a voluntary approach may not create sufficient impetus for companies to adopt even core corporate governance requirements. Striking the right balance between rules and flexibility is a tricky task for any country, but is of fundamental importance for countries where the corporate governance framework is very much evolving.
Jo Iwasaki, ACCA’s head of corporate governance, says: ‘We see a lot of interaction with internationally available principles and with other countries that have adopted corporate governance codes or similar frameworks. However, success in implementing frameworks, whether they have mandatory or voluntary requirements, depends on the effort made by the enforcing body. Having a corporate governance framework in place is fundamental but is only the starting point.’
The ACCA/KPMG study looked at countries’ requirements across four pillars or tenets of corporate governance associated with the OECD principles. Countries tend to have the most well-defined corporate governance requirements in relation to the stakeholder engagement pillar (which includes shareholder rights), followed by leadership and culture (eg role of the board, director independence, nominating committee), then compliance and oversight (eg disclosures, audit committee and financial integrity). Requirements related to the fourth pillar – strategy and performance (eg performance evaluation and remuneration structures) – are significantly less well defined.
In general, the better defined areas of corporate governance are mostly quantifiable or tangible in nature (structural), or have had more widespread attention over a longer time. They are fundamental tenets of a strong corporate governance framework, and the researchers were encouraged to find that countries are ‘getting the basics right’.
Several markets have even moved ahead of OECD principles. For example, the recent King IV Report in South Africa contains elements that go beyond leading and even emerging practice, with board responsibility for governing the technology and information framework (including a specific and separate responsibility for governing cybersecurity risk frameworks).
The corruption problem
Transparency International’s Corruption Perceptions Index shows that Africa endures some of the highest levels of corruption in the world. They include countries in the KPMG and ACCA study, which found no correlation between strong corporate governance requirements and lower levels of corruption. This indicates that adding anti-corruption requirements to corporate governance instruments is not enough in itself to combat entrenched corruption. The report suggests a coordinated effort by business and government (including a zero-tolerance stance on corruption in government and investment in enforcement) is needed to start tackling the problem.
A third of the countries in the KPMG and ACCA study have recently reviewed their corporate governance codes. Given the impetus of the OECD 2015 principles and the need to encourage more foreign direct investment, the report suggests that now could be the right time for regulators to take stock and revise their codes where necessary.
‘A number of countries have had governance codes for some time, and the experience of implementing them must have created practical learning points,’ Iwasaki says. ‘These could be reflected either in a revision of the code or the production of related guidance material so companies can improve corporate governance practice.’
Sarah Perrin, journalist