ADF IV Private sector and governance focus group

by Karugor Gatamah
Executive Director, Private Sector Corporate Governance Trust

Introduction

The ability of any government to function effectively and sustainably intervene in poverty alleviation rests on its ability to raise revenue from its citizens. The citizens can only pay their taxes or contribute to government revenues if they are engaged in viable and productive economic activities. Success in creating adequate opportunities for fully productive employment of all members of society who are willing and able to work, is primarily dependent upon the existence of competitive, profitable and sustainable business enterprises. Full and productive employment is the only means of creating a society in which all individuals feel part of, and participants in, the development process. Consequently, the creation of wealth is fundamental to the alleviation of poverty. It is in this context that the proper governance of the business enterprise - the wealth creating and the wealth producing organ of society - becomes cardinal to the development and governance strategies of the African continent.

In essence therefore:

• Any responsible Government would be interested promoting the good governance of business enterprises inoreder to ensure increased productivity, an expanding base for employment opportunities, the efficient and effective use of resources with enhanced probity, transparent accounting ,reporting and disclosure processes that ensure prompt and full remittance of all taxes due.

• Society should be concerned to ensure that the licence to operate granted to the business enterprise- to operate in, on and for society- is used responsively and responsibly in the best interests of society to add value; and that the wealth producing resources entrusted to business enterprises are efficiently and effectively utilized.

• Consumers should be concerned to ensure that they get value for money, obtain the highest quality products and that they can trust and rely on the enterprise to supply the goods or services as and when they need them.

• Investors or shareholders ,should be concerned to ensure that their investments are secure, productive, sustainable, growing and profitable with protection of their rights.

• Suppliers, Contractors or indeed Lenders or providers of finance, are concerned to ensure that the enterprises are well run and governed such that they remain viable and solvent so that they can make payments when these fall due.

• Employees or workers are concerned to ensure that the enterprises remain viable and sustainable and able to secure jobs , pay today and indeed pensions tomorrow.

• The youth, students, or the unemployed, should be interested to see business enterprises thriving and growing to ensure that new jobs and employment opportunities are created tomorrow.

• As directors we are concerned to ensure that the enterprises we direct are viable, sustainable, competitive, credible and accepted by consumers and society as reliable, competitive, creative, innovative and credible.

It is not surprising therefore that having accepted that the private sector shall be the engine of growth, Africa now recognises that the survival of the continent, the continued existence of its independent states and the prosperity of its people are closely linked to its ability to create and maintain viable and competitive well governed business enterprises and on establishment of aconducive environment in which business enterprises can grow and thrive.

Creating an enabling environment calls for the establishment of effective partnerships between the Government, the private sector, civil society and the society as a whole to 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 New Partnership for Africa's Development (NEPAD) advocacy for pro-active public-private dialogue and partnership in advancing a value-added production culture is timely. It will, however, involve heavy investment in labour at all levels and mutually beneficial business relationships at the continental and international levels to attain such goal. Goals for the partnership include:

• Formation of strong African private sector associations with a special focus on small and medium-sized micro-enterprise development;

• More focused and integrated public-private partnerships in sponsoring home-grown national and regional development strategies;

• Reliable and dependable information and analytical interfaces between the African private sector, international business and capital, and the NEPAD Secretariat;

• Timely, credible, structured, comprehensive and usable information on business opportunities to advance private sector development;

• Regional integration efforts more focused on building productive capacity, as opposed to an overemphasis on trade.

The memorandum of understanding on the African Peer Review Mechanism (APRM) that was adopted in March 2003 at the sixth summit of the NEPAD Heads of State and Government Implementation Committee acknowledged the challenges that face the continent in relation to corporate governance. The document recognises the need for openness in Africa's international trade and investments and for new partnerships between government, the private sector and civil society. There are priority codes and standards-designed to achieve market efficiency, control of wasteful spending, consolidation of democracy, and larger private financial flow-in such areas as: monetary and financial policies; fiscal transparency; budget transparency; public debt management; corporate governance; international accounting standards; international standards on auditing; and effective banking supervision.

In the area of corporate governance, key objects include:

a) the provision of an enabling environment and effective regulatory framework for economic activities;

b) ensuring that corporations act as good citizens with regard to human rights, social responsibility and environmental sustainability;

c) promoting the adoption of codes of good business ethics (e.g., OECD, the Cadbury and King codes or the Ohada principles) in achieving the objectives of the organization;

d) ensuring that corporations treat all their stakeholders (shareholders, employees, communities, suppliers and customers) in a fair and just manner; and

e) assuring accountability of corporations and directors.

In response to appeals for good governance, the Africa Business Round Table (ABR) is putting together, with assistance from a number of international organisations and agencies, a rating system by which to judge eligibility for the award of a Seal of Good Corporate Governance. This project aims to establish continent-wide standards of good corporate governance that will apply throughout the business landscape. The intention is to set out appropriate standards, obtain general approval for these, train corporations in their application, and measure compliance with them. When fully implemented, the project is expected to give African private enterprise a unique gateway to international markets, attract major inflows of foreign direct investment, develop strategic partnerships with world-class corporations, and be recognised as a central feature of the NEPAD initiative.

Objective of the Focus Group

The purpose of the Private Sector and Governance Focus Group is to take up the processes and structures necessary for creating a corporate governance architecture that encourages a strong and vibrant private sector. It will examine policy and regulatory frameworks, means for combating corruption, business standards and codes of conduct, and public-private partnerships.

Key Issues

2) Secondly, to find a way to maximize wealth creation with equitable distribution and employment generation to facilitate participation, involvement and engagement of the majority in the development process . . . and to do so NOW.

3) The setting of standards; Africa has committed to implementing uniform and harmonised standards of corporate governance. Given the diversity of enterprises, the historical and colonial heritage etc certain issues arise:-

• How is such a balance to be struck? Is the ABR's system promising in this respect? What specific proposals would it do well to take on board?

• Is there a danger that corporate bodies will not be sufficiently motivated to comply with the standards? What is suggested by the record thus far?

• How far can countries be fairly and reasonably assessed in their compliance with the listed set standards for corporate governance?

• More generally, when is it appropriate to tackle poor corporate governance via incentive schemes, and when via the penalties of law?

4) The role of governments

It is generally accepted today that the first task of governments in relation to the national economy is to provide, as far as possible, a sound macroeconomic framework to stimulate sustainable social and economic development. But certain questions of interpretation may be raised:

• Is there adequate recognition of how important a part of this task it is to improve standards of corporate governance? If not, how is such recognition best to be promoted?

• What specific measures are vital in stimulating domestic and external investment?

• How much of the material and technical prerequisites for good corporate governance can African governments be expected to provide, or assist with?

• What else can realistically be done to curb corruption?

5) The intra-African perspective

One of the numerous factors contributing to the low level of cross-border trade within Africa is the ineffectiveness of domestic policies in the area of market access/pricing and of incentive mechanisms. And one problem that stands out is the lack of streamlined, harmonized and enforceable regulatory mechanisms to integrate cross-border business dealings and trade. Answers are urgently needed to the following questions:

• How can intra-African trade and investment be speedily advanced beyond regional protocols and policy enactments?

• If, as the EU experience suggests, policy harmonization is an important prerequisite for sound regional corporate governance, what are the challenges facing the African continent in this respect?

It therefore appears that certain actions are now necessary if we are to promote Good Corporate Governance in Africa. These include:

• Promoting 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.

• Advocacy and other activities to promote public and community understanding of the benefits of good corporate governance and hence facilitate community participation and involvement in promoting, demanding and enforcing good corporate governance.

• Building the capacity and capabilities of business leaders through training and certification programmes. It is surprising that we demand minimum qualifications and a certificate of competence from the bus driver, the plumber and the mason, but neglect to demand a certificate of competence from those to whom we entrust the wealth producing and creating organ of society. It is even more surprising to learn that all we require is that they not be infants, overtly insane, or known bankrupts.

• Developing and improving institutions that have the capacity to implement and enforce best practices, including regulators, particularly in the financial sector and self-regulatory organisations.

• Developing 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, the society be prepared to recognise, acknowledge and reward good corporate governance.

• Establish well-regulated, well-functioning and competitive capital and financial markets that provide a disciplinary mechanism.

• Promote inclusive partnerships for sustainable wealth creation that involve both the public and private sectors, as well as the civil society.

• Update and strengthen the legal, judicial and tax systems.

• Develop and adopt supervisory arrangements that effectively place risk-management responsibility with the board of directors, instead of passing it to the supervisory agencies.

• Prepare future business leaders by introducing the subject of corporate governance into education programmes at all levels.

Key issues relevant to leadership of the Private Sector in Africa:-

"Africa and the majority of its people bear the sad status of being historically the most exploited, the most dependent, the most vulnerable and now increasingly the most internationally isolated, marginalized and least well-governed. The under-pinning of this tragic phenomenon of the world underdog status of Africa is the dehumanizing poverty in the African continent." [GENERAL OLUSEGEN OBASANJO AT THE AFRICAN LEADERSHIP FORUM, KAMPALA, May 1991.]

"The ability of the leaders of Africa to lead the people of Africa into the exploitation of the resources of their continent to the greatest advantage of the people of Africa is the challenge to us the people of Africa today and tomorrow. It is this which will decide the difference between the Africa of yesterday and today, on the one side, and the Africa of tomorrow and the future ahead, on the other side." [Dr. Kenneth D. Kaunda, President of Zambia, in the Statement made at the African Leadership Forum, Kampala, Uganda 19th May 1991.]

The big question is : does good corporate governance or governance of business matter to the average citizen in Africa - and therefore to politicians who are concerned about the votes of average citizens? Are corporate governance, and trust in business leadership, problems which are exclusively for foreign and rich investors and `big shots' who run large business companies? Or are these matters which the average citizen, the politician and the civil servant should worry about?

The good governance of business is a critical issue which merits attention from citizens as well as private, public and civil society leaders - it is a system of control over leaders in the national and international economic chain, and if the leaders are a weak link the whole chain will soon break.

it is a serious issue that the commercial competitiveness of companies operating in the global market, the protection of `other people's money' in banks and investments, and thus the economic future of countries, are in the hands of many leaders who do not know their legal duties, are untested in the essential knowledge required to lead their organisations, untrained in the skills needed for their positions, and often appointed through cronyism rather than personal merit. Nobody would accept medical care from untrained doctors (pace traditional are promoted on their personal and family connections instead of their military prowess.

The army in many of our countries include intensive training as an integral part of every officer's whole career path, which outshines anything provided by most business companies : all officers pass through a cadet training college, their promotion to the middle rank of major depends on further training and an examination, promotion to senior rank as colonels require passing through staff college, with promotion to top rank as generals means attendance at war college before they take over senior command posts. So corporate governance advocates ask why is it widespread and acceptable practice that the leaders of the national economy should have no formal training for their vital role, but are assumed to gain the necessary knowledge and skills only through one days experience repeated many times? Is the creating a competitive national economy any less important than war ?

"Leadership ability determines a person's level of effectiveness" [ ` The law of the Lid' as expounded by John C. Maxwell in "the 21 Irrefutable Laws of Leadership" , 1999 Magna Publishing Company ltd.]

Has the Leadership of the Private Sector in Africa failed to live up to expectation?

The quality of leadership determines the success of all forms of organisation but in many respects the quality of leaders is even more critical in Africa and increasingly so in the business sector of the continent, and particularly so if indeed that sector is to become the Engine of Growth.

It is clear that many of the archaic systems of governance operating in Africa , in our business enterprises and even in most of our business associations needs to be changed so as to provide a modern framework within which high quality leadership can flourish