POWER, POLICY AND PITFALLS: CORPORATE GOVERNANCE IN COMPARATIVE PERSPECTIVE
A paper by Liina Kalili
The motivation behind this paper has originated from what was reported online and in local newspapers, indicating a governance crisis in some organizations in Namibia. Some scandals involved organizations, such as the Fishrot saga. According to what was widely published online and in local newspapers, the Namibian governance system and processes were bent and undermined over a period to cover and enable a grand corruption scheme in Namibia involving the largest Icelandic fishing company, allegedly paying bribes in the Namibian fishing sector. It resulted in the collapse of large fishing companies and the devastation of thousands of jobs in Namibia. This matter is still in Namibian courts.
Another scandal was the Kora Award scandal, which involved irregular payment through Namibia Tourism Board of an advance of over 1.5 million USD to the West African entrepreneur for hosting a Kora All-African Music award in Namibia in 2016, which never took place, but the entrepreneur disappeared with the money. However, the court ordered that he pay back the money.
Further, the large Namibian government-owned Small Medium Enterprise (SME) Bank collapsed in 2016-2017. The collapse led to business closures and job losses. The court ordered that the Zimbabwean entrepreneur and associates behind the SME Bank pay back the money. However, despite the two court orders for SME Bank and the Kora All-African Music Award, none in Namibia has been held accountable despite the clear evidence of improper conduct.
The selection of countries such as the United Kingdom, Zimbabwe, Nigeria, and South Africa is justified as follows: South Africa was chosen due to its legal systems, like Namibia’s. Zimbabwe and Nigeria were chosen as jurisdictions with similar experiences and issues like Namibia. The United Kingdom was chosen as a developed country to determine best practices. The comparison focuses on governing rules and regulations, leadership, board structure, appointment, and independence.
COMPARATIVE ANALYSIS OF CORPORATE GOVERNANCE IN SELECTED COUNTRIES
1. United Kingdom (UK)
Governing laws and regulations
The UK’s corporate governance system includes legislation, rules of practice, and market guidelines. Mandatory default norms and legal standards are derived from common law; the statute is the Companies Act of 2006, and the regulation is the Listing Norms and Disclosure and Transparency Rules (Online), released by the Financial Conduct Authority (FCA), a statutory agency.
Combined Code
The first Combined Code for UK-listed businesses was established in June 1998. It was developed with the support of the Cadbury, Greenbury, and Hampel corporate governance committees. The Combined Code was updated and published in July 2003, with additional input from the Higgs Report, and it became effective for all UK businesses listed on the London Stock Exchange for reporting periods commencing on or after November 2003. The Combined Code focuses on the requirements of boards of directors, which include their appointment, remuneration, accountability, relations with shareholders, and the responsibilities of institutional investors. The Combined Code additionally contains provisions on the plan of performance-related remuneration, instruction on the liability of non-executive directors in care, expertise, and diligence, and mechanisms for disclosing corporate governance arrangements (World Bank Toolkit, Online:23).
The Higgs Review examines the role and effectiveness of non-executive directors in restoring investor confidence in the quality and dependability of financial reporting, on which the entire UK stock market was believed to rely (Roberts, Sanderson, Seidl, and Krivokapic, 2020:16).
The Cadbury Report is the ‘best practice’ system of corporate governance, both in the UK and then in various countries around the world that combined some or all its recommendations into their corporate governance codes, where non-executive directors (NEDs) are independent of management and independent of any dealing or other association that could materially obstruct the practice of their independent verdict (Mallin, 2011: 4).
UK Corporate Governance Code 2018
The Code states that the board has a governance position and is responsible for developing purposes, standards, and plans. The board should also judge and observe the culture and ensure management takes corrective action when necessary. The Code (2018:2) stipulates the principle of governance, which states that there should be a flawless division of responsibilities at the top of the company between the operation of the board and the executive obligation to operate the firm. Nobody should be able to make decisions on their own. (Council 2012:6). Section B specifies the board’s and its committees’ efficacy in maintaining an acceptable balance of talents. They must have the necessary experience, independence, and company knowledge to fulfil their duties and responsibilities successfully. Section C requires the board to provide a fair, balanced, and understandable evaluation of the company’s situation and prospects.
According to Council (2012:4), the Code operates on the “comply or explain” approach, which is the icon of corporate governance in the United Kingdom; it has been in place since the Code’s inception and serves as the foundation for the Code’s flexibility. Both businesses and shareholders enthusiastically support it, and it has been extensively adopted and replicated worldwide. The Combined Code (1998) consolidated the recommendations of the Cadbury, Greenbury, and Hampel reports, with organizations implementing Code provisions and explaining why they did so in a specific way, as well as any areas where they did not apply them (Mallin, 2011:5).
The “comply or explain” method is flexible and effective. It has been adopted by numerous countries (Mallin, 2011:9). The notion of “comply or explain” represents liberty of choice (Roberts, Sanderson, Seidl, & Krivokapic, 2020:8). As it encourages organizations to embrace the essence of the Code. In contrast, a legislative system would result in a “box-ticking” approach that would not allow for sound departure from the rule and would not build investor trust (Faure-Grimaud, Arcot, & Bruno, 2005:1).
Complying or explaining indicates that an organization that adopts standards on this basis must follow those standards in the letter and justify any instances in which it has been unable to do so or has purposefully deviated from them. (Datenservice Online). Standards that operate on a “comply or explain” basis are not strictly obligatory, and there is no penalty for failing to comply.
Board size and structure
The Code states that the board should be of sufficient size and comprise a proper mix of executive and non-executive directors so that no single or small group of people can overshadow the board’s decision-making and that board members are appointed based on excellence with logical succession for appointments (Council,2012:12). However, it is argued that because the term “sufficient size” is not specified in the Code, the appointing authority will most likely define it at their discretion.
Builder Carillion and retailer BHS cases
In January 2018, the UK’s accounting regulator fined KPMG 21 million pounds ($26 million) for failing to challenge Carillion management and losing objectivity in audits of Carillion, a major government contractor building hospitals and other infrastructure. Two years earlier, the collapse of retailer BHS triggered a review of auditing standards (Reuters, October 12, 2023).
As a control measure, firm directors must sign a code of conduct to improve boardroom conduct and behaviours following such incidents. (Reuters; June 19, 2020).
2. Zimbabwe
Governing laws and regulations
Governing laws and regulations
Zimbabwe, which gained independence in 1980, lacks a legislative national corporate governance code like the King Code, Cadbury Code, or Sarbanes Oxley Act, while efforts are underway to establish such a code in Zimbabwe (Maune 2015:168). Corporate governance exercises in Zimbabwe are currently governed by the Companies Act (Chapter 24:03) and Zimbabwe Stock Exchange Act (Chapter 24:18) Zimbabwe Stock Exchange Act (ZSE) listing requirements, the Public Finance Management Act (PFMA Act) (Chapter 22:19) and the rules of numerous professional bodies such as the Institute of Directors of Zimbabwe (Maune 2015:168).
Private institutions with 1 to 10 shareholders should have at least two directors, while those with more than ten must have at least three. However, public institutions must have 7 to 15 directors (Progreso, 2023: Online). In decision-making, directors must exercise independent judgment and operate in good faith in the firm’s and its stakeholders’ best interests while not exceeding their power (Volpe, 1979:127-130). The law emphasises due diligence and directors’ loyalty, specifically their need to manage conflicts of interest that may arise while carrying out their obligations (Velasco, 2018:1037).
According to Chimuka and Sena (Online), shareholders elect and dismiss board of directors’ members at general meetings. While executive management is chosen through employment contracts, directors can remove them by their employment contracts and applicable labour laws. Section 221 (4) of the Companies and Other Business Entities Act allows the board of directors to choose the Chief Executive Officer to represent the organisation’s interests and conclude transactions.
Nonetheless, corporate governance crises are common in Zimbabwe, and there is concern that political governance principles prevail in trade. According to Maune (2015:168), some Zimbabwean companies experienced corporate catastrophes because of shortcomings in directors’ and management’s corporate governance. Further, Chifaka, Foya, and Ncube (2022:35) indicate that numerous organisations, including Air Zimbabwe, Premier Service Medical Aid Society, Zimbabwe Broadcasting Corporation, African Renaissance Bank, United Merchant Bank, ENG Capital, and Barbican Bank, encountered problems due to corporate governance weaknesses.
Mangena, Tauringana, and Chamisa (2012:9) state that political connections are an asset for Zimbabwean organisations because they provide superior access to limited resources such as oil, gas, and foreign currency and the ability to ward off political intimidation, such as from war veterans.
The use of the “apply or explain” approach to corporate governance codes worries the public about the viability of the “apply or explain” approach, bearing in mind the Zimbabwean context, whether the Zimcode is another toothless tool that is just encouraging natural and juristic persons to take accountability of given set of standards and possession of corporate governance, but not obliged to comply with whatever, have freedom to select those principles that are relevant (The Herald, 2016; Online). As a result, corporations are free to implement whichever corporate governance principle they choose.
3. Nigeria
Companies And Allied Matters Act
This Act established the Corporate Affairs Commission and specifies the creation of corporations and related matters, the registration of business names, and the appointment of trustees to various committees, bodies, and associations.
Section 244(i) of Companies and Allied Matters Act (CAMA) (1990: Online) defines “director” as a person selected by a company to oversee its business rather than defining the term itself. Section 650 defines a director as “any person occupying the position of directors by whatever name called”. The executive director is a full-time corporation official who may be appointed under a service contract. While Section 63(3) CAMA 1990 holds the non-executive director responsible for the organisation’s management, Section 246(1) CAMA 1990 requires that each organisation have at least two directors.
Code of Corporate Governance for Public Companies
The Code of Corporate Governance for Public Companies (2014: Online) only requires one independent NED; the remaining NEDs are not independent. The obvious conclusion is that promoters have a high-power level and may cause issues for the board and the organisation.
The Securities and Exchange Commission of Corporate Governance Code
One of the board’s primary responsibilities is to ensure strong corporate governance in the firm. According to the Securities and Exchange Commission of Corporate Governance (SEC) Code (Online), the board of directors must protect the organisation’s leadership through its articles, memorandum of association, and the country’s laws while maintaining the highest ethical standards and sustainability. The most interesting aspect is that the Nigerian Codes do not require all NEDs to be autonomous.
There is no distinction between executive and non-executive directors’ legal roles and duties under the CAMA 2004. The distinction was introduced by the Court of Appeal in Nigeria in the case of Longe v. First Bank of Nigeria Plc91, where Salami JCA deferred between the executive and non-executive directors, saying: “The respondent’s board in the instant case consists of two classes of directors, executive and non-executive.” The non-executive directors are appointed directly under Sections 247, 248 and 249 of the Companies and Allied Matters Act, Cap. 59. The second tier of directors are not employees of the corporation because they do not have contracts of employment and do not get a salary.” The learned Justice of the Court of Appeal distinguished between NED and executive directors, classifying the latter as “employees” who operate under a contract of service; their nomination is not documented in CAMA 1990.
Nigerian Code of Corporate Governance 2018
The Nigerian Code of Corporate Governance 2018 (NCCG) (Online) is based on the “apply and explain” principle, which requires companies to apply principles tailored to their specific needs and explain how they were used.
4. South Africa
The King III Report
Legislation and common law govern the principles of good governance, and Codes of Best Practice include vital advice. South African corporations utilised the King II Report on Corporate Governance of 2002 (referred to as ‘King II’) until the end of February 2010.
The King III Report is like King II. It establishes general principles for ethical leadership and corporate governance (chapter 1), principles of good governance for the board and directors (chapter 2), audit committees (chapter 3), risk and information technology governance (chapters 4 and 5), compliance with laws, codes, rules, and standards (chapter 6), internal audit (chapter 7), stakeholder relationship governance (chapter 8), and integrated reporting and disclosure (chapter 9). The King III Report applies to all public, private, or non-profit organisations, regardless of how they were formed or incorporated (para 13 of the report’s introduction and background).
According to the Companies Act of 2008, corporate governance matters are governed by codes of best practice and legislation. Chapter 2, Part C, addresses broad transparency and accountability obligations. Chapter 3 records improved requirements but only applies to select businesses. Chapter 2, Part 7 addresses broad organisational governance, whereas sections 75 and 76 provide a moderate classification of directors’ tasks, which include the organisation judgment rule.
The Institute of Directors in South Africa (IODSA) creates and publishes the King Code on Corporate Governance, which provides overarching corporate governance principles that South African courts often consider when determining directors’ duties and responsibilities. Principle 3(14) of the King IV Report on Corporate Governance states that the board of directors must manage and control the business and consider how the repercussions of an organisation’s activities and products affect its standing as a responsible corporate citizen. So, firms listed on the Johannesburg Securities Exchange (JSE) must comply with King IV.
The Companies Act and King IV highlight a board of directors’ corporate governance practices. Non-executive directors, like in Namibia, are independent board members without responsibility for the organisation’s day-to-day operations, whereas executive directors have. Common law defines directors’ duties and obligations, and Section 66(1) of the Companies Act specifies how a company should be governed under the guidance and supervision of the board of directors. Good corporate governance requires directors to behave in good faith and in the best interests of their organisations, which includes exercising care, skill, and diligence in carrying out their duties.
King IV identifies 16 principles a firm should follow while implementing excellent corporate governance. Among other things, King IV specifies that a board of directors shall, among other things, lead ethically and effectively, control ethics and create an ethical culture, ensure responsible corporate citizenship, and serve as the major theme and guardian of corporate governance.
Eskom case
South Africa’s electrical utility firm, Eskom, has been implicated in a corporate controversy. According to Godinho and Hermanus (undated:14), the Eskom Inquiry uncovered evidence revealing pervasive wrongdoing in managing Eskom’s operating costs. The Eskom executive management and board of directors were accountable for Eskom’s corporate governance. However, they failed miserably to prevent corruption and, in some cases, supported or even engaged in it (Blom, 2017:84). As a result, the utility had forced South Africa into the darkness since 2007, when it first implemented load shedding to prevent a total grid failure.
Roman Dutch law
Namibia follows common law, the Roman Dutch law, which was in place before independence in 1990. Furthermore, Article 140 of the Namibian Constitution states that all pre-independence South African case laws and statutes are applicable in Namibia unless overturned by an act of parliament or a competent court (Amoo and Skeffers, 2008:17-18).
King Report I and II
According to Muswaka Zinatsa and Chilunjika (2020:125-126), Namibia has extensively employed the South African Corporate Governance Code, notably the King I and King II reports, since independence in 1990.
Namcode
The Namibian Stock Exchange established Namcode, the Corporate Governance Code for Namibia, in 2014 after being unable to accept the King III code, as it had done with the King II. That was when the need arose to develop a code based on the principles outlined in King III and other international best practices. The Namcode applies to all organizations constituted by statute under the Companies Act or any other legislation applicable in Namibia to encourage good corporate governance.
However, corporations are not required to follow the Namibian Code of Corporate Governance. Although the NamCode recognizes what happens in practice, each board is expected to nominate a chairperson, who should be a non-executive director or Chief Executive Officer (CEO), and to provide a structure for the transfer of authority. Furthermore, the Company Act of 2004 and NamCode define the directors’ roles as board chairperson and CEO. Furthermore, the board shall include most independent, non-executive directors (NamCode, 2014: Online), whereas Principles C2 to 22 dictate board of director assessments to measure their efficacy. Namibia’s organizations are represented by two bodies: shareholders, who ultimately own the organization, and the board of directors, who manage it (Asheela-Shikalepo, 2021:5).
Companies Act No. 28, 2004
It governs Namibian companies’ incorporation, management, and liquidation; nevertheless, the Companies Act does not mention chief executive officers, even though a CEO or managing director leads most enterprises. Although directors are nominated by shareholders or a class of shareholders, their interests should not take precedence over those of the firm. According to the Companies Act, every public company must have at least two directors, and every private company must have at least one director. Therefore, until directors are appointed, every subscriber to a company’s memorandum of incorporation is regarded as a director of the business (Namcode: Section 216).
Section 1 of the Companies Act defines a director as any individual who holds the post of director or alternate director of an organisation; there are both executive and non-executive directors. Furthermore, the Companies Act requires every public company to have at least two directors, while every private business must have at least one director. All directors must act in the organisation’s best interests, even if the Companies Act limits their powers; otherwise, they may be liable to compensate the organisation for any loss, damages, or costs.
Analysis
The UK corporate governance system is an excellent model that has affected many governments worldwide, which is laudable. The board’s most important functions in both states are to ensure strong corporate governance in firms, the board’s effectiveness, and accountability. Namibia and South Africa, with similar legal systems, have adopted the voluntary “comply or explain” approach from the United Kingdom, with no punishment for failing to comply with the principles.
However, the question is whether the adopted principle serves any purpose, given that it is optional. Zimbabwe and Nigeria follow the apply and explain the concept, which encourages businesses to apply principles customised to the circumstances of their organisations and explain how they were used. Again, firms can implement any corporate governance standard without being required to do so. The issue is that firms will be biased towards the easiest rule to adopt regarding compliance.
In all selected nations, non-executive directors are independent board members who have no responsibility for the organisation’s day-to-day operations, whereas executive directors do. Furthermore, in all selected countries, good corporate governance requires directors to act in good faith and in the best interests of their organisations, including the need to exercise care, skill, and diligence in performing their duties and board effectiveness regarding the directors’ individual and collective performance regarding their roles and responsibilities.
Executive directors are not independent in Namibia and South Africa because the corporation determines their compensation. Nonetheless, all the selected countries have effective corporate governance laws and regulations. However, it begs the question of whether the development of good governance rules and legal reforms improves how executives manage and control firms by making them healthier and more sustainable. Moreover, do legal reforms potentially reduce corporate scandals and collapses? Given the reported business scandals in Namibia, South Africa, Nigeria, and Zimbabwe, it would be interesting to learn the answers to these questions. Finally, the challenge may be triggered by the concept of ‘box-ticking’ certain areas/boxes to demonstrate conformity with a specific standard.
As demonstrated in the following chapter, these Namibian firms were subjected to good laws and codes but failed to adhere to corporate governance principles. Creating exceptional good governance codes helps organisations become healthier and more sustainable. Another concern is whether drafting codes and legislation reforms reduces the risk of organisational collapse. The responses are tied to the concept of ‘box-ticking’ to imply compliance when none existed.
SELECTED NAMIBIAN CASES ON CORPORATE GOVERNANCE CRISIS
Fishrot case
Fishcor was established on December 27, 1991, by the National Fishing Corporation of Namibia Act No. 28 of 1991. Its purpose was to exploit the allocated quotas sustainably while maximising profits for shareholders, employees, and the Namibian economy.
However, according to Coetzee (2021:131-132), in November 2019, the manager of Namibian operations for Samherji blew the whistle on the company’s bribery of the previous Minister of Fisheries to secure 55,000 tons of the horse mackerel quota from 2012 to 2019. Politically connected business people utilised bribes to form multiple corporations and buy assets in Namibia and abroad, including the Marshall Islands, Mauritius, and Dubai. It is claimed that the Namibian governance system and processes were bent and degraded over time to conceal and permit this massive corruption.
According to Ndeyanale (Online), Fishcor’s auditor alleged that payments made to several law firms that facilitated the movement of illegally obtained funds through their trust accounts and property development were discussed with the Chairman of the Board, the former Minister, and the CEO, but were never brought to the board’s attention. Furthermore, 700 fishermen lost their jobs because of what is widely regarded as the country’s largest industrial scandal since independence. These allegations remain to be proven in Namibian courts.
Kora All-African music award case
Namibia Tourism Board (NTB) was founded by Section 2 of the Namibia Tourism Board No. 21 of 2000 to promote environmentally sustainable tourism in Namibia.
However, in the matter of NTB v Mundial Telecom SARL (Online) argues that on December 4, 201, an agreement was signed to hold the Kora Awards Ceremony in Namibia on March 20, 2016; money was paid, but the event never took place, and the organisers disappeared after collecting the funds and people behind this incident are accused of having a political connection. According to Links (2023: Online), public funds have yet to be repaid despite the court order, and no one in Namibia has been held accountable for this despite evidence of improper conduct and alleged politically connected individuals involved.
Small Medium Enterprices (SME) Bank case
The Government of Namibia established SME Bank under Namibian laws to provide business support services to SMEs by increasing their exposure and revenue.
According to Van Rensburg (2019: Online), the Namibian government was the largest shareholder in SME Bank. However, the bank was allegedly taken over and looted by Zimbabwean minority owners who stole at least N$380 million and fled across the Namibian border when authorities began investigating the matter. The South African bank VBS aided the heist in Namibia by creating phoney invoices for the SME bank to pay, then routing the stolen monies through numerous entities in South Africa. In contrast, misleading authorities until the SME bank collapsed and all workers were laid off.
Analysis
The three business scandals described above are about more than just the loss of revenue; they also distort and deteriorate Namibia’s growth strategy. In the Fishrot case, it was claimed that the major perpetrator was the Marine Resources Operation 2000, which allowed the Minister of Fisheries to operate with paradoxical discretionary power and remains untouchable since Namibian governance law was bent to conceal and facilitate this huge corruption. The possible concern is why the board of directors did not recognise the risk posed by the Marine Resources Act.
In the instance of NTB, the court determined that Mundial Telecom was unjustly profited and required to repay millions in public funds to NTB; nevertheless, no one has been held accountable to date, despite the evidence shown in court. One might wonder if good corporate governance is as important as the statutes suggest.
In the SME case, minority shareholders stole from the company because they had complete bank control and participated in day-to-day operations without sufficient scrutiny from the board of directors. These majority shareholders ran the bank with little or no oversight from the board of directors and the Central Bank of Namibia (BON). Therefore, the looting of SME bank raises the question regarding the efficiency of corporate codes and regulations and the control of SME bank by BON.
All three corporate scandals are good examples of corporate governance disasters despite the availability of good corporate codes and regulations in Namibia.
About the author
Liina Kalili is a Candidate Legal Practitioner in Namibia, and a holder of Masters in Law from University of Namibia, Masters in Business Administration from International Business Relations (IBR) awarded by Albstadt-Sigmagingen University in German, Degree in Accounting and Finance from the Polytechnic of Namibia, Certificate in Compliance Management and Business Risk Management Certificate from University of Cape Town in South Africa. This article is written in her personal capacity.
Link to paper : POWER, POLICY AND PITFALLS- CORPORATE GOVERNANCE IN COMPARATIVE PERSPECTIVE
