Friday, September 14, 2012

The state of Corporate Governance in Zimbabwe’s State Enterprises: Can the situation be rescued?

The state of Corporate Governance in Zimbabwe’s State Enterprises: Can the situation be rescued?


Keynote Address by

The Minister of State Enterprises and Parastatals

Honourable Gorden Moyo (M.P)

At

IIA Annual Conference

Elephant Hills Resort

Victoria Falls

13 September 2012

Chairperson, Organisers of the Conference, Captains of the Business Sector, Distinguished Guests, Ladies and Gentlemen.


It is my pleasure to be part of this important conference and am grateful to the organizers for the invitation to address delegates on the very topical subject of corporate governance as it relates to State Enterprises and Parastatals in Zimbabwe. This invitation is coming at a time when the Government is implementing a number of reforms aimed at transforming the Parastatals sector so that they efficiently deliver their respective mandates.

Ladies and Gentlemen, it is important to note that State Enterprises and Parastatals, are a entities created by Governments all over the world to carry out certain activities, which by their nature do not attract investment from the private sector either due to the fact that the return on investment is minimal, takes long to recoup, or the infrastructure required is expensive to construct and maintain. At the same time the activities are such that they cannot be ordinarily carried out by a Government Department efficiently.

State Enterprises and Parastatals provide diverse services to both the public and corporate institutions thereby providing a platform upon which other economic activities can ride and grow such as telecommunications or ICTs, transport services and infrastructure, energy and power, these are activities that facilitate the creation of wealth through the industrial and manufacturing sectors including the financial and retail sectors. Provision of electricity generation and water reticulation in developing economies does not readily attract private capital investments for reasons related to costs including tarrifs.

In essence Ladies and Gentlemen SEPs are key enablers that facilitate economic growth and sustainable development.

Ladies and Gentlemen, these entities, despite their strategic importance, have not been performing to expectations due to a number of well known constraints ranging from very limited flow of foreign direct investment and a very difficult operating environment characterized by liquidity constraints arising from a number of conditions including the adoption of the multi-currency system.

This situation has been compounded by general weaknesses arising from weak corporate governance enforcement mechanisms.

As a result, institutions have been established and countries, as well as groupings of countries have developed corporate governance standards to improve the way corporations are governed and controlled as well as mitigate against occurrences of failure.

Some of the most prominent efforts so far include the following:

• Corporate Governance Framework for State Enterprises and Parastatals

• Malawi Code

• The Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance (2002);

• The King Report on Corporate Governance for South Africa (1994) including King II (2002) and King III (2009);

• State Owned Enterprises Governance Act of Namibia (2006);

• The New Economic Partnership for Africa’s Development (NEPAD): African Peer Review Mechanism (2003).

Some initiatives have also been made through the Pan African Consultative Forum on Corporate Governance, The United Nations Economic Commission for Africa (UNECA), The African Development Bank, African Union, The Common Market for Eastern and Southern Africa (COMESA), SADC, and ECOWAS.

The turn of the century witnessed the stunning collapse of a number of business organizations worldwide. Most prominent among these, being the extensive corporate (financial) sector failure in South –East Asia (1997) and more recently a number of major corporations have failed in the United States such as Enron (2001) and AIG (2008) corporations. The majority of failures in both regions have been attributed to an absence or dereliction of efficient corporate governance. In Zimbabwe a number of corporate failures has been recorded especially in the financial sector, which are still to be resolved by way of Judicial Management.

As Minister responsible for Cross-Cutting policy issues related to the administration of SEPs, I note, with great concern that will still have some SEPs which continue to ignore the requirements of the law as provided for in the enabling pieces of legislation as well as the provisions of the Corporate Governance Framework launched by the Government in November 2010 particularly the requirement to hold Annual General Meetings (AGMs).

Annual General Meetings are critical in keeping company performance under scrutiny and in defining strategic issues covering, among others, further development of the business. The AGMs create an opportunity for Shareholders to interrogate the performance of the entity and approve new projects.

Ladies and Gentlemen, let me appreciate the recent holding of the first Annual General Meeting in 81 years by the Grain Marketing Board. This is a positive development and is in line with the Corporate Governance Framework for State Enterprises and Parastatals.

Ladies and Gentlemen, allowing SEPs, for whatever reasons, to operate without boards creates not only a leadership vacuum, but also legal constraints for the validation of policy decisions and approval or authorisation of programmes. It is worrying for State entities to operate without boards for long periods because management are then left to operate without accountability, a situation which may compromise the efficiency and effectiveness of an entity due mainly to the absence of an effective oversight function. This calls in some instances for changes in leadership structures and renewal in SEPs for better performance, financial reporting and audit systems.

Ladies and Gentlemen, the question is, “Can the Corporate Governance situation in our State Enterprises and Parastatals be rescued?”

The answer is, yes, the situation can be rescued and it can be done if every one of us with a hand in the running of SEPs play their part and if all institutions play their respective roles and behave as good corporate citizens.

This requires a paradigm shift and movement away from traditional ways of selection of both Boards and Management to the adoption of systems that take cognisance of the need for the right skills mix, professionalism, the introduction of public accountability and self monitoring mechanisms. This is precisely the reason the Government has therefore introduced Board Performance Agreements and Performance Contracts for CEOs of SEPs.

Ladies and Gentlemen, enhancing transparency and accountability in SEPs is central for improving the corporate governance compliance. It is one of the efficient entry points for governance reforms. It is also a central recommendation of the Organisation for Economic Co-operation and Development (OECD) Guidelines. The Government needs to be kept accountable for the way it exercises its ownership rights: “The state should act as an informed and active owner ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness" (OECD Main Guideline, Chapter II, p. 13).

Ladies and Gentlemen, corporate governance developments both locally and around the world have reaffirmed the board’s responsibility for ensuring the effectiveness of their organisation’s internal control framework.

These developments have highlighted the key role that internal audit can play in supporting the board in ensuring adequate oversight of internal controls and in doing so form an integral part of an organisation’s corporate governance framework.

The key role of internal audit is to assist the board and/or its audit committee in discharging its governance responsibilities by delivering:

• An objective evaluation of the existing risk and internal control framework.

• Systematic analysis of business processes and associated controls.

• Reviews of the existence and value of assets.

• A source of information on major frauds and irregularities.

• Reviews of operational and financial performance.

• Recommendations for more effective and efficient use of resources.

• Assessments of the accomplishment of corporate goals and objectives.

• Feedback on adherence to the organisation’s values and code of conduct/code of ethics.

However in attempting to adequately discharge their responsibilities, internal auditors often find themselves in an anomalous position. They report to senior management within the organisation, yet are expected to objectively review management’s conduct and effectiveness. The only satisfactory solution to this problem is for internal audit to report primarily and directly to the board and its audit committee rather than to senior management.

In the UK, a report by Sir Robert Smith on the Combined Code Guidance for Audit Committees (the Smith Report) states that “…management is responsible for the identification, assessment, management and monitoring of risk, for developing, operating and monitoring the system of internal control, and for providing assurance to the board that it has done so – except where the board is expressly responsible for reviewing the effectiveness of the internal control and risk management systems.”



In Australia, the ASX Principles of Good Corporate Governance has a bet each way. It recommends that internal audit “…should report to management and should have all necessary access to management and the right to seek information and explanations.” However, the ASX Principles then go on to suggest that “…companies should consider a second reporting line from the internal audit function to the board or relevant committee.” Under the ASX Principles it is also recommended that the audit committee have access to internal audit without the presence of management.

If we look to the financial services industry, we also find that the Basel Committee makes no distinction in its guidelines as to the natural reporting line for the internal audit function except to note that “…the principle of independence entails that the internal audit department operates under the direct control of either the organisation’s CEO or the board of directors or its audit committee”.

Ladies and Gentlemen, the structure and reporting lines adopted for the internal audit function should promote independence, objectivity, consistency and business understanding. This can be achieved by combining the concept of a clear reporting line to the board/audit committee with an organisational structure that allows internal audit to operate independently of other functions within the organisation.

The Internal Audit function is one management tool that, if given its proper place, would propel our State Enterprises and Parastatals to greater heights as one of the biggest problems in the entities is one related to wastefulness, leakages and improper management of both financial and material resources.

Therefore Mr. Chairman, Internal Audit Units should not only focus on risk management and control systems, but also dedicate attention to the whole spectrum of governance issues as well as keeping abreast of new developments and standards on the subject.

So, full implementation of best practices in corporate governance coupled with other reform initiatives in the management of SEPs, I am convinced Ladies and Gentlemen, should bring back the “engines of growth” status to our SEPs.

Ladies and Gentlemen, to reduce the occurrence of corporate governance failures in our entities, let us all embrace and inculcate into all our institutions a culture of good corporate governance practices, revive the African philosophy of Ubuntuism that fosters togetherness, righteousness, a sense of belonging and mutual accountability for the achievement of community objectives and the desired well being of society.

I have reflected on the roots or sources for the development of a culture in corporate governance context and taken the conclusion that, for any particular mode of behaviour to become part of a culture, that behaviour must be a product of not just commitment but also passion.

A culture of corporate governance means that the principal players, the directors, care deeply about the corporation and about its governance processes. The mode of behaviour of the principal players in governance systems, i.e. the directors, shareholders, officers (and other stakeholders) must reflect a deep and abiding commitment to good governance principles and a strong desire to be associated with good things, and the promotion of good morals in individual institutions and society at large.

Various initiatives such as the restructuring of SEPs with the view of establishing joint ventures, review of the regulatory and operational environment and strengthening of performance Management systems are equally important for the successful transformation of our SEPs.

With regards to restructuring of SEPs, the Ministry, through State Enterprises Restructuring Agency (SERA), is working closely with line Ministries to identify and effect appropriate restructuring options for SEPs.

The adoption of restructuring strategies for public enterprises is one of the key economic reforms that will strengthen the role played by the public enterprises sector in economic growth and development.

I would also want to assure you that, since the adoption of the Corporate Governance Framework for State Enterprises and Parastatals in November 2010, there have been positive developments in the way corporate governance practices are being embraced. We have seen new Boards being appointed timeously with the appropriate skills mix, and the number of SEPs holding AGMs has increased.

Ladies and Gentlemen, compliance with the Corporate Governance principles benefits both the Shareholders and employees of companies as it increase transparency and disclosure. When a company is doing well every stakeholder benefits in one way or another. Also, adopting good Corporate Governance practices leads to a better system of internal control, thus leading to greater accountability thereby improving access to capital and financial markets.

Many businesses seeking new funds often find themselves obliged to undertake serious corporate governance reforms at a high cost and upon the demand of potential investors. When the foundations are already in place investors and potential partners will have more confidence in investing in or expanding the company’s operations.

“If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country suffer the consequences.” (Arthur Levitt, former chairman of the US Securities & Exchange Commission)

Overally, Mr Chairman, there has been a significant improvement in as far as compliance and performance reporting is concerned giving the Government the confidence that our SEPs can be brought back on track in one form or another for the benefit of all Zimbabweans.

In closing I would like to point out that Corporate Governance must be taken seriously at all levels, the Government, through its various arms must take a lead in ensuring that good corporate governance becomes a culture in SEPs. In instances where there are no Boards and substantive Chief Executive Officers, these must be appointed as a matter of urgency since the absence of these institutions in an organisation diminishes its ability to execute its mandate and brings into question issues of legitimacy and validity of decisions made under such circumstances.

Until the launch of the Corporate Governance, it was not a requirement for Parastatals governed by individual Acts of Parliament to hold Annual General Meetings. It is however good practice that they do so, and is now a requirement in terms of Section 4.1.1 of the Corporate Governance Framework.

Ladies and Gentlemen, when fully implemented, good corporate governance ensures that SEPs are well-run institutions that earn the confidence of investors and lenders. The practice safeguards against corruption and mismanagement, while promoting fundamental values of a developing democratic society.



Philippians 4v8 “ Finally, brethren, whatsoever things are true, whatsoever things are honest, whatsoever things are just, whatsoever things are pure, whatsoever things are lovely, whatsoever things are of good report; if there be any virtue, and if there be any praise, think on these things.”

LADIES AND GENTLEMEN, I THANK YOU FOR YOUR ATTENTION

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