What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa © 2018 International Finance Corporation. All rights reserved. 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly, and when the repro- duction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. IFC does not guarantee the accuracy, reliability, or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The boundaries, colors, denominations, and other inform­ ation shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The contents of this work are intended for general informational purposes only and are not intended to constitute legal, securities, or investment advice, an opinion regarding the appropriateness of any investment, or a solicitation of any type. IFC or its affiliates may have an investment in, provide other advice or services to, or otherwise have a financial interest in, certain of the companies and parties (including named herein). All other queries on rights and licenses, including subsidiary rights, should be addressed to IFC’s Corporate Relations Department, 2121 Pennsylvania Avenue, NW, Washington, DC 20433 USA. International Finance Corporation is an international organization established by Articles of Agreement among its member countries, and a member of the World Bank Group. All names, logos, and trademarks are the property of IFC, and you may not use any of such materials for any purpose without the express written consent of IFC. Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa Contents Foreword................................................................................................................................. v Acknowledgments................................................................................................................... v Part I: Introduction............................................................................................................. 1 Purpose of this document........................................................................................................ 1 The broader context................................................................................................................ 2 Part II: 10 Learnings .......................................................................................................... 3 1. Position corporate governance as accountable leadership................................................. 3 2. Draft the code to achieve positive outcomes instead of mindless box-ticking.................... 3 3. Address the threesome—the Self, the Other, and the Outer —toward sustainable development.................................................................................................... 4 4. Advocate stakeholder inclusivity—for resilient and attuned organizations........................ 6 5. Draft the code to be applicable across the ecosystem of organizations for reinforcement of the ethos of governance ...........................................................................7 6. To encourage buy-in, design the process for code development to be top-down as well as bottom-up........................................................................................................... 8 7. Start with the end in mind for a more efficient process...................................................... 8 8. Introduce a qualitative application regime that encourages substance over form............. 8 9. Aim for a transparent disclosure regime for effective enforcement..................................... 9 10. To win hearts, connect with cultural values. .....................................................................10 Part III: Conclusion............................................................................................................. 11 Bibliography......................................................................................................................... 13 What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa iii PART I Foreword Africa faces many sociopolitical and economic suited to not only listed companies but also unlisted challenges—inequality, poverty, globalized trade, entities and family-, state-, and foreign-owned climate change, population growth, ecological companies whose shares are not traded widely. This overshoot, geopolitical and social tensions, radical is a recognition of how most of the African corpo- transparency, and rapid technological and scientific rate landscape is structured. In short, King IV is a advancement. But it is also the continent of hope homegrown solution by Africans for Africans. and potential. Although corporate governance is King IV was developed through wide consultation, not the magic wand that makes challenges dis- and this spirit of collaboration must continue if it appear and that realizes all opportunities, it is an is to be truly effective. I commend the International indispensable ingredient in the sustainable develop- Finance Corporation of the World Bank for raising, ment of healthy economies and communities. across Africa, the awareness of and engagement Sustainable value creation is a common theme with the philosophy and approach to corporate in the United Nations Sustainable Development governance as advocated in King IV. Goals (agreed by all governments in 2015) and The time has come for Africans to unite in the use the Africa 2063 Agenda. It is now expected of all of qualitative corporate governance as a force for organizations to play an active part in sustainable change. I believe this document will serve to stimu- development and not to abdicate this responsibility late such change. to governments and nonprofit institutions. This expectation is a fundamental concept of King IV Mervyn E. King SC, and stems from the belief that qualitative corporate Chair of the King Committee on Corporate governance is a powerful change agent. Governance in South Africa, Chair of the African Integrated Reporting Committee, The time has come, however, to be very focused on Chair of the International Integrated Reporting Council and determined with how we leverage that regime of corporate governance for positive change. We do not require incremental changes to how we develop, Acknowledgments use, and apply our codes of governance but rather IFC would like to thank the African Corporate a fundamental shift that demands innovative and Governance Network, which represents 28 direct­ collaborative approaches. King IV represents both ors’ membership or corporate governance organiza­ of these. tions and other affiliate institutions across Africa, The innovative approach of King IV is illustrated for its assistance in introducing and setting up the by, among others, having African philosophies such roadshow events. We also would like to acknowl- as ubuntu at its center, which ties the code in with edge Ansie Ramalho for facilitating the roadshows the African worldview. Furthermore, unlike the and summarizing for this publication the perspectives vast majority of international codes, King IV is and experiences garnered. What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa v II:Introduction Part I: 10 Learnings King Report on Corporate Governance for South Purpose of this document Africa 20161 (King IV) is the fourth iteration of This document is a high-level account of discus- the code of corporate governance that applies on sions held and conclusions reached during the a voluntary basis to all organizations operating in roadshow. It describes 10 learnings attained over South Africa. During the 22 years from the issue the more than two decades of experience in code of King I in 1994 until the launch of King IV in development in South Africa. Under each of these November 2016, extensive knowledge accumulated learnings, we present the South African experience on how to optimize code development to achieve as well as experiences shared in the various coun- better results. tries where the roadshow was conducted. IFC shared these learnings with African audiences The purpose of this document is to provide guid- as part of the greater African Corporate Govern­ ance to IFC staff, regulators, and private institu- ance Project to spark engagement on governance in tions (such as institutes for directors and corporate Sub-Saharan Africa. The sharing took place during governance) for developing codes of corporate a roadshow consisting of a series of events cohosted governance in Sub-Saharan African countries and by IFC and local organizations or institutions in potentially other developing economies. Cote D’Ivoire, Ethiopia, Kenya, Mozambique, The objective is for the insights shared in this Namibia, Nigeria, and Tanzania. document to support achievement of the following During the roadshow, participants explored the results: following questions (among others): • A more effective process of code • How can governance be leveraged to development; change African societies and countries? • Code content that will be easier for • What role can a code of corporate governance organizations to implement; play in assisting organizations in their efforts to • A higher degree of commitment by the users of achieve both profit and sustainable development? the code; and • What process should an organization follow to develop a code? • Should Africa and other developing economies have a different approach to governance, such as that spearheaded by King IV? • Is the Sub-Saharan Africa market ready for the approach to corporate governance presented by King IV? • How do we build the future of governance in Africa on the lessons of the past? • What regimes and mechanisms are necessary for the effective enforcement of a voluntary code of A participant shares a comment at the Institute of Directors (IoD) corporate governance? King IV roadshow event in Kenya. (Photo courtesy of IoD Kenya) 1 Published by the Institute of Directors in Southern Africa. Available at http://www.iodsa.co.za/?page=KingIVReport. What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 1 PART I: INTRODUCTION • Good governance that will result in better out- ate performance examined the degree of African comes for organizations as well as the communi- firms’ adherence to certain aspects of corporate ties and countries in which they operate. governance. Figure 1 illustrates the study’s findings. This guidance document should be read in con- As Figure 1 shows, more than 62 percent of the junction with the IFC Toolkit for Developing firms in the study professed a commitment to Corporate Governance Codes of Best Practice.2 corporate governance. From that, we can infer that The broader context more than a third of firms do not commit to adher- Before sharing the learnings, it is important to ence to a code of governance, which is concerning understand the context for the application of and indicates that more work is required to posi- corporate governance in Africa. This will provide tion corporate governance as a value proposition. perspective on why some of the learnings are vital. Further, Figure 1 shows that only slightly more Organizations—the users of codes of corporate than half of the firms assessed apply good prac- governance—operate in a broader context, which tices regarding the structures and functions of the King IV calls the “triple context,” consisting of board—arguably the foundations for organizational the economy, society, and natural environment in governance. If those foundations are weak, it is which organizations operate. In Africa, depending unlikely that other areas of corporate governance on the country, the triple context may appear as could be strong. economic and political instability, lack of or failing However, it is encouraging that, taken together, the infrastructure, skills shortage, inequality, water and firms scored above 50 percent on all five of the di- food scarcity due to environmental vulnerability, mensions assessed. Organizations in Africa operate and corruption. in a challenging triple context, and much work must Furthermore, the application of corporate govern­ be done to gain maturity in the corporate gover- ance is not mature in all African countries. An IFC nance practices they follow. Codes for corporate study3 on the link between governance and corpor­ governance should be cognizant of these realities. Figure 1: Adherence to Corporate Governance by Companies in Sub-Saharan Africa Source: Governance and Performance in Emerging Market Firms (IFC, forthcoming). 2 Available at http://www.ifc.org/wps/wcm/connect/9fbe290048a7e4ac9e67df6060ad5911/Toolkit2-read.pdf?MOD=AJPERES. 3 IFC, Governance and Performance in Emerging Market Firms: Empirical Study on the Link Between Performance and Corporate Governance of IFC Investment Clients (Washington, D.C.: IFC, forthcoming). 2 What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa Part II: 10 Learnings 1. Position corporate governance as accountable leadership—and not as a system only. The traditional definition of corporate govern­ ance goes back to the early 1990s, when it was defined as simply “the system by which companies are directed and controlled.” Many codes of corporate governance, including King I, borrowed this definition from the Cadbury Report, which introduced it. This definition is still a significant point of departure for coming to grips with corporate governance. Nonetheless, From left, Head of Kenyan Banking and Finance at Bowmans persisting with such a narrow understanding Law Kamami Christine Mweti; CMA Chief Executive Officer Paul Muthaura; and Sanlam Kenya PLC Non-Executive Director of governance—as a system that concerns itself Susam Mudhune at the IoD King IV roadshow event in Kenya. only with the mechanics of structures, processes, (Photo courtesy of IoD Kenya) policies, frameworks, and other arrangements for controlling the organization—would not be 2. Draft the code to achieve positive out- fit for purpose in the African situation, where comes instead of mindless box-ticking. organ­ izations have to meet the many challenges posed by the triple context, as outlined above. One of the pitfalls of corporate governance is that it is often regarded as a mindless compliance exer- The system is still necessary for the governing cise that involves the implementation of structures body to lead effectively, but it is not primary. A and processes, regardless of whether they serve system that is not exemplified and directed by to make the organization stronger, better, and leadership is tantamount to mindless compliance. more resilient. No organization, including those Of primary importance to corporate governance operating in Africa, will choose to spend time and is leadership—the exercise of judgment and dis- human and financial resources on governance that cernment that brings the system to life and makes is implemented without an understanding of its it fit for purpose. Without leadership, it amounts potential to add value. to form over substance. This is why the under- standing of corporate governance evolved and With the drafting of King IV came changes to the came to be described in King IV as “the exercise code that clearly present its contribution to organi- of ethical and effective leadership by the govern- zational value. The realization that a code of govern­ ing body” toward certain outcomes. ance should be results-driven—or outcomes-based rather than input-focused—has been one of the biggest learnings of the King journey. The three To Consider: building blocks of the King IV Code are principles, Positioning governance as a leadership matter brings to the recommended practices, and governance outcomes. fore the responsibility of the governing body for directing Principles express the aspirations and ideals that and overseeing the system of corporate governance. This are fundamental and basic to good governance. For is important for establishing accountability. example, the first principle states that the govern- ing body should lead ethically and effectively. What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 3 PART II: 10 LEARNINGS Another principle says that the governing body Participants in discussions fully agreed with this should govern risk in a way that supports the assessment. Their only concern was whether this organization in setting and achieving its strate- approach was too “mature” for countries that gic objectives. Once an organization professes its have only recently developed a code of corporate commitment to governance, the application of such governance or are about to do so. They concluded principles is a basic and fundamental part of the that, in such circumstances, the optimum position overall govern­ ance framework. The principles are would be for an organization and its triple context phrased to apply universally, regardless of the orga- to aspire to positive outcomes from the outset as nization. As they are understood for the purposes a way to instill the desired mindset. Ticking boxes of King IV, the principles point like a compass may be a starting point, but ultimately governing needle to the “true north” for all organizations that bodies have to think about result. wish to follow good governance. Practices recommended in support of each prin- ciple describe what needs to be done to achieve To Consider: these aspirations and ideals. The practices provide An outcomes-based approach to corporate a roadmap, and the choice of road to take will governance is pertinent in Africa, where it is depend on the particular organization’s nature, critical for governance to promote value size, complexity, and impact. It is appropriate for creation instead of being an ineffective drain various organizations to follow different roads, as on scarce human and financial resources. long as they don’t lose sight of the true north—the ideals set forth in the principles. 3. Address the threesome—the Self, the Governance outcomes are 4 Other, and the Outer —toward sustainable the potential positive effects or development. benefits that an organ­ization can realize by achieving the un- The Self—members of the governing body derlying principles. Outcomes Lao Tzu said, “Mastering others is strength; are an ethical organizational mastering yourself is true power.” The King IV phi- culture, good performance, losophy of leadership is in accord with this quote. effective control, and legitimacy. According to King IV, leadership starts Whether these governance out- with mastering the Self, and the members of the comes are realized over time is governing body are expected to individually and the litmus test for whether good collectively cultivate and exhibit the characteristics governance is in place. of integrity, competence, responsibility, account- ability, fairness, and transparency. As Africans, we The significance of the IFC Country Manager, Eastern understand very well the power of leadership—to- Region, Manuel Moses speaks results-driven and outcomes- ward good and bad. Hence the idea of the gov- at the IoD Kenya King IV road- based approach is that an show event. (Photo courtesy of erning body setting the tone for the organization’s organization can no longer IoD Kenya) culture has become part of the King tradition. claim that it has good gover- nance in place just by ticking the boxes of recom- The Other—the organization mended practices implemented. Such reasoning is King IV provides that, on the foundation of like painting a target around where the arrow has self-mastery, the governing body should lead the already landed—instead of identifying the target and organization—the Other. This is typically done then aiming for it. through the system of structures, processes, policies, 4 Daniel Goleman, Focus: The Hidden Driver of Excellence (New York, NY: Harper, 2013). 4 What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa PART II: 10 LEARNINGS frameworks, and other arrangements that are as a matter of course part of the recommendations found in codes of corporate governance, including King IV. The Outer—the triple context in which the organization operates A system that is inwardly focused—considering only the organization itself—is deficient. It does not embody the full reality, as it fails to include the Outer—the context in which the organization operates. As noted above, King IV explains that all organizations operate in a triple context of the economy, society, and natural environment. This is the Outer. Understanding the synergy between the organi- Ansie Ramalho, King IV program manager and IFC senior zation and its triple context is critical for sustain- consultant on code development. (Photo courtesy of IoD Kenya) ability. It has become increasingly important for organizations operating in Africa to recognize that During one of the sessions, the moderator of a their success is intertwined with the fate of the panel used the following metaphor: One genera- societies around them and the health of the envi- tion plants the tree; the next generation sits under ronment. Ultimately, no organization can succeed its shade. The classical definition of sustainable in a society that fails. development is “meeting the current needs without compromising the ability of future generations to As a responsible corporate citizen, an organization meet their needs.”5 The ensuing panel discussion is accountable for the effect its operations and brought out that corporate governance, understood activities have on society and the environment, as a catalyst for change, prevents this generation and it should take steps to ameliorate any negative from being the one that leaves our children and impact. However, merely reacting to negative grandchildren without trees to sit under. effects is not enough. King IV asks organizations to be proactive in positively shaping the context How does King IV propose that organizations posi- of their operations. This is ultimately to their tively shape the triple context in which they operate? benefit—and in some instances essential for their • King IV recommends that the risks and the op- long-term survival. portunities—as represented by an organization’s Positively shaping the operational context is not dependence and effect on the economy, society, about ad hoc activities involving corporate social and the environment—be incorporated into investment. Rather it is about redefining the role strategy formulation. Considering its dependence and purpose of the organization to create value and reliance on these dimensions is intuitive to not only for itself and its shareholders but also well-run organizations, but externalities caused for its other stakeholders. It is about creating win- by the organization are not always appreciated as win solutions for organizations and the societies risks as well as potential opportunities. and natural environments in their triple contexts. • King IV recommends that performance be In this way organizations can become agents of measured and rewarded across the triple context, social change and can contribute to sustainable as opposed to measuring and rewarding only development. financial performance. 5 Report of the World Commission on Environment and Development: Our Common Future, also known as the Brundlandt Report (Geneva: World Commission on Environment and Development, 1987). What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 5 PART II: 10 LEARNINGS • King IV’s focus on The Outer is clear from its recommendation of integrated reporting. This is a form of reporting that connects financial results with a narrative on whether and how the organi- zation has affected—positively and negatively—the context in which it operates. This strong Outer focus, which is found in King IV as an imperative toward sustainable development, is a distinctive positioning of corporate governance relative to other jurisdictions, especially if com- From left, Ansie Ramalho; Deputy Governor, Financial System pared with the governance codes for developed Stability, Central Bank of Nigeria, and Financial Institutions Training economies. Centre (FITC) Chairman Okwu Joseph Nnanna; Godwin Emefiele; Lucy Surhyel Newman; and Tunjo Ajiboye at the King IV roadshow held in Lagos, Nigeria, September 19 and 20, 2017. The event was part of the FITC Continuous Education Programme for directors of To Consider: banks and other financial institutions. (Photo courtesy of FITC) A code of corporate governance that is concerned with the behavior of the threesome—the governing body itself, the organization, and the organization as to its surroundings, thus reducing the likelihood of it operates in its triple context—is indispensable for a nasty surprises and missed opportunities. governance system designed to enable organizations Discussions acknowledged that balancing stake- to become agents for social change and to contribute holders’ interests—and particularly balancing the to sustainable development. In Africa, positive social interests of shareholders with those of other stake- change cannot be left to government only; organiza- holders—is a dilemma for many boards. This situ- tions must also contribute. ation is fueled by shareholders’ expectations for a return on investment, an outcome that may or may not be aligned with longer-term considerations. 4. Advocate stakeholder inclusivity—for Adding to this dilemma is the common misconcep- resilient and attuned organizations. tion that, for directors to act in the best interest King IV advocates for organizations to follow a of the company, it legally means they must act in stakeholder-inclusive policy. This approach is con- the best interest of the body of shareholders. In gruent with the Outer focus and is an alternative to recent years, many academic sources have pointed shareholder primacy, where shareholder interests out that the correct legal position is that this duty receive preference over those of other stakeholders. should be interpreted as applying not only to the One benefit of a stakeholder-inclusive approach current shareholders but also to all future share- is greater awareness of potential opportunities holders, which position is consistent with ensuring and pitfalls. During one of the roadshow events, a the continual survival of the company. discussion brought out that organizations operate Directors owe their duties to the company and the in VUCA (Volatility, Uncertainty, Complexity, and company alone. Yet the company represents the Ambiguity).6 To come to grips with VUCA, gov- collective interests of all its stakeholders, including erning bodies should be attuned to the breadth and the shareholders. Serving stakeholders such as the depth of risks and opportunities presented by the employees, customers, and the community does triple context. Adopting a stakeholder-inclusive in fact benefit shareholders as well. Stakeholder approach helps an organization become attuned inclusivity versus shareholder primacy presents a 6 The U.S. Army College introduced VUCA in the early 1990s to describe the world at the end of the Cold War. 6 What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa PART II: 10 LEARNINGS false dichotomy, because the longer the time horizon consists of family businesses, smaller enterprises, for making decisions, the greater the alignment be- and state-owned entities. A benefit of having a sin- tween the interests of the company, its shareholders, gle code of governance is that it promotes a com- and other stakeholders. mon understanding of corporate governance across Internationally, there is a wave of change regarding the ecosystem of organizations, which reinforces the shareholders’ role in ensuring the long-term health the strength and ethos of the system. of companies. Many countries, including Brazil, In recognition of this, King IV was drafted to be Malaysia, South Africa, and the United Kingdom, applicable to all organizations. The principles are have stewardship codes that address responsible phrased to be universally applicable, regardless of investing by shareholders. The Sustainable Stock the type of organization, thus achieving consistency Exchanges initiative7 is another move in this direction. of understanding within the South African ecosys- All these developments are in recognition of the tem of organizations. (Part 6 of King IV contains fact that taking a short-term view is not in the sector supplements, but they are not alternatives interest of the company or its stakeholders—or the to the code but rather serve as guidance for these long-term interests of shareholders. However, a sectors’ interpretation of King IV.) long-term perspective requires short-term tradeoffs, To achieve applicability to all organizations, the which shareholders need to be engaged on. King IV Code has built flexibility into the prac- tices it recommends in support of the principles. These practice recommendations should be applied To Consider: proportionally, which means they must be scaled Codes of corporate governance that advocate a depending on the size, resources, complexity, and stakeholder-inclusive approach promote more resilient impact of the organization. For example, following organizations that are attuned to the breadth and all or most of the practice recommendations may depth of risks and opportunities presented by the be appropriate for a multinational organization, triple context. but it would be inappropriate for a family business. In many Sub-Saharan African countries there are codes of corporate governance addressing various 5. Draft the code to be applicable across sectors that exist in parallel. Roadshow discussions the ecosystem of organizations for concluded that these codes need to be harmonized reinforcement of the ethos of governance. so that there is consistency and alignment, or they Each organization acts within a bigger ecosystem should be replaced by a single code. where organizations interact and are interdepen- dent. Delegates of the roadshow events agreed that it was important for all organizations in the ecosys- tem to follow good corporate governance. There- To Consider: fore, the ideal is a code of corporate governance The code of corporate governance should be applicable that is applicable to all organizations operating across the ecosystem of organizations for reinforcement within this ecosystem. of the ethos of governance. This is particularly import- ant in Africa, where much of the economic activity In many jurisdictions internationally, governance happens at the level of smaller enterprises and state- codes address publicly listed companies only. For a owned entities. governance code in Africa to do so would render it irrelevant to the largest part of the economy, which 7 This initiative, in collaboration with investors, regulators, and companies, seeks to enhance corporate transparency on environ- mental, social, and governance issues and encourages sustainable investment. What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 7 PART II: 10 LEARNINGS 6. To encourage buy-in, design the process The matters set out below are among those that for code development to be top-down as need to be considered prior to embarking on the well as bottom-up. drafting. Each of these will affect approach, style, One of the most important lessons of the King and content: journey is the role of consultation during the draft- • Who the main audience(s) of the code on cor- ing process. Consultation is a bottom-up process porate governance will be. For example, will the that is essential for the adoption of a voluntary code apply to the whole organizational ecosys- code of corporate governance. But more than that, tem or only certain sectors or organizations? it also contributes to rich and robustly tested con- • What the application regime will be. For exam- tent. As one of the delegates at a roadshow event ple, comply or explain, apply or explain, or apply put it, “It takes a thousand voices to tell one story.” and explain. The recommended course is to consult not only the • The drafting style. For example, detailed (for organizations the code will apply to but also the more guidance) or succinct (easier for users to stakeholders of those organizations. The result is process), prescriptive or allowing for judgment. better and broader understanding of what govern­ • What terminology is to be used. For example, ance entails and more participation in holding “company” or “organization,” “board” or organizations accountable. “governing body.” • How the report will be positioned alongside To Consider: legislation. For example, will it incorporate Designing the process for code development to include legislation by reference (for more succinct draft- top-down enforcement as well as bottom-up involve- ing), or will it repeat legislation in the code (for ment requires an extensive consultative process. The ease of reference)? time invested in such consultation has the following benefits: • It ensures commitment and buy-in, which is es- To Consider: sential for the effective functioning of a voluntary Proper planning and upfront agreement—on the code of corporate governance. process to be followed for the development of the • It raises awareness of governance and codes, code and the drafting style and convention—result which enhances participation in holding organi- in a more efficient process. zations accountable. 7. Start with the end in mind for a more 8. Introduce a qualitative application regime efficient process. that encourages substance over form. A matter that is important but easily overlooked Various application regimes for codes of corporate during the planning of the drafting process is to governance exist, among them comply and explain, clarify certain aspects beforehand. Having these adopt or explain, apply or explain, and apply and matters settled at the beginning of the process explain. makes the job easier for the person responsible for The application regime in King IV is apply and drafting—especially so if more than one person or explain, a departure from King III’s apply or ex- group become involved in the drafting. It prevents plain. Given that the principles (explained above) wasting time on rewrites and edits that might not are expressed as fundamental and basic to good have been necessary if there had been agreement governance, it is difficult to imagine a reasonable upfront. explanation for not applying them. Therefore, King 8 What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa PART II: 10 LEARNINGS IV assumes the application of principles, and no confirmation of application is necessary. The “ex- plain” part of the application regime is a narrative of the practices that have been implemented and the progress made toward giving effect to each principle. During the roadshow discussions, some partici- pants raised concerns about the competency of governing bodies to ensure mindful implementation and application of corporate governance codes, and about the level and quality of disclosure on application. The discussion concluded that training of governing bodies on corporate governance is key to building competency. However, training is a good start but not sufficient by itself; members Strathmore Law School Dean Luis G. Franceschi speaks at the IoD of governing bodies also need to gain experience. Kenya King IV roadshow event. (Photo courtesy of IoD Kenya) This is a matter to be addressed in conjunction with code development by governance bodies and ernance should therefore be limited and applied institutions. carefully, and market and social forces should be allowed to function. The question invariably raised about a voluntary To Consider: code of governance is whether its greater flexibility A qualitative application regime that places the focus will affect the efficacy of the code. An important on outcomes encourages the application of a code of point in this debate is that it would be a mistake corporate governance in substance rather than only in to conclude that voluntary codes of governance form. This is particularly relevant to Africa, where carry no sanction when contravened. The principles governance should be harnessed to lead to better results and practices in these codes become the norm for for organizations and their context of operation. behavior as soon as they are generally and widely adopted, and these adopted norms are then moni- tored and enforced by market forces—mostly 9. Aim for a transparent disclosure regime represented by shareholders who sell their shares, for effective enforcement. customers who stop buying or supporting, and employees who resign if they are dissatisfied—and A “comply or else” regime is relevant to corporate social forces, including the media, civil society, and governance as contained in legislation rather than other stakeholders using social media and other in a code of voluntary practice, as legal sanction is means to apply pressure on organizations to change. attached to noncompliance. It is also important to recognize that most voluntary codes of corporate However, for these forces to work, there must be governance exist alongside legislated governance transparency. Society and the market can only provisions. It is completely appropriate for the respond to what is known to them. Africa gener- absolutely essential and basic aspects of corporate ally has a poor reputation for corporate govern­ governance practice to be legislated. Nonetheless, ance and the protection of investors and other legislation is inflexible and has limited ability to stakeholders. That’s why King IV places so much accommodate variations in situational context and emphasis on meaningful disclosure that enables therefore often leads to unintended and perverse stakeholders to assess the quality of corporate consequences. Use of legislation to enforce gov- governance. What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 9 PART II: 10 LEARNINGS Delegates agreed that enforcement is a critical com- ponent of an effective corporate governance system in Sub-Saharan Africa. They also recognized that enforcement is not just the responsibility of reg- ulators, and that society should become involved in holding organizations accountable. They also acknowledged that investors, directors’ institutes, governance institutes, and the media all have an important part in making this work, and that awareness raising should encourage responsible shareholder and stakeholder activism. The consul- All who participated in the IoD Kenya King IV roadshow event. tation process, which is part of code development, (Photo courtesy of IoD Kenya) is an important aspect of awareness raising among stakeholders, especially in markets where corporate Delegates mentioned that corporate governance is governance has not yet become mature. about understanding what needs to be done and doing it—a mind-and-hands matter. Also, it is a matter of the heart, which is what values speak to. To Consider: One of the ways this was expressed during discus- A code of governance should aim for a disclosure sions was that what we say should be congruent regime that enables stakeholders to make an in- with what we do and who we are. formed assessment of the quality of governance at The notion of ubuntu, used in King IV in South the organization so that they can hold it account- Africa, was put forward during the roadshow as an able. Transparent disclosure is the lever for effective example of such a value scheme. The full expres- enforcement by regulators, the market, and society. sion of ubuntu literally means “I am because we are,” denoting our interconnectedness and interde- pendence through shared humanity. In Zimbabwe, 10. To win hearts, connect with cultural this same idea is expressed as unhu, in Malawi values. as uMunthu, in Rwanda and Burundi as ubuntu (which particularly refers to human generosity), One of the most prominent themes at discussions and in Uganda and Northern Tanzania as obuntu. during the roadshow was the need for a value scheme to support a code of corporate governance. Ubuntu in King IV is the philosophical golden It was repeatedly mentioned during the roadshow thread that binds the content of the code. Its under- that corporate governance without an underpin- pinning of interconnectedness and interdependence ning of beliefs and convictions comes to naught. finds expression, for example, in appreciating that The reason for this is that an effective corporate all organizations operate in the triple context, governance regime cannot rely solely on an exter- which they affect and by which they are affected, as nally imposed system; it must also be internally well as in the stakeholder-inclusive approach, both driven. of which are discussed in more detail above. 10 What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa Part III: Conclusion A careful reading of the learnings set out above will reveal that they aim for code development to achieve the following benefits: 1. Clarifying accountability 2. Positive outcomes for the organization and the context in which it operates 3. Contribution to sustainable development 4. Resilient and attuned organizations 5. An ecosystem of organizations that reinforces the ethos of the code of governance 6. Commitment to the code 7. An efficient process 8. Substance over form 9. Effective enforcement by regulators, the market, and social forces 10. Encouraging an internal drive to commit to governance The purpose of this guidance is to assist organizations with realizing these benefits. All who participated in the King IV roadshow event in Lagos, Nigeria. (Photo courtesy of FITC) What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 11 Bibliography Goleman, Daniel. 2013. Focus: The Hidden Driver of Excellence. New York, NY: Harper. IBRD. 2005. Toolkit 2: Developing Corporate Governance Codes of Best Practice. Global Corporate Governance Forum. Washington, D.C.: The International Bank for Reconstruction and Development/ The World Bank. http://www.ifc.org/wps/wcm/connect/9fbe290048a7e4ac9e67df6060ad5911/Tool- kit2-read.pdf?MOD=AJPERES. IFC. Forthcoming. Governance and Performance in Emerging Markets Firms: Empirical Study on the Link Between Performance and Corporate Governance of IFC Investment Clients. Washington, D.C.: IFC. IoD South Africa. 2016. King Report on Corporate Governance for South Africa 2016 (King IV). Johannesburg, South Africa: Institute of Directors in Southern Africa. http://www.iodsa. co.za/?page=KingIVReport. WCED. 1987. Report of the World Commission on Environment and Development: Our Common Future, also known as the Brundlandt Report. Geneva: World Commission on Environment and Development. What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 13 About IFC wide, in line with regional priorities. IFC works IFC, a member of the World Bank Group, is the with the program to improve firm performance largest global development institution focused on and increase the ability of markets and firms in the the private sector in emerging markets. Working Sub-Saharan Africa region to attract and retain with more than 2,000 businesses worldwide, we investment. The initiative spans socioeconomic use our capital, expertise, and influence to create strata and includes firms, investors, market inter- opportunity where it’s needed most. Our long- mediaries, and regulators. The focus is on enhanc- term investments in developing countries help the ing the regulatory infrastructure and building the private sector play an essential role in the global corporate governance capacity of institutions, with effort to end extreme poverty and boost shared the expectation of increased awareness, knowledge, prosperity. In promoting sustainable private sector and capacity to adopt good governance practices. investment in developing countries, IFC has iden- tified a need for emphasis on improved corporate Contacts for information about the content governance practices. For more information, visit of this publication: www.ifc.org. Roman Zyla Regional Corporate Governance Lead (Africa) About SECO IFC Environment, Social, and Governance Department SECO is Switzerland’s competence center for all 14 Fricker Road, Illovo core issues relating to economic policy. SECO’s Johannesburg, South Africa economic development cooperation strives to rzyla@ifc.org achieve sustainable growth. Growth is sustainable if it creates jobs, helps increase productivity, and Chinyere Peace Almona helps reduce poverty, inequalities, and global risks. Regional Program Manager For more information, visit www.seco-cooperation.ch. Africa Corporate Governance Program IFC Environment, Social, and Governance Department About the Africa Corporate 7th Floor, Alliance Place, Governance Program 33A Alfred Rewane Way, Ikoyi The Africa Corporate Governance Program, funded Lagos, Nigeria by SECO, is an initiative to promote corporate calmona@ifc.org governance best practices and standards continent­ 14 What We Learned about Corporate Governance and Code Development in Sub-Saharan Africa 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Tel: +1 (202) 458-8097 www.ifc.org/corporategovernance MAY 2018 www. ifc.org/sustainability