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Zambia: From nationalisation to corporate governance

24 August 2017 by Chibamba Kanyama

Zambia: From nationalisation to corporate governance - Read more

After a history of state-owned industry, Zambia's Institute of Directors is spearheading a governance push.

Until the beginning of this century, little was known about corporate governance in Zambia and the reason for this lies in the structure of the its economy.

After gaining independence from British rule in 1964, Zambia nationalised nearly all industries, including the copper mining companies where it acquired majority shareholding. Nationalisation defined a new form of corporate governance in which the government of independence leader Kenneth Kaunda created superstructures that controlled, directed and supervised all state-owned enterprises.

An example was the Zambia Consolidated Copper Mines (ZCCM), which controlled all mining activities, while the Zambia Industrial and Mining Corporation (Zimco) controlled all other companies involved in commerce, transport, manufacturing, media, finance and even mining activities.

The few privately-run enterprises were largely family owned with their own corporate control structures. For example, Abe Galuan, an investor who controlled much of the land in capital city Lusaka, had a string of companies that had family members and a few local businessmen as company directors.

Economic shake-up

Signs for what would become a shake-up to Zambia’s corporate governance standards emerged soon after the liberalisation of the economy in the early 1990s. The new government of former trade unionist Frederick Chiluba that took over power from Kaunda embarked on major economic and political reforms. Nearly 300 state-owned enterprises had to be privatised.

By the mid-1990s, Zimco and ZCCM had collapsed. The Lusaka Stock Exchange (now Lusaka Securities Exchange) was born, signalling total transformation around how companies would be managed.

New regulatory standards affecting all incorporated companies were introduced to enhance transparency and accountability. This followed the closure of nine commercial banks in a space of five years, largely because of poor governance.

Then, at the close of the 20th Century, the Institute of Directors Zambia (IoD) was born.

Shaping standards

The IoD came on the scene in 1999, and was then immediately embraced by some of the high-profile individuals that had represented private capital interests during the Kaunda era.

David Phiri, a respected business leader who sat on several private sector boards, was installed as the first president of the institute. That gave IoD the traction as a respected leader in shaping corporate governance standards in Zambia.

“In terms of numbers, the institute has trained nearly 3,000 directors from quasi-government and private-sector institutions”

The contribution of the IoD towards good corporate governance can best be seen through its impact. In terms of numbers, the institute has trained nearly 3,000 directors from quasi-government and private-sector institutions.

Qualitatively, and as stated by the 2016 Report on Corporate Governance in Zambia by the Africa Corporate Governance Network, the IoD has developed a good number of competent directors in both the private and public sectors. It has also always been called upon to offer regular orientation and training programmes for newly inducted directors.

State-owned enterprises

The most pronounced challenge to, or apparent failure of, corporate governance standards, come from remaining state-owned enterprises.

The most recent auditor general’s reports have signalled existing gaps in the way these entities are managed; for example, 27 institutions had not produced audited financial statements for the financial years up to 31 December 2015, contrary to their enabling acts and the tenets of good corporate governance.

The reports further exposed glaring irregularities and poor corporate governance. Among the main issues raised were poor financial and operational performance, relatively little awareness of corporate governance systems, weak enforcement, transparency, accountability, unethical behaviour, and unsatisfactory balance in skill-sets and representation.

The issue of tenure is also critical in promoting corporate governance. Evidence shows that every government that comes to power, and even changes of a minister, leads to dissolution of boards. The IoD has made efforts to resolve this problem through private discussions with government authorities.

Listed companies

Despite the notable improvements in corporate governance practices in the private sector, listed companies also still need to boost standards so that they are benchmarked against those practiced internationally.

The Zambia Lusaka Securities Exchange (LuSE) is relatively small, with total market capitalisation standing at US$5 billion (that includes shares of the dual-listed Shoprite Chain stores worth about US$2.5 billion).

Given the small size of the LuSE and perceived low spillover effects of any risks, many listed companies lag behind their peers on the global market in terms of responsiveness to market demands and pressures.

To keep pace with international standards, the LuSE has made efforts to demutualise in order to enhance a strong governance culture within its own structures and among the listed companies. Some of the new measures include reducing shareholder and broker board representation from eight to two.

“The impact of demutualisation is hard to ascertain, but it does point to a desire for more transparency”

The motivation for demutualisation is summed up in the new LuSE board charter: ‘The board recognises that the LuSE, by virtue of the crucial role that it plays in respect of the economy of Zambia as well as its regulatory role, sets the benchmark against which companies listed on the exchange will measure their corporate governance practices.’

The impact of demutualisation is hard to ascertain, but it does point to a desire for more transparency. The LuSE may need to define certain responsibilities, roles, and disclosure requirements for its directors.

One of the critical issues being discussed informally by the LuSE members is the conflict of interest among directors who sit on the LuSE board when they already sit on the board of a subsidiary of a listed company.

Looking to the future

There are many factors that will shape the future of corporate governance in Zambia, with the government unsurprisingly playing a significant role.

In the past few years, the government has become more businesslike, emphasising profit as the primary motivation for all state-owned enterprises’ boards. Although an invisible hand remains in the way boards are run, most of those appointed to directorships are seeking greater independence than before.

The creation of the Industrial Development Corporation to control, direct and supervise state-owned enterprises has some sharp reminders of previous failures under Zimco, something that worries many.

However, the government believes this will improve corporate governance standards for entities that have remained under-capitalised and faltering.

The future of corporate governance is also being shaped by emerging business links between small and medium enterprises and the large multinational corporations. This interaction is leading to adoption of corporate governance standards through things like mentorship, financing requirements and supply-chain benchmarks.

For corporate governance to permeate all sectors, there is an immediate need to strengthen human resource capacities, to continuously review various acts (such as the Companies Act and the Securities Act), increase public awareness and, as is under discussion, for the IoD to assume greater powers to regulate its members.

Chibamba Kanyama is a managing consultant at Bridges Limited, and formerly of the International Monetary Fund

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