In Tanzania, as elsewhere in the world, regulators strive to prevent dubious corporate practices, to enhance regulations and regulatory frameworks, and to devise modern standards and guidelines. The bedrock of any corporate governance structure used for directing and managing a company is disclosure.
The commonly held view nowadays is that increased emphasis on disclosure will put companies and executives under intense scrutiny and gravitate them towards avoiding conflicts of interest, towards overseeing extensively the company’s procedures and practices, and towards greater transparency and accountability. The aim is to facilitate the flow of investments and to mobilize financial resources for poverty alleviation and economic development of Tanzania.
Too few companies, particularly in heavily regulated sectors (such as banking, financial services and insurance; energy; mining, telecommunications; aviation; and shipping and maritime) want to put themselves on a collision course with Tanzanian regulators. This pronounced shift towards greater corporate governance disclosure is most evident in the realm of executive compensation or remuneration.
There is a deep-rooted norm that executive compensation that is well designed, linked to a company’s strategic objectives, and which rewards executives for their contribution to the company’s long-term success is vital in increasing shareholder value. This is why investors, as shareholders, cogitate about executive compensation when making decisions.
Improperly or excessively remunerating an executive can have nasty consequences to profits and share price and the economy, yet there are no laws or regulations in Tanzania that place a cap on, or prescribe a structure for, executive compensation. Even though the Companies Act, 2002 does not specify requirements about how executive compensation should be structured, existing local guidelines require that compensation should be sufficient to attract and retain directors to run the company effectively and should be approved by shareholders. Accordingly, corporate governance and legal circles are abuzz with discussions about what amounts to sufficient remuneration for executive and non-executive directors.
It is true that companies listed on the Dar es Salaam Stock Exchange (DSE) are required to adhere to the ‘Guidelines on Corporate Governance Practices by Public Listed Companies in Tanzania’, which are made under section 10(d) of the Capital Markets and Securities Act, 1994 (“CMSA Guidelines”). The CMSA Guidelines require every board of directors to annually disclose information about its policies for remuneration, including incentives for the board and senior management.
To put it briefly, Guideline 3.1.3 of the CMSA Guidelines stipulates the following disclosure requirements for executive compensation: (a) quantum and component of remuneration for directors, including NEDs on a consolidated basis showing the executive directors’ and NEDs’ fees and emoluments; and (b) share options and other forms of executive compensation that have to be or have been made during the course of the year. This information is required to be disclosed in the annual reports.
Moreover, the Bank of Tanzania’s Guidelines for Boards of Directors of Banks and Financial Institutions (“BoT Guidelines”) require every board of directors of a bank or financial institution to put in place a policy spelling out clearly the compensation for its directors. But unlike the CMSA Guidelines, the BoT Guidelines do not mandatorily require banks and financial institutions to disclose executive compensation in their annual reports. After all, not all banks and financial institutions are publicly-traded companies.
Annual reports are the principal source of information for the vast majority of investors about publicly-traded companies in Tanzania. However, there’s concern about the lack of clarity on how executive compensation decisions are made, and the nexus between executive compensation and performance. New reforms to further clarify the disclosure of compensation would be laudable.
There’s also concern that the CMSA Guidelines on Corporate Governance are inadequate to control seemingly excessive pay for underperformance and hence, the need for a law that sets a cap on executive compensation, possibly as a percentage of net profits.
In this article, I have discussed the Tanzania law perspective on disclosure of executive compensation. Given that the Government wants Tanzania to attract and retain the best talent to support its industrialization agenda and promote sustainable growth, will the coming financial year 2019/20 bring renewed attention to the importance of executive compensation in investment decision-making? I’d love to hear all about your expectations via the e-mail below!