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A new breed of legal support

How corporate governance can promote Tanzania's growth

2016-11-29 13:01:50

By Paul Kibuuka

Dar es Salaam. Building a strong private sector is crucial to fully realizing Tanzania’s economic potential and attracting foreign direct investments (FDIs), which stand at $1.5bn, representing 2.8 per cent of total FDI inflows to Africa last year, according to the most recent data published in UNCTAD’s World Investment Report 2016.

Many surveys that track investor sentiment have revealed that investors are more confident in companies with effective governance and in countries with comprehensive, continually-updated legal frameworks and business regulations.

Consequently, Tanzania stands to gain if local companies implement corporate governance principles, policies, and procedures that go beyond the bare minimum requirements and bolster investor trust through transparency and rule of law.  

Yet, many of these companies melee with the problem of weak board of directors oversight; unclear director responsibilities and accountabilities; lower transparency; elementary risk management and internal control structures; and laughable shareholder practices. Research studies indicate that weak corporate governance has not only triggered colossal business failures, but also exacerbated frustration and bewilderment among creditors, business partners and customers.

In addition, while connecting the topic of quality of governance to the growth or otherwise of economies, Fernando A.C., in his book “Business Ethics and Corporate Governance”, argues that weak governance can become a ruinous impediment to the performance of national economies, which, considering the financial crises of 1997-1999 in Asia, Russia, and Brazil, can upset global financial stability and access to financing by emerging market countries. He also contends that weak corporate governance can dent investor confidence in markets and cause a country’s financial system to stagnate.  

The presence of effective corporate governance systems in Tanzania, thus, will be central to investors’ decisions whether, for example, to buy shares in a Tanzanian company. Investors are unlikely to put funds into companies whose boards of directors and management cannot be trusted to take the right decisions for all shareholders.

Within this context, to fathom the importance of corporate governance from a macro-scale perspective, consider aggregating, at the national level, the decision of each investor to invest or not to invest in a Tanzanian company.

Now, you appreciate why Tanzania should nourish investor trust to attract and retain FDIs by initiating significant long-term efforts in the field of company law and mergers and acquisitions (M&A). Of course, many will agree that some progress has been recorded in improving the country’s business regulatory framework, judicial system, and corporate governance rules.

Banks have been scrambling to comprehend a new wave of regulations, of which 13 were promulgated by the Bank of Tanzania in 2014 alone! For instance, the Banking and Financial Institutions (Internal Control and Internal Audit) Regulations, 2014 introduced extra measures aimed at better risk governance and enhancing the role of a bank’s board of directors.

Moreover, listed companies in Tanzania are required to adopt best practice principles and guidelines stipulated in the Capital Markets and Securities (Corporate Governance) Guidelines 2002. These Guidelines should, however, be constantly updated in response to prevailing market conditions and investor demands. 

Plans by the Registration Insolvency and Trusteeship Agency (RITA) and the Business Registration and Licensing Agency (BRELA) are in the works to introduce changes into the Companies Act, 2002, which will impose further requirements on the duties and rights of directors and shareholders, particularly around insolvency issues which impact on corporate governance.

Nevertheless, business executives in Tanzania should not wait for the anticipated changes; instead they can begin working with experienced legal counsel to strengthen their corporate governance systems immediately–this may help drive in and retain investment capital.  

Effective corporate governance is, conceivably, indispensable in the banking sector. Banks perform a cardinal role in the Tanzanian economy by intermediating funds from savers and depositors to support business activities and help stimulate economic growth. The safety and soundness of banks is critical to the stability of the country’s financial system and to the high level of public trust they possess.

Governance weaknesses at the biggest banks can destabilize deposit funding and lending activities, even leading to problems across the banking sector and the economy as a whole. This demands effective corporate governance, risk management, and internal control/audit systems by which under-reported bad loans will be safeguarded against; concentrated exposures will be better managed; and strong credit administration procedures will be followed–in correspondence with the public interest. These constitute some of the toughest challenges facing Tanzanian banks today. 

By the same token, although the Dar es Salaam Stock Exchange (DSE) is a ground-breaking milestone that’s raising new sources of capital to help “turbo-charge” the development of the private sector in Tanzania, there’s a comparable public trust facet that should be preserved with effective corporate governance mechanisms and transparent decision making.

Devising more effective corporate governance rules for DSE-listed companies should, as explained earlier, be an ongoing process. In Morocco, Nigeria, South Africa, Kenya, and Egypt, there are deliberate initiatives to modernize rules for, and enhance information reported by, listed companies. Tanzania’s capital markets regulator, the CMSA, and the private sector should draw outstanding lessons from these initiatives.

The current government led by President Dr. Magufuli has vowed to repossess more than 500 divested companies, whose investors have reportedly breached agreements with the government; so, corporate governance will be vital to this renewed interest. As the government plans to move back into ownership of commercially-oriented industries, adopting and implementing effective corporate governance mechanisms will be critical to sustaining overall market efficiency and economic growth in Tanzania.

And without forgetting that small and medium enterprises (SMEs) are the engine of growth and industrial development, and constitute a significant majority of Tanzanian entities, government reforms aimed at creating an adequate legal and supporting regulatory environment will bring new opportunities for SME growth.

Accordingly, SMEs should be aware of and embrace effective corporate governance, which should help ease access to lines of credit and ultimately improve the chances of SMEs surviving and decently performing.

That said, in today’s globalized world, the conventional scope of corporate governance defined within Tanzania’s policies, laws, regulations has become increasingly challenged by situations that have a global impact. Hence, within this context, investors who are keen to invest in Tanzania are paying attention to the country’s corporate governance mechanisms. We have to persuade these investors that in at least Tanzania, they can prosper.

In this regard, effective corporate governance is necessary to assure investors that their investments will be secure and efficiently managed–in a transparent and accountable way. Furthermore, Tanzania should take advantage of the vibrant network of professionals in the African Corporate Governance Network (ACGN), the African Securities Exchanges Association (ASEA), and the Institute of Directors in Tanzania (IoDT).

It needs to be underscored that the government of Tanzania (and its regulatory bodies) cannot bring about effective corporate governance without the private sector, nor development partners.

Whereas effective corporate governance requires that the government maintains a supporting legal and regulatory framework, the private sector should play its part and encourage discourse with the government in promoting public accountability and transparency–for example, in government procurement processes.

The private sector also should initiate collaborations with Tanzania’s development partners, such as, the United States Agency for International Development (USAID) and Japan International Cooperation Agency (JICA) and with local banks to fund industrial and infrastructure projects that generate profits, create jobs, improve the investment climate, and support corporate social responsibility (CSR) programs in health and education–to overcome disease and illiteracy, and  contribute to the growth of human capital, which is not only essential for a thriving private sector, but also vital in reducing poverty.

Paul Kibuuka is the Managing Partner of Isidora & Company Advocates. Email: paul.kibuuka@isidoralaw.co.tz Twitter: @isidoralaw

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