Examining and Addressing Corporate Governance Collapse in Africa

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1 Examining and Addressing Corporate Governance Collapse in Africa Student’s Name Institution Affiliation Course Name and Number Instructor’s Name Date

2 Introduction Experiences from developed nations have consistently showcased the value of a positive marriage of convenience between well-coordinated and well-managed wealth and economic development. In contrast, the absence of a framework for managing wealth and resources still plagues many organizations in Africa, plunging them into liquidation. Ayandele and Emmanuel (2013) attribute this phenomenon to the failure to embrace and practice good corporate governance ideals. Corporate governance encompasses a vast number of distinct concepts and phenomena (Tricker, 2015). It guides how rights and responsibilities are distributed between varying stakeholders within an organization, including the board, management, and shareholders (Tricker, 2015). Besides this, the corporate governance structure also outlines the procedures and rules to guide corporate decision-making (Tricker, 2015). Therefore, it regulates the relationship an organization has with its stakeholders and the society at large and depends on fairness, transparency, and accountability to govern decision-making to ensure that actions and decisions are aligned with stakeholders’ interests (Tricker, 2015). The presence of corporate governance appears not to be real but a myth in many organizations in Africa, considering its mechanisms have failed to sufficiently monitor and control the strategic decisions made by top-level managers and boards. As such, this paper will explore the factors undermining the concept in Africa and recommend solutions to address them. Theoretical Framework Having a theoretical framework to guide one’s study is critical. In line with this, the examination of the collapse of corporate governance in Africa will be guided by several theories, including agency theory, stewardship theory, stakeholder theory, resource dependency theory, and transaction cost theory. Agency Theory Agency theory originated from economic theory as espoused by Alchian and Demsetz (1972). It was further expounded upon by Jensen and Meckling (1976). Agency theory focuses on the relationship between principals in an organization, including shareholders and agents like company managers and executives (Younas, 2022). It is based on the premise that as principals or owners of an organization, shareholders are responsible for hiring agents to make decisions and implement them on their behalf (Younas, 2022). Thus, the shareholders delegate the running

3 of the company to the directors and managers and expect them to act and make decisions in their best interest. Stewardship Theory Stewardship theory traces its roots to sociology and psychology. It is based on the premise that an organization's stewards (executives and managers working for the shareholders) are responsible for protecting and maximizing shareholders' wealth via excellent firm performance (Younas, 2022). Essentially, the executives and managers work for the shareholders to safeguard their interests, including generating profits for them. Unlike agency theory, this theory does not emphasize individualism (Younas, 2022). Instead, it treats top-level management as stewards who are expected to attain organizational goals rather than personal goals. Due to this, they will be inspired to achieve organizational goals and feel satisfied when this happens. Stakeholder Theory Stakeholder theory was integrated into the management field in 1970. It borrows concepts from sociology and organizational disciplines (Younas, 2022). According to this theoretical framework a stakeholder denotes a group of individuals affecting or are affected by achievement of a company’s strategic objectives (Younas, 2022). Unlike agency theory, which argues that managers and executives are working for and serving shareholders, the theory posits that managers and executives leverage a network of stakeholder relationships to guarantee business prosperity and sustainability (Younas, 2022). This network includes employees, suppliers, partners, and the local community. Resource Dependency Theory This theoretical framework focuses on the role played by boards, especially when it comes to providing access to the resources an organization needs to attain its strategic objectives. This theoretical framework emphasizes how organizations rely on external resources and relationships to attain their strategic objectives (Younas, 2022). It is based on the notion that organizations should strategically manage their dependencies to improve their stability and control (Younas, 2022). As such, organizations are expected to minimize their vulnerability by diversifying the resource sources they depend on, forming strategic alliances, and maintaining positive relationships with stakeholders. Comprehending and managing dependencies will allow organizations to reduce the risk of external influences and ensure the adoption of effective governance structures (Younas, 2022).

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4 Transaction Cost Theory This theoretical framework was introduced by Cyert and March in 1963 and, later on, theoretically described and expounded on by Williamson in 1996. It is an amalgamation of law, economic, and organizational concepts. According to this theory, an organization is made up of people with different interests and worldviews (Younas, 2022). Its underlying assumption is that organizations have become so large to the extent they substitute the market when it comes to matters of resource allocation, meaning a company’s organization and structure can determine price and production (Younas, 2022). Furthermore, since the unit of analysis under this theory is the transaction, combining people with transactions suggests that managers are opportunists, and this arranges an organization's transactions to attain their selfish interests (Younas, 2022). Corporate Governance: Background Information Understanding what corporate governance entails before exploring the causes of its collapse in organizations in Africa and, subsequently, recommending workable solutions to address these contributory factors is vital. The term "corporate governance" originated in Greece from the word Kyberman , meaning steering, leading, or governing (Ayandele & Emmanuel, 2013). Based on its usage in Greece, the term was integrated into Latin and referred to as gubernare, with its French version being governor (Ayandele & Emmanuel, 2013) . Agbonifoh (2010) perceives corporate governance as demonstrating ethical business behavior, transparency, and integrity while operating a business. Agbonifoh (2010) also includes distinguishing between corporate and personal funds while managing a company in the definition of corporate governance. Ayandele and Emmanuel (2013) view it as a core component for balancing the desire for order and equality in society, promoting efficient production and delivery of services and goods, guaranteeing accountability, and protecting human rights and freedoms. Organizations have varying shareholder groups. Due to this, conflicting interests among these stakeholder groups are often unavoidable. Corporate governance and its accompanying principles are designed to address such situations by allowing an organization to balance conflicting stakeholder interests (Zheng & Kouwenberg, 2019). This brings all stakeholders together, helping them work collaboratively to attain an organization’s corporate objectives (Zheng & Kouwenberg, 2019). The board of directors is at the heart of corporate governance. Members of such boards are responsible for charting the path an organization will take on matters to do with growth and development as well as short-term profitability and long-term

5 sustainability. Thus, embracing good corporate governance requires boards to demonstrate transparency, accountability, and ethical business practices to stakeholders (Zheng & Kouwenberg, 2019). Even though most of a company’s management gets done by the board of directors, other stakeholders also have a hand when it comes to matters of governance. Due to this, they should not only be aware of and understand corporate governance ideals but also demand adherence to them within their organizations (Zheng & Kouwenberg, 2019). Besides this, it is no longer enough for organizations to demonstrate profitability (Sar, 2018). Organizations are now under increased pressure to display good corporate governance by practicing sound environmental practices, engaging in ethical business practices, and having good governance structures and practices (Sar, 2018). Overview of Corporate Governance Practices in Africa The concept is not as widely practiced in Africa as it is in other developed nations across the globe. This is because countries within the continent started paying attention to good governance ideals relatively recently, more specifically, at the start of the 1980s. According to Ayandele and Emmanuel (2013) the first time the concept was alluded to was in a World Bank report on Sub-Saharan Africa in 1989. The popularity of the concept of corporate governance grew after that, with numerous Western donor agencies pushing for good governance across the continent (Ayandele & Emmanuel, 2013). Despite this, opinions vary with respect to the content, boundaries, and relevance of corporate governance ideals in developing nations. Ayandele and Emmanuel (2013) attribute these differences to the underdevelopment, unstructured, and informal structure of African economies. Most African nations have started formalizing their economies. This phenomenon has created a clamor for good corporate governance (Ayandele & Emmanuel, 2013). Even though corporate governance systems have significantly evolved in several developing African countries, many other developing nations within the continent do not necessarily perceive and treat it as the optimal solution for their developing economies (Agbonifoh, 2010). This is because they are already dealing with issues such as poverty, political instability, and ailments. Furthermore, these issues require more nuanced measures to address them than simply relying on corporate governance to help them overcome the problems (Agbonifoh, 2010). According to Okafor (2009) African executives ability to lead organizations was historically rarely impugned. Due to this, little attention was paid to the value of corporate governance ideals or even

6 information disclosure, accountability, and transparency. This mindset, according to Waweru (2020), has since changed, with the concept of corporate governance being currently acknowledged as playing a critical role in the management of organizations in Africa. Despite this, Waweru (2020) contends that many African countries still deal with uncertain economies, weak legal controls, poor protection of investors, and frequent government intervention. These issues should increase African countries’ urgency to embrace and practice the concept. Waweru (2020) further posits that the pressure emanating from the globalization of the world’s economy, democratization, the economic reforms being advanced by the World Bank/IMF, and financial scandals in developed nations should sound an alarm for African countries to adopt the concept’s ideals. Ayandele and Emmanuel (2013) argue that unsatisfactory economic performances by African countries and their high indebtedness are forcing the IFC, World Bank, and IMF to make concerted efforts to push for the adoption of the concept to address these issues. Some developing nations in Africa have already adopted the concept. However, the models they are relying on vary from those used by developed countries. Waweru (2020) blames this variance on the unique political and economic systems adopted by developing Sub-Saharan African countries. In addition, these countries are poorly equipped to adopt Western models because many major corporations are publicly-owned rather than privately-held (Mutize & Tefera, 2020). Besides this, other contributory factors include interlocking relationships between financial sectors and governments, weak legal and judicial systems, and limited human resources capabilities (Mutize & Tefera, 2020). In light of these issues, several measures have previously been proposed to help improve the adoption and practice of the concept in Africa. Some of these proposals include using equity rather than debt for growth, leveraging transparency and accountability to increase the overall confidence of investors (both local and foreign), boosting capital market structures, and leveraging competition to enhance local companies’ performance (Ahunwan, 2021). The Challenges and Failures of Corporate Governance in Africa Poor training and capacity development for managers and executives in African countries prevents them from effectively identifying and managing risks. This, according to Waweru (2020), has led to huge agency costs, with shareholders having to avoid numerous agency costs as the boards of directors normally fail as an internal monitoring device for minimizing agency issues. The harm Nigeria felt between the years 2007 and 2011 because its stock market

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7 exchange collapse, coupled with its financial institutions merging with and being acquired by others are the impact of the absence of effective controls and accountability. Additionally, these failures result in the interests of stakeholders being ignored and, thus, their confidence dwindling (Ayandele & Emmanuel, 2013). Besides this, the concept’s failure in Africa can also be traced to missing an effective, objective performance metric for evaluating boards, management processes, and the overall performance of organizations (Ayandele & Emmanuel, 2013). This issue can be traced to the requirement in most African countries that board sub-committees be fully independent. However, audit and remuneration committees are frequently compromised (Ayandele & Emmanuel, 2013). For instance, audit committees in Cameroon and Nigeria have frequently been castigated for helping conceal fraudulent business practices by executives and managers, especially in light of their readiness and propensity for covering up corrupt practices by executives in the hope of receiving kickbacks and being retained for future audit ventures (Ayandele & Emmanuel, 2013). Observations and Recommendations Observations Several critical observations and conclusions can be deduced from the analysis and discourse shared in the prior two sections of the paper. First, an analysis of the legislation governing the adoption and practice of the concept in Africa as well as the standards regulating it within the continent suggests that the institutions and legal framework needed for effective corporate governance are at a dismal level (Waweru, 2020). Furthermore, compliance and enforcement of existing legal frameworks are non-existent and weak at best. Besides this, another key observation is that embracing the concept by practicing its core values of integrity, trust, transparency, and accountability will allow companies in Africa to gain a competitive advantage, especially when it comes to not only attracting and retaining talent but also generating positive reactions within the marketplace (Waweru, 2020). Lastly, poor ethical and corporate governance practices by African executives are contributing to the slow pace of operational performance by most African companies (Waweru, 2020). Recommendations Based on the observations shared above, one can reasonably deduce that corporate governance practices in most African countries are inefficient, ineffective, and ultimately failed.

8 In line with this, the recommendations shared in this section of the paper will help address these failures, improving corporate governance in African companies. First, African executives should ensure they maintain the highest possible ethical standards even when pursuing profits for their organizations (Waweru, 2020). Second, regulatory institutions’ enforcement mechanisms should be strengthened to ensure company executives demonstrating unethical business practices are identified and prosecuted promptly (Waweru, 2020). Third, current regulatory frameworks governing the operationalization of the concept must be reviewed to guarantee better alignment African countries’ underlying political, social, and economic issues (Waweru, 2020). Fourth, policymakers should consider interactions between corporate governance and the institutional framework in varying countries across the continent (Waweru, 2020). This is because the search for good corporate governance practice that works in a specific country should be done by discerning what broad principles and practices can be obtained from the experiences of other African countries (Waweru, 2020). Once this happens, a country can examine and localize the most applicable corporate governance practices and principles. Conclusion Good corporate governance is an essential component of effective organizational management. Organizations, irrespective of their location across the globe, are expected to be accountable not only to their internal shareholders but also to their external shareholders. This group includes the local communities that surround companies. However, as the analysis and discussion presented in this paper demonstrate, African companies are failing at this due to various contributory factors. Since addressing these factors will allow African companies and their stakeholders to enjoy the benefits of good corporate governance, the paper has proposed several measures that should be implemented to eliminate the factors contributing to the collapse of corporate governance in Africa. Implementing these recommendations will help improve corporate governance structures in Africa, ultimately benefiting all stakeholder groups.

9 References Agbonifoh, B.A (2010) Human Management and Corporate Governance: The Quest for Best Practices in Nigeria. Nigerian Academy of Management 4(2), 37-47. Ahunwan, B. (2021). Globalization and Corporate Governance in Developing Countries: Micro Analysis of Global Corporate Interconnection between Developing African Countries and Developed Countries . BRILL. Alchian, A. A., & Demsetz, H. (1972). Production, information costs, and economic organization. The American Economic Review , 62 (5), 777-795.

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10 Ayandele, I. A., & Emmanuel, I. E. (2013). Corporate governance practices and challenges in Africa. European Journal of Business & Management , 5 (4). Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach . Cambridge University Press. Jensen, M.C. & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305-360. Mutize, M., & Tefera, E. (2020). The Governance of State-Owned Enterprises in Africa: an analysis of selected cases. Journal of Economics and Behavioral Studies , 12 (2 (J)), 9-16. Puni, A., & Anlesinya, A. (2020). Corporate governance mechanisms and firm performance in a developing country. International Journal of Law and Management , 62 (2), 147-169. Rossouw, J., & Styan, J. (2021). Steinhoff collapse: a failure of corporate governance. In Ownership and Governance of Companies (pp. 173-180). Routledge. Sar, A.K. (2018). Impact of Corporate Governance on Sustainability: A Study of the Indian FMCG Industry. Academy of Strategic Management Journal, 17(1), 1-10 Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices . Oxford University Press, USA. Waweru, N. (2020). Business ethics disclosure and corporate governance in Sub-Saharan Africa (SSA). International Journal of Accounting & Information Management , 28 (2), 363-387. Younas, A. (2022). Review of Corporate Governance Theories. European Journal of Business and Management Research , 7 (6), 79-83. Zheng, C., & Kouwenberg, R. (2019). A bibliometric review of global research on corporate governance and board attributes. Sustainability , 11 (12), 3428.

Examining and Addressing Corporate Governance Collapse in Africa

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