By Andrew Kibaya at Shonubi Musoke & Co.
The proper control and direction of companies is a necessary catalyst for commercial development and wealth creation. Corporate governance emphasises separation of company ownership from management.
Whatever definition is adopted, corporate governance denotes principles of independence, accountability and transparency. Given the role of companies in development and the varied interests they represent, state regulation is easily justifiable.
The strongest justification for regulation is the need to protect the public from any excesses of the persons controlling the company and its resources – usually, directors. Despite corporate governance taking root in many jurisdictions around the world, in Uganda this has until recently been an oft-ignored concept.
Recent legislation has sought to address this, however, the emphasis is placed on financial and listed institutions, leaving others operating outside statutory regulation. Such companies have had to look to their internal or group regulations, and in the case of local family businesses, the rare desire to abide by good practices.
1998-2000 was a dark period for the banking industry as several banks in Uganda collapsed. Many laboured under governance failures and some were controlled like family empires with no clear distinction between management and ownership. Depositors’ funds were lost.
Government responded by introducing the Financial Institutions Act 2004 and governance regulations to augment it. The Act for the first time codified directors’ duties and qualifications and set clear penalties for corporate failure against institutions, shareholders and directors.
Various board committees and accountability mechanisms were introduced. The codification of directors’ duties ensured that no illusions exist about the different roles of management, board and ownership.
The relative stability in the banking industry is partially explained by the strict enforcement of regulations. This steady spell has encouraged foreign investment. The Capital Markets Authority (CMA) under the Statute of 1996 and the USE Listing Rules 2003 issued guidelines containing acceptable minimum standards for corporate governance. These apply to public listed companies and issuers of corporate debt - again underscoring the desire to protect the public.
The CMA calls for compliance with the guidelines to encourage competitiveness and good management practice. However these regulations lack a clear penalty regime. The lack of detailed corporate governance provisions in the Insurance Act leaves another sector at risk.
The Insurers Association can recommend sanctions to the Insurance Commission against an errant member, but this is hampered by the lack of a detailed regulatory regime for enforcement. The Companies Act Cap 110 of 1961 contains some sparse provisions on the subject. Its commencement date is indicative of its lack of depth on the subject given the dynamic world.
Generally, most sectors are not well regulated. There is neither legislation nor ability for enforcement as no specific penalty provisions exist. Provisions such as the “Board or the Company shall observe good corporate practices” hardly suffice. The Institute for Corporate Governance of Uganda (ICGU) remains a private sector initiative and carries no enforcement powers with it.
To most private companies, corporate governance is completely absent and businesses are run as an extension of the shareholders – often with no clear distinction between the two, never mind corporate principles. The demise or greed of the owner translates into doom for the company. Inherently, such companies lack accountability and demonstrate a high propensity for unethical practices. When a company is run in such a manner, its employees, owners, creditors including banks (that are protected), and other stakeholders remain exposed.
Other organisations including government enterprises, NGOs and donor funded entities have resorted to relying on internally formulated guidelines, often based on what is imposed upon them by the funding bodies that enforce strict compliance. These also draw from principles developed in the UK, South Africa, Commonwealth and OECD countries.
The ICGU has developed guidelines with minimum standards for corporate governance, and raises awareness about corporate responsibility through workshops and lectures. For either of these measures to serve their purpose, they must be backed by legislation. The need for tighter regulation through legislation cannot be overstated.
The global financial crisis has again highlighted the need for good corporate governance. Like it or not there can and should be justification for the IMF and other international and local lending institutions to require an established track record of corporate behavior before funds are made available to companies. In doing this, banks would assume a role as enforcement agents of compliance.
There is need for appropriate legislation to create sanctions for failure, to codify executives’ duties, to create more accountability by specialised board committees and to reduce owner interference in company management.
The Companies Bill 2009 tabled before Parliament makes an attempt at codification of some directors’ duties. It details provisions which ensure corporate governance and creates more meaningful penalties for breach. Whatever its failings as a bill, it is a welcome development and an opportunity to provide detailed statutory legislation for corporate governance.
The existing gaps in the law are slowly being closed. The performance and regulation of the financial sector is encouraging and has an effect on the industries that feed off it. Increasing foreign investment in the country is an indication of investor confidence.