Measuring corporate governance

once again at an all time high.
I have spoken to many investors and depositors who have lost money, particularly on investments in companies that went bankrupt due to poor ethical and governance practices, and they all seem to be saying the same thing. Where is the protection for the investor, the depositor and the ordinary man in the street when perpetrators who have committed various atrocities against corporations are still enjoying their freedom, their Green/Blue Label scotch whisky and most importantly their golf every Wednesday or Saturday?
It is therefore time that we start looking and investing in ways to prevent this happening again, and hope to spot the mismanaged companies before they implode rather than ask where the regulators were when all hell has broken loose.
Globally this has resulted in a call for a system to be developed that can measure a company’s system of ethical practices and good governance. In almost all of the systems developed so far, “executive powers, succession planning executive compensation, non-executive director independence” have been some of the topics used as a measure.
Each time I look at the various definitions of corporate governance I realise that they are all definitions that need the people element to make them work effectively and cohesively. Corporate governance in my eyes and based on my practical experience defines “the whole set of legal, cultural, and institutional arrangements that determine what corporations can do, who controls them,  how that control is exercised, and how the risks and return from the activities they undertake are allocated”.
It appears that the concept of measuring a company’s corporate governance is one that is immediately fraught with problems especially when I look at the Zimbabwean landscape. How can a concept so subjective be objectively measured?
The problem of measuring corporate governance was recognised with the spectacular collapse of Enron, WorldCom, Parmalat and PolyPeck International. In terms of policies surrounding good corporate governance, using Enron as a company it was faultless, it had everything in place and it observed all the tick box mechanism for showing compliance with regulatory requirements. Post-Enron collapse the research carried reflected that “the organisation and structure of the Enron board was a paradigm of good corporate governance”.
As one commentator put it: “The Enron board had all of the committees one would hope to see in a corporation of its size, including an Executive Committee, Finance Committee, Audit and Compliance Committee, Compensation Committee, and Nominating and Corporate Governance Committee.” Despite all of these measures, Enron still went bankrupt, and has become known as “one of the largest frauds in business history”.
The scary scenario is that here in Zimbabwe we have a lot of companies and parastatals that resemble Enron as seen in the failures that recently shook the financial services.
Despite these difficulties, many organisations in Zimbabwe are now waking up to the reality that good governance is real and it is needed fast. So how do we measure good corporate governance? Many bodies have attempted to set up a method to measure how various entities are performing with regard to governance. On a global scale, the United Nations University drew up the World Governance Survey in 2002, in order to “effectively assess and analyse corporate governance issues”.
The World Bank attempted to measure the governance of governments in 2007, using data and annual indicators from the previous 10 years. In the UK, researchers have looked at compliance with the UK Corporate Governance Code and performance by making it mandatory for each company to adopt the code and ensure it’s embedded within their business operation both in theory and practice. In order to achieve they have “developed an index to measure a company’s governance arrangements”, I was fortunate enough to work through one of the index in my previous role with BDO as our external auditors.
BDO formulated a corporate governance compliance audit index that measured the prevalence and success of corporate governance within the group looking at various corporate governance strands such as policies and procedures, recruitment of non- executive directors, succession plans, independence and formulation of the various committees, reviewing their terms of reference, looking at board evaluations.
A lot of the information was available in the form of a paper trail but what was more important was whether the board members, executive, staff members had an understanding of what corporate governance entailed.
In addition to what BDO uses there has been an emergence of commercial corporate ratings agencies such as the Governance Fund in Minnesota, US and Governance Metrics International (GMI), who also aim to provide a measure of a company’s corporate governance policies and practices. For instanc,e Governance Metrics produced a questionnaire with hundreds of metrics which, once answered, gave a score between one and 10 for that company. Of the six research categories analysed by GMI, one of these is executive compensation.
There are many benefits to such a system that measures the performance of corporate governance systems in companies. Instead of a rule-based system whereby companies are forced to comply with a list of regulations, companies are motivated to improve their ratings as they are linked to their business’ opportunities. The advantages of a well-established governance rating agency are easy to predict — companies would work hard to comply with the survey, and would seek to improve their corporate governance in order to obtain a favourable rating.
Zimbabwe does not have as developed a system for measuring corporate governance as other economies. This is demonstrated by the lack of our own corporate governance code as well as governance rating agencies that exist in the country. Across the border measuring governance is taking gigantic strides with Ratings Africa being one organisation that has tried to implement a means to measure governance across the Southern African markets.
The organisation drew up a survey that asked companies to measure their own corporate governance, but the response level in 2009 was disappointing. Of the Listed Top 40 South African companies, 68,3 percent did not respond, and 2,4 percent declined filling out the survey. This led the organisation to conclude that “the survey cannot be considered successful in the level of response that it has generated”.
Should we therefore advocate for a similar approach across Zimbabwean companies just to understand the corporate governance appetite. I believe that we are on track as we are close to launching our own robust corporate governance code which should be adopted in theory and practice. In comparison to South Africa both the King III Code and the Companies Act No. 71 of 2008 (the Companies Act) have boosted business and given the international investor confidence to part with their money.
A recommendation would be that, instead of merely forcing listed public companies to comply with corporate governance requirements it could be helpful to create an incentive for companies to comply with corporate governance. A corporate governance rating could supply this motivation, as companies that scored well on the rating would enhance their reputation, and open up potential investment opportunities. For this reason it is recommended that a system for measuring corporate governance is implemented in Zimbabwe alongside the National Corporate Governance Code.

Terrence N. Chimanya, MSc, LLB (Hons), ACIS, MCMI is a corporate governance practitioner and senior manager Risk Advisory Services with PricewaterhouseCoopers Zimbabwe. He writes in his personal capacity. He can be contacted on [email protected]