Overview of corporate governance in Ethiopia: The role, composition and remuneration of boards of directors in share companies

Author:Hussein Ahmed Tura
Position:(LL.B, LL.M), Lecturer, Wolaita Sodo University, School of Law
Pages:45-76
SUMMARY

Good corporate governance is an important pillar of the market economy and it enhances investor confidence. A strong and balanced board of directors is necessary as a supervising body for the executive management of a company with dispersed ownership. The Ethiopian company law does not have adequate legislative provisions on governance issues related to the separation of supervision and... (see full summary)

 
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OVERVIEW OF CORPORATE GOVERNANCE IN
ETHIOPIA:
THE ROLE, COMPOSITION AND REMUNERATION OF
BOARDS OF DIRECTORS IN SHARE COMPANIES
Hussein Ahmed Tura
Abstract
Good corporate governance is an important pillar of the market economy and it
enhances investor confidence. A strong and balanced board of directors is
necessary as a supervising body for the executive management of a company
with dispersed ownership. The Ethiopian company law does not have adequate
legislative provisions on governance issues related to the separation of
supervision and management responsibilities, and on the composition,
independence and remuneration of board of directors in share companies.
Besides, the draft Commercial Code has not yet been finalized. This article
critically examines Ethiopia’s company law with specific reference to the
powers, composition and remuneration of board of directors in light of
internationally recognized best practices and principles of corporate
governance. It argues that there is a need to distinguish between corporate
governance and corporate management in Ethiopian company law, and that the
board should be suitably composed of non-executive and truly independent
members who should be professionally competent. Furthermore, directors’
remuneration should be incentive-oriented based on company and individual
best performance, subject to the caveat against excessive amounts of
remuneration that go beyond the achievement of this purpose.
Keywords:
Corporate governance, powers of board of directors, composition of
board of directors, remuneration of board of directors, share companies,
Ethiopia.
DOI http://dx.doi.org/10.4314/mlr.v6i1.2
Acronyms:
BIS Bank for International Settlement
CEO Chief Executive Officer
(LL.B, LL.M), Lecturer, Wolaita Sodo University, School of Law. Email:
<hatura7@mail.com>. The author thanks Elias Nour as well as the undisclosed
internal and external assessors for their encouragement and constructive comments
on the draft version of this article.
46 MIZAN LAW REVIEW Vol. 6 No.1, June 2012
GTP Growth and Transformation Plan
LSE London Stock Exchange
MFI Micro Financing Institutions
NBE National Bank of Ethiopia
OECD Organization for Economic Cooperation and Development
SEBI Securities and Exchange Board of India
______________
Introduction
Good corporate governance enhances the confidence of investors in the
companies and positively contributes towards the overall business environment.1
Well-governed companies often draw huge investment premiums, get access to
cheaper debt, and outperform their objectives.2 Good corporate governance
requires competent board of directors as a supervising body for the executive
management of a company. In companies with dispersed ownership,
shareholders are usually unable to closely monitor management, its strategies
and its performance for lack of information and resources.3 Hence, the function
of non-executive directors in one-tier board structures and supervisory directors
in two-tier board structures is to fill the gap between the uninformed
shareholders as principals and the fully informed executive managers as agents
by monitoring the agents more closely.4
The Commercial Code of Ethiopia (hereinafter the Commercial Code)
incorporates provisions pertinent to the governance of share companies.5
However, such provisions are inadequate to address specific issues in corporate
governance related to board of directors such as separation of roles of non-
executive directors and CEOs, composition and independence of the board as
well as director’s remuneration. Moreover, proclamations and directives
governing financial share companies in Ethiopia do not sufficiently address the
aforementioned issues.
1 See Indonesia’s Code of Good Corporate Governance, (National Committee on
Governance, 2006), Preamble.
2 Ibid.
3 See Report of High Level Group of Company Law Experts on a Modern Regulatory
Framework for Company Law in Europe, Brussels, (4 Nov. 2002), p.59.
4 Ibid.
5 For instance, in share companies, dealings between the company and a director that
involve conflict of interest must receive prior approval by the board of directors (Art.
356); the company may not make loans to a director (Art. 357); directors are
personally liable to the company for failure to carry out their duties that include a duty
of due care and diligence (Art.364) and the company may sue a misbehaving director
up on approval of shareholders representing 20% of the capital (Art.365).
OVERVIEW OF CORPORATE GOVERNANCE IN ETHIOPIA: BOARD OF DIRECTORS IN SH. COMPANIES 47
This Article examines the law pertinent to the governance of share
companies in Ethiopia with specific reference to the powers, composition and
remuneration of board of directors with a view to identifying deficiencies in the
company law and suggests the solutions in light of internationally recognized
best principles and practices of corporate governance. It contends that the
supervisory powers of the board should be separated from the management
responsibilities of the executives of share companies in the relevant laws. It also
argues that the composition and independence of directors should be
reconsidered. Moreover, it examines the effects of quantum of directors’
remuneration on the integrity of share companies, independence of directors and
the retention of competent and diligent directors. It further provides some
conclusions based on the findings of the study.
1. What is Corporate Governance?
Various scholars and practitioners define ‘corporate governance’ differently.6
Economists and social scientists, for instance, tend to define it broadly as “the
institutions that influence how business corporations allocate resources and
returns”; and “the organizations and rules that affect expectations about the
exercise of control of resources in firms.”7 This definition encompasses not only
the formal rules and institutions of corporate governance, but also the informal
practices that evolve in the absence or weakness of formal rules.
Corporate managers, investors, policy makers, and lawyers, on the other
hand, tend to employ a narrower definition. For them, corporate governance is
the system of rules and institutions that determines the control and direction of
the corporation and that defines relations among the corporation’s primary
participants.8 The definition used in the United Kingdom’s 1992 Cadbury
Report is widely cited from this perspective, and it reads: “Corporate
governance is the system by which businesses are directed and controlled.”9
This narrower definition focuses almost exclusively on the internal structure and
operation of the corporation’s decision-making processes, and is central to
public policy discussions about corporate governance in most countries.10
6 See A. C. Fernando (2006), Corporate Governance: Principles, Policies, and
Practices, (Pearson Education), p.12.
7 See Jeswald W. Salacuse (2004), “Corporate Governance in the New Century”, 25
No.3, The company Lawyer, p.69.
8 Ibid.
9 See Report of the Committee on the Financial Aspects of Corporate Governance,
(Cadbury Report), para. 2.5 available at <www.ecgn.org> (Visited on 24 March,
2011).
10 Salacuse, supra note 7.

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