Corporate Governance and Development in Africa

Businesspeople working by glass building

By John Mukum Mbaku, ESQ.
J.D (Law), Ph.D (Economics)
Attorney & Counsellor at Law

The business firm is the foundation for an effective and fully functioning private sector—the latter, of course, is the key to the creation of the wealth that each African nation needs to fight poverty and material deprivation. For Africa, the business enterprise is the single most important vehicle for confronting poverty, dealing with mass unemployment, and promoting human development. In addition to the fact that business firms create jobs, develop new technologies that can significantly improve productivity and hence, increase national output, they also pay taxes that the government can use to provide essential public goods and services, which may include roads, bridges, railways, schools, hospitals, and other structures that can significantly increase the country’s productive capacity. Thus, both the business firm and the private sector represent the most important tools for dealing effectively with poverty and promoting human development in Africa.

The need to promote entrepreneurship and enhance the creation of wealth
Since the late-1980s, there has been a renewed interest in fighting corruption in Africa’s public sectors and making the latter more efficient and more relevant to the needs of the private sector, particularly those of the entrepreneurial class, which is expected to create the wealth that each country needs to fight mass poverty and improve human development. Throughout the continent, governments are implementing policies to rehabilitate, enlarge, and make more viable their private sectors and provide them with the tools to function effectively as engines of investment, job creation, trade and economic growth. Governments are also actively seeking ways to improve their regulatory regimes so that they can promote wealth creation and at the same time, minimize any harm (e.g., ecosystem degradation) that business firms may impose on the societies in which they operate. In as much as business firms represent the key to economic growth and development in Africa, their profit-maximizing activities can also impose significant costs on people and the environments in which they live. Additionally, business firms, through the payment of bribes to senior civil servants and politicians, can interfere with public policy and endanger the ability of governments to serve their citizens.

The business firm: friend or foe
Corrupt and self-dealing executives, particularly those of multinational companies, can impose significant costs on African societies. First, they can compromise national bureaucracies by paying bribes to public officials in order to secure government contracts at favorable terms. Second, with the help of a highly compromised civil service, they can deprive the government of desperately needed tax revenues by engaging in fraudulent accounting practices. Third, corporate officers can engage in unethical business practices (e.g., polluting the environment, refusing to provide workers with a safe working environment, and paying workers non-competitive wages) that impose significant costs on the societies in which they operate. Fourth, managers can discriminate against certain categories of workers (e.g., women, ethnic and religious minorities), exploit and abuse others and force them to engage in unsafe and unhealthy practices (e.g., women can be forced to provide sexual favors to their bosses as a condition to keep their jobs or get promoted in those jobs), and generally undertake activities that maximize shareholder value but harm the African societies in which they operate. Finally, given the fact that most African countries suffer from significantly high rates of poverty and have tax bases that cannot generate enough revenue to meet national development needs, the governments of these countries are quite susceptible to capture by-managers of both transnational and domestic corporations. Capture can produce a distortion in public policy, significantly constraining the ability of the government to maximize the national interest, which must include poverty eradication and the protection of the environment and human rights. Each African country, then, must adopt a corporate management model that allows firms to maximize profit but at the same time, contribute positively to social, economic, and human development in the country in which these firms operate. Such a more participatory corporate governance model calls for a redefinition who is a shareholder—the latter must include (1) the firm’s traditional shareholders (that is, those who own the firm); (2) the country in which the firm has its operations; (3) the immediate community of which the firm operates; and (4) the global community of which the firm is a part. Within such a highly participatory and inclusive corporate governance model, local communities are provided with the wherewithal to determine corporate policy, especially as it relates to issues that affect their welfare.

Corporate governance: a broader more inclusive view of the corporation
The most effective corporate governance model for African countries must be one that, at the minimum, enhances the ability of each corporation to maximize the creation of wealth, but at the same time, significantly minimizes the externalities (e.g., pollution) that negatively affect the environments in which they operate. The traditional corporate governance model emphasizes two important issues: first, providing the set of laws and norms that regulate the relationship between boards of directors, managers, and shareholders, and second, finding ways to resolve the conflict between the principal (i.e., the shareholders) and the agent (i.e., the managers). However, in the aftermath of many international corporate scandals, such as the Enron case in the United States and the corrupt activities of the Bank of Credit and Commerce International (BCCI), there has been need to modify the corporate governance model and place emphasis on ethics, transparency, and accountability. With respect to Africa, it is important to make certain that the communities in which corporations operate have the wherewithal to make certain that company policies are made congruent with, not just profit maximization, but also with social needs. Within such a model, the corporation operating in Africa must treat its employees and consumers, as well as the countries and communities in which it operates, the same way as its shareholders. Hence, while the corporation is dedicated to the maximization of shareholder value, it should also be willing to maximize the welfare of its other stakeholders—by treating its workers well, obeying the laws and respecting the customs and traditions of the countries and communities in which it operates, and minimizing any externalities (e.g., pollution and ecosystem degradation) that can harm the welfare of the communities it operates in.

For the African countries, good corporate governance must, at the minimum, seek to (1) enhance the firm’s ability to operate efficiently and competitively; (2) minimize externalities imposed on the environment by the firm’s operations; (3) maintain transparency, as well as, accountability to both shareholders and other stakeholders, including especially the citizens of the countries and communities in which the firm has its operations; (4) provide opportunities for employees and other members of the communities in which the firm operates to participate fully and effectively in the shaping of corporate policy; (5) minimize corruption and self-dealing by corporate officers; and (6) promote effective communication between managers and investors, as well as its employees and members of the communities in which the company has its operations.

Advocates for business firms, including multinational companies, have argued that forcing firms to dedicate a significant amount of resources to meeting social and environmental demands in the communities in which they operate will constrain the ability of managers to maximize firm profits and meet the needs of investors. Nevertheless, firms, including especially those that operate in Africa, must recognize the fact that doing socially responsible things, such as treating workers well and paying them competitive wages, minimizing environmental damage, creating a safe working environment for workers, and contributing positively to human development in the countries in which they operate, is actually an important way to enhance firm profitability and its long-term survival. Granting local communities a stake in the firm will most likely minimize the type of violence that has endangered the operations of multinational companies in various communities across the continent, as well as actually enhance not just firm survival, but also its long-term profitability. The effective corporate governance model calls for firms to maximize profits and shareholder value but do so through a process that is undergirded by participation, transparency and accountability, and sensitivity to the needs of the firm’s other stakeholders—its employees and the citizens of the country and communities in which it maintains its operations.