Africa Governance Inclusion Legislation

Insight: Corporate governance through a well-designed legal system

The modern corporate governance arguments, both in academic and practice, is basically concerned with the design of institutional, legal as well as policy frameworks that help in protecting widely dispersed and weak shareholders towards the corporate executives.

Since the relationship between corporate executives and shareholders is portrayed as a principal vs. gent type of relationship. Accordingly, creating a healthy executive-shareholder agency relationship appears to be a long-standing challenge for big corporations and policymakers working on corporate governance issues.

It is also recognized that main shareholders, who are mostly equity investors in huge companies, may come upon many costly and complex problems of opportunism on the side of corporate executives. In some situations, collective actions may avert close monitoring of management performance and enable executives to utilize a variety of techniques in an effort to abuse corporate assets for their own interests. Hence, corporate governance reforms and development of appropriate legal frameworks are high on policy agendas nowadays.

In view of that, macro level policy proposals have happened to alter, among others, the role of executives and non-executives in companies, payments, internal and external audit strategies, data disclosures and some type sanctions on low and high level  executives. In this aspect, suggestions have been forwarded to adapt new corporate standards of integrity for corporate executives and auditors. It is, therefore, important to design measures in an effort to protect shareholders from fraud, abuses, and failures of executives. These, most notably, include the certification of accounts by top executives as well as the imposition of strict internal controls and prohibition of conflict of interests such as taking company loans to executives.

The main purpose of these corporate governance actions is, therefore, to create value to the primary stakeholders of the company that primarily includes the shareholders of the company. No company ever continues to exist that ignored the interests of customers, employees, as well as suppliers. The main debate in the academia and practice, however, focuses normally on the internal issues of the corporate governance structure that basically mediate in the relationship between executives and dispersed shareholders of the company.

However, the greater effectiveness of policy and legal rules covering protection of shareholders of a company shall also incorporate the performance of the financial systems and equity markets. Having the best practice principles that comes out from the corporate governance literatures is essential.

The cost of designing an effective corporate governance structure that mitigates the expected risks can be assured by a reliable legal system that addresses the same.  As a result, policymakers shall design an effective application of the corporate governance principles tailored to the needs of effective corporate governance sector throughout the country. In fact, the best practice principles usually gets different stakeholders including the government, banks and insurances, investors, and others.

This consideration and policy framework, of course, shall avoid one-size fits-all approach to the handling of corporate governance related matters. Corporate governance framework, which has the support of the legal framework, not only assists the efforts of stakeholders but also helps judicial organs in solving complicated problems. It is therefore important to formulate a well-designed legal support that shall back-up the corporate governance framework in Africa.

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