Governance trends and best practice: Are we behind the curve in Botswana
Correspondent | Friday May 24, 2019 13:35
Following the discovery of diamonds in 1967, Botswana quickly became Africa’s foremost success story with an average growth rate of about 7.7 percent per year from 1967 to 1995.
Our escape from the resource trap which is synonymous with other resource-rich countries and its phenomenal economic growth (the highest growth rate in the world at the time) was due mainly to good governance.
Indeed, our good governance as Botswana saw us gain worldwide recognition as a country that prudently managed its resources, had a sound democracy, upheld the rule of law, had good economic and other policies and was ranked as one of the least corrupt countries in Africa. This historically prudent governance was a positive influence on private sector corporate governance and on Botswana’s reputation. In fact, it has gained Botswana the trust of global financial markets.
Despite Botswana’s historical success, recent events arguably raise questions regarding the current status of Botswana’s governance structures in Government and in the private sector. The financial sector, specifically the non-banking sector, has borne the brunt of the corporate governance challenges over the last few years.
The question of whether Botswana is behind the curve is therefore not easy to answer without statistical data or a model that measures corporate governance effectiveness. An evaluation of acquainted organisations therefore should provide a good indication of the effectiveness of corporate governance in Botswana.
First, let us fully appreciate how corporate governance functions. Corporate governance is essentially a framework of principles and practices that an oversite authority puts in place to ensure that there is accountability, ethical behaviour, alignment, clear communication and reporting lines and transparency with all its stakeholders. An effective governance framework generally ensures there are sustainable strategies in place across the organisation.
‘Sustainable’ is a loaded word in this case, and this also includes practices outside of pure profit maximisation. If you are a corporate business, ask yourself this: how much time does your Board allocate to corporate governance and its associated risks and how much time does your Board allocate to business development and profit margins?
The Boards of Directors are the gatekeepers of governance and are the most important element in corporate structures. The Board sets the tone or the organisational culture and put in place structures to mitigate corporate governance risks. Therefore, it is important to have an effective Board with a good balance of skills that covers several critical functions and a good balance of independent Directors as this encourages Board effectiveness. What is your Board’s composition and how is the Board’s effectiveness generally measured?
Since poor corporate governance is an organisational risk, it should therefore follow a risk-based approach to manage risk. This allows for the clear identification, assessment, evaluation and monitoring of all governance risks. The corporate governance risk report is therefore the foundation of the governance framework.
The governance framework clearly identifies the organisational structures, the committees, the duties and responsibilities of each committee, the reporting lines and the levels of approval and accountability within the organisation. Has your organisation implemented a risk-based approach to governance or to the organisation in general?
King IV replaced King III from the 1st of November 2016 and became effective for all organisations / institutions with financial years commencing April 1, 2017. King IV is internationally recognised as the most relevant and up to date benchmark for corporate governance and therefore outlines a very effective framework, an improvement on King III. Does your organisation have a governance framework in place, and are you moving to adopt King IV?
Beyond this, the true implementation of an effective framework is reliant on an effective compliance programme and internal audit to support and monitor adherence to the governance framework on behalf of the Board and other stakeholders.
Often, both compliance and internal audit are not seen as a value add to the organisations (profit centre), but rather a cost centre. This is even though they ensure that good governance structures are in place and adhered to, to protect and maintain the organisation’s reputation.
Does your organisation have a compliance and internal audit function in place to implement the corporate governance framework and monitor and report on the effectiveness of the framework?
The Board and Senior Managements’ understanding of how critical both the compliance and internal audit functions are to corporate governance and organisational sustainability should be the catalyst to hiring the most competent and experienced personnel for these critical functions.
To be effective, these functions must have unrestricted access to all organisational information and must operate at a strategic decision-making level. This will ensure that these functions can quickly and effectively address any corporate governance and other breaches as well as being able to make recommendations on the required course of action decision makers can take.
Has your organisation hired experienced, competent personnel that are part of Senior Management in these functions, do they have a direct reporting line to the Board, and do they have unrestricted access to information up to and including at Board level?
The compliance and internal audit functions’ level of objectivity and independence are important in ensuring that the functions can maintain effective reporting procedures.
Objectivity and independence assist in facilitating early warning systems within the organisation’s structures which mitigate risk and in turn promote sustainability. Developed financial markets ensure that their regulations allow for outsourced compliance and internal audit functions to encourage objectivity and independence in corporate governance and other reporting. Do local regulations allow for the outsourcing of both compliance and internal audit functions?
Lastly, ethical behaviour is the key to good corporate governance, and without developing a culture of ethical behaviour, corporate governance is relegated to a box-ticking exercise. The organisation’s culture sets the tone for how it balances its risks versus rewards. Sustainable organisational culture is based on strong cultural values, and practices. What is the culture in your organisation?
These questions should facilitate some self-analysis and therefore an awareness of where your organisation is relative to the curve. Hopefully this encourages the need to develop models that measure the effectiveness of corporate governance in Botswana with the aim of improving our governance structures relative to our market, our culture, and our ecosystems.
BRANDON HARTNEY*
*This is a consumer education piece from Kgori Capital. This piece was drafted by Brandon Hartney, Compliance Manager at Kgori Capital, and is for public consumption