PRACTICAL GOVERNANCE: Establishing and Sustaining Effective Corporate Governance in African Markets

Corporate governance is a concept frequently discussed in boardrooms and management circles. But what does it truly mean in practice, especially in the unique context of African markets? How can we identify a company that genuinely practices governance, beyond the buzzwords and the polished annual reports?

In this article, we’ll explore the practical aspects of corporate governance, provide actionable tips for establishing it in African markets, and address common pitfalls, particularly in private companies, family businesses, and wholly-owned foreign subsidiaries. I also intend to provide practical tips for establishing governance in small companies, but this will be covered in a separate article.

Understanding Governance in Practice

Governance, in its most practical form, is about how a company is directed, controlled, and held accountable. It’s not merely a set of policies or frameworks but the daily actions, decisions, and behaviors that ensure the company operates ethically, transparently, and sustainably. The essential elements of governance include organizational structure, corporate policies, internal regulations and codes, stakeholder relationships, and corporate culture. True governance is evident when these principles are not just discussed but ingrained and is visible in the company’s operations and how it does business.

In many African markets, the reality of corporate governance often diverges from the ideal. Despite well-documented governance frameworks and codes, such as Nigeria’s Companies and Allied Matters Act (CAMA) 2020 and the several Corporate Governance Codes in the various sectors of the economy, many companies struggle to implement these principles effectively. This gap between theory and practice is particularly noticeable in private companies, family businesses, and wholly-owned subsidiaries.

Practical Observations on Governance in African Markets

In many jurisdictions, the shareholders' meeting, often referred to as the Annual General Meeting (AGM), is recognized as the highest decision-making body of a company. The Board of Directors should report to the AGM, allowing it to take critical decisions, make approvals, and perform oversight functions on the Board’s actions. However, in practice we observe the following:

• AGMs are Often Superficial: Many companies either do not hold AGMs at all, hold them only on paper for filing purposes, or use them merely as a rubber stamp for pre-made decisions. This undermines the very purpose of the AGM as a forum for genuine oversight and shareholder engagement. Unfortunately, in most cases, the shareholders themselves are the directors, so who is going to insist on doing the right things? Who will call the Board to order when they go rogue?
• Board Meetings Are Often Formalities: In some companies, particularly subsidiaries of foreign entities, Board meetings are either not held or serve only to formalize decisions already made by the parent company. This results in a situation where governance exists only on paper, with little real oversight or strategic input from the Board.
• Governance as a Facade: Companies may present a polished image of governance, filling their Boards with seasoned professionals and showcasing robust governance frameworks. However, if these structures do not function as intended, governance becomes merely a facade, masking the reality of centralized control and lack of true oversight.

Key Indicators of Effective Governance

So, how can we tell when a company truly has good governance? Let’s explore the key indicators that reveal a company is not just talking the talk but walking the walk when it comes to governance.

1. Clear Organizational Structure and Defined Roles

A key indicator of governance in a company is the presence of a well-structured Board of Directors, with a balanced mix of executive and independent non-executive directors. Independent directors are crucial for bringing objectivity to decision-making. The Board is central to any discussion on governance, and its effectiveness is demonstrated by regular meetings, documented minutes, and transparent communication of decisions.

Effective governance is also indicated by a clear delineation of roles between the AGM, Board, and executive management. The AGM, as the highest decision-making body, is responsible for approving financial statements and appointing directors. The Board, accountable to the AGM, provides strategic direction and oversight, while executive management handles the day-to-day operations.

Furthermore, effective governance is evident when roles like CEO, CFO, and other key positions are clearly defined. For example, the separation of the roles of CEO and Board Chair is crucial to avoiding conflicts of interest and ensuring independent oversight. Additionally, the presence of functional committees—such as audit, risk, and remuneration committees—each with specific mandates and regular reporting structures, is a strong indicator of governance in action.

2. Accountability and Transparency

Regular, accurate, and transparent financial reporting is a must, if such a company should be seen as one that implements governance. Companies which shroud their financials in mystery indicate to you that they should not be trusted. Companies should produce quarterly reports, annual financial statements, and undergo external audits. These practices ensure that stakeholders are kept informed and can trust the financial health of the company. Good governance involves openly disclosing material information, especially in the annual financial statement, including risks, significant management decisions, and any potential conflicts of interest. For instance, disclosing executive compensation and related party transactions builds trust and demonstrates transparency.

Companies that regularly engage with shareholders and other stakeholders through meetings, reports, and feedback mechanisms are practicing governance effectively. Prompt and transparent responses to shareholder inquiries further reinforce this.

3. Effective Risk Management

A company with a documented and actively managed risk management framework is clearly committed to governance. Regularly identifying, assessing, and mitigating risks—with clear reporting on risk exposure—is essential. Robust internal controls prevent and detect errors, fraud, and other irregularities. For example, an internal audit department that regularly reports to the audit committee is a key component of effective governance. Also, companies with protocols for managing crises, including communication plans and strategies to protect stakeholder interests, demonstrate that they take governance seriously.

4. Ethical Behavior and Compliance

It is not enough to have a code of conduct or ethics outlining expected behaviors for employees, management, and the Board. Companies that enforce such codes fairly and responsibly demonstrate good governance practices. Regular training and communication of the code are vital for embedding ethical standards in the company culture. A system for monitoring compliance with laws, regulations, and internal policies is crucial. Addressing non-compliance issues promptly is a practical demonstration of governance. Having a confidential whistleblowing mechanism that allows employees and stakeholders to report unethical behavior without fear of retaliation is also an essential element of a robust governance framework.

5. Performance and Strategic Oversight

The Board’s active participation in setting the company’s strategic direction and regularly monitoring progress against goals is a strong indication of governance. This is something that is either rare, and in most cases the Board is already hijacked and there is no real independence. Further, Companies that conduct regular performance reviews for the Board, management, and the company as a whole are committed to governance. Tying executive compensation to performance and long-term value creation further underscores this. Another indication that Governance is evident is when a company has a clear succession plan in place for key leadership roles, ensuring continuity and stability in leadership.

6. Stakeholder Engagement

This is a very significant indicator of Governance:

- Holding regular Annual General Meetings (AGMs) where shareholders can ask questions and vote on key issues is a hallmark of good governance. Regular engagement with other stakeholders, such as employees and the community, further reinforces this.

- Companies that actively seek and respond to stakeholder feedback—and incorporate it into their strategic and operational decisions—indicate that governance is in place.

- A company’s commitment to CSR, through initiatives that benefit the community, environment, and society at large, is a visible sign of governance in practice. note however, that CSR alone does not establish that a company conducts its affairs ethically. I know many companies which use CSR initiatives as a facade, but internally they are rotten and evil.

7. Sustainability and Long-Term Focus

Integrating sustainability into the business model and focusing on long-term value creation rather than short-term gains is a key indicator of governance. Regular reporting on ESG factors shows how a company manages its impact on society and the environment, a crucial aspect of governance today.

Practical Tips for Establishing Governance in Companies operating in African Markets

1. Assess and Adapt Governance Codes: While some sectors and countries, like Nigeria, have Corporate Governance Codes that are mandatory and backed by law, it may not be feasible for all organizations to implement these codes fully and immediately. Companies should assess the available Governance Codes and adopt the minimum requirements that align with their current capabilities. As the organization grows and develops, these practices can be scaled up to incorporate more comprehensive governance principles.
2. Start with the Board: Ensure your Board is composed of individuals with diverse skills and experience, including independent directors. Regularly assess the Board’s effectiveness and provide ongoing training on governance best practices. The tone at the top should reflect a commitment to governance principles. Leaders must exemplify ethical behavior and adhere to policies to reinforce the importance of governance throughout the organization.
3. Corporate Governance for Small Companies: In markets like Nigeria, where CAMA 2020 allows for the registration of companies with sole shareholders and a minimum of one director, governance frameworks could still be tailored to suit smaller entities. [We will cover this in detail in a subsequent article.]
4. Establish Organizational Structure: Even in small businesses, develop a clear organizational structure that outlines roles, responsibilities, and reporting lines. Ensure that each team member understands their role within the structure. Also ensure to clearly define and communicate job descriptions and expectations to all employees. This clarity helps avoid overlaps and gaps in responsibilities.
5. Code of Conduct and Ethical Policies: While it’s true that despite strongly worded codes and internal regulations, unethical behavior may still occur within companies, this does not diminish the importance of establishing a clear and concise code of conduct. This code should outline expected behaviors at all levels of the company and be tailored to the specific context of the organization, rather than merely copied from foreign jurisdictions. The code must be practical, fit for purpose, and easy to understand. It should be widely communicated across the organization, ensuring that everyone is aware of the ethical standards expected of them. It is essential that these ethical standards are not merely symbolic but are actively practiced, with clear governance obligations and consequences for any breaches.
6. Develop a Strong Compliance Culture: Appoint a dedicated compliance officer or establish a compliance committee. Regularly review compliance with local regulations, especially as they evolve in African markets, and ensure that internal policies are adhered to.
7. Implement Robust Risk Management: Create a tailored risk management framework that addresses the specific risks of operating in African markets. Regularly review and update this framework to respond to changing market conditions.
8. Engage with Stakeholders: In African markets, building trust with stakeholders—especially local communities and governments—is essential. Regularly engage with stakeholders through consultations, meetings, and CSR initiatives.
9. Focus on Long-Term Value: Adopt sustainable business practices that contribute to long-term value creation.

Conclusion

Effective governance is not just about ticking boxes or creating a facade of compliance; it’s about embedding principles of transparency, accountability, and ethical behavior into the very fabric of the company. In African markets, where challenges can be unique and complex, this commitment to genuine governance is not just desirable—it’s essential for long-term success.

Companies must move beyond the mere appearance of governance and ensure that the structures they create are functional, active, and capable of driving real oversight and strategic direction. I envision a future where many African companies are not just operating, but are properly organized and run with a strong foundation in governance. This shift will enable these companies to not only meet compliance standards but also to build resilience, gain stakeholder trust, and achieve sustainable growth.

By following these practical steps and adapting governance practices to the realities of the African market, businesses can not only comply with governance standards but also thrive and grow sustainably.

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