CORPORATE GOVERNANCE COUNTRY CASE EXPERIENCE PERSPECTIVES AND PRACTICES: ZIMBABWE L. L.

Tsumba Reserve Bank of Zimbabwe

I. Introduction This paper provides a commentary to the presentation: How Banks Can Exert Better Governance on Corporates made by Mr. Ryszard Kokoszczynski, Director of the Bureau of Macroeconomic Research, and former Deputy Governor, National Bank of Poland, with respect to Polish experiences with corporate governance. In addition, the paper discusses corporate governance country case experiences in Zimbabwe and the Southern African Development Community (SADC). The rest of the paper is organized as follows: Firstly, the paper considers what constitutes corporate governance, from both a macro and micro perspective. Secondly, it articulates the differences in approaches taken by Poland and Zimbabwe on this problem. Thirdly, it highlights the nature, strengths and limitations of the Polish Enterprise and Bank Reform Program (EBRP), especially the Bank Conciliation Agreement (BCA). Fourthly, it draws lessons from the Zimbabwean experience on how banks have gone about exerting governance on corporates. The paper also outlines the approaches taken to improve corporate

governance within the banking sector in Zimbabwe, and highlights the regulatory framework for banks and corporates. Lastly, the paper details recent corporate governance initiatives, which have been undertaken in Zimbabwe and the SADC region. There is no

consensus, on whether banks are able to or should be expected to exert the sort of governance expected of them, on enterprises with which they do business. What is clear, however, is that no bank is able and willing to underwrite poor corporate performance as such behavior also impacts negatively on its own viability and survival. II. Nature of Corporate Governance Corporate governance 1 depends on the quality of economic, regulatory, fiscal, institutional and, judicial structures, which in turn are influenced by a given countrys political dispensation.2 The state does, of course, execute its functions through various bodies, a process which naturally gives rise to rent seeking behavior. The quality of a countrys legal traditions, and institutions also impacts on prospects for economic and financial development, through the enforcement of contracts, and property rights. 3 There has been a renewed focus in recent times, on political structures as determinants of the degree of the financial sophistication of a given country. 4 A group in power does design policies and institutions that guarantee self-entrenchment and self-enrichment at the expense of financial deepening and financial development. If the ruling class stands to benefit from free markets, it will enact laws and create institutions supportive of competitive markets. For very personal reasons as well, centralised or autocratic political systems will, in contrast, tend to be intolerant of competition, transparency and accountability and are, therefore, bound to retard rather than encourage financial development.

Governance has to do with the exercise of authority, direction, and control Zingales (1997, p2). In this context, one can refer to governance of a transaction, contract, institution or nation. Governance is, therefore, essential at both the micro and macroeconomic levels. 2 Shleifer and Vishny (1997, p738). Beck, Demirgs-Kunt and Levine (2001) provide sound evidence on the linkages between law, politics and, finance. 3 For an in-depth analysis, see LaPorta, Lopez de-Silanes, Shleifer and Vishny (1997, 2000) who have looked at these linkages in detail. Beck Levine R. and Loayza (2000) as well as Levine, Loayza and Beck (2000) also provide valuable empirical evidence. 4 Chirozva (2001) traces the evolution of the Zimbabwe Financial System since 1892, providing evidence that historical developments affected the prospects of financial development

Similar conclusions can be drawn regarding the origins and, driving force behind colonialism, empire building, and territorial conquest. In countries where settlers paid little regard to equity, the rule of law, and contract enforcement, in as far as this affected the indigenous population, postIndependence rulers will exploit the established institutions to their own adva ntage and profit.5 There is need, therefore, to create an environment where stakeholders, be they shareholders, citizens or other interested parties are assured that the goings-on are not detrimental to their own political and financial interests. For the state, this takes the form of checks and balances, as reflected by the separation of powers; the Judiciary, Executive and Legislature 6. For state owned enterprises, the objective would be the same, with an additional requirement, however, that while functional appointments are determined by market practice, the appointment of Chairmen and Chief Executive Officers and, members of the board of directors, are the responsibility of the executive or some such power. Confirmation by Congress or Parliament is an effective check and, does inject the requisite transparency. A group of sophisticated shareholders provides checks and balances in the private sector. Without sophisticated shareholders, governance of a body corporate is impossible. This is why recourse is made to external auditors, possibly on the presumption that external auditors are independent arbiters and, that being from the outside, they would be hard to compromise.7

5 6

Beck, Demirg-Kunt and Levine (2001, p23) The Standard is the American arrangement which, with some variation, has been emulated by most democracies. 7 This presumption does not seem to have stood the test of time given the unfolding ENRON debacle.

In the wake of the Enron saga, however, the question must now be raised regarding the effectiveness of such arrangements in an emerging market setting such as Zimbabwe, which is characterised by an even less sophisticated investing public, paucity of financial information and, monopoly of financial knowledge and skills by a limited number of people. Governance structures do, of course, cascade down from state to the private sector. Poor results, in some countries, arising from experiments with privatization have taught the world that privatization of state owned enterprises, without the establishment of adequate institutional structures, will not lead to sustainable economic development, because governance issues have a significant effect on the creation of value, its control, and, distribution. At the micro level, good corporate governance improves strategic direction. It attracts outside investment, sets standards of transparency, accountability, and probity, promotes integrity, as well as high standards of corporate citize nship. Corporate governance is, therefore, rightly often defined as the ways in which suppliers of finance assure themselves that they will receive a fair return on their investment. 8 Banks, as significant creditors, have vested interests in enforcing sound corporate governance on companies they lend to. In general, banks enforce sound

corporate governance by screening projects to be funded. They monitor performance, and enforce lending clauses. They ask for project proposals, statements of financial condition, resumes of senior management, shareholding structure, and review the borrowers records to establish accomplishment, before granting loans. Borrowers are routinely required to submit periodic management accounts, as part of the monitoring process. All this is, of course, all very desirable.

Shleifer and Vishny (1997, p737)

Sound corporate governance may also be brought about through the capital markets. Mechanisms used will correspond to ways in which corporates raise funding. Enterprises typically fall into three groups depending on their funding requirements, which in turn is determined by a companys capital endowment9 and reputation10.

Number of firms

Bank finance (Indirect Finance) Direct finance Cash assets of firms Figure 1 Categories of sources of finance among companies11 No finance

Figure 1 above depicts the respective funding and own capital endowment relationship. Small companies cannot afford the cost of borrowing and, have no known reputation to directly access capital markets. The smallest companies, therefore, receive no external funding. Medium sized companies tend to make the greatest use of bank fi nance. This has fundamental implications for small economies and for many developing countries such as Zimbabwe, where SMEs are considered the major engine of economic
9

10

Holmstrm and Tirole (1997, p674) Freixas and Rochet (1997, p185)

development. In Zimbabwe and the SADC region as a whole, for example, there is more value arising from sound corporate governance, through banks than through capital markets. This is because in most cases, only a few companies would normally be listed on a countrys stock e xchange. III. Comparative Corporate Governance Experiences: Poland and Zimbabwe Poland and Zimbabwe have obviously very different political histories, as well as institutional arrangements. The most obvious distinction is that Poland was once a fullyfledged socialist country, while Zimbabwe has always been a mixed economy. In theory, the state owns all productive resources, under socialist governance arrangements. Banks channel state funds, and provide no competent monitoring role, and or guarantee of efficiency. In Poland, a state monobank system, essentially a large accounting firm, was only dismantled in January 1989, to create nine state owned commercial banks (SOCBs). By contrast, privately owned banks in Zimbabwe date back to 1892. Successive governments, however, allowed private enterprises to coexist with a heavy dosage of official controls. In theory, one would expect Zimbabwe to have better corporate governance structures than Poland, as she has had a longer market economy experience. Furthermore, because Zimbabwe has a Common Law legal system, which theoretically is supposed to provide better contractual protection than the Civil Law System in Poland, one would expect that corporate governance would be more advanced. Poland introduced macroeconomic reforms in 1990, involving the removal of price controls and subsidies, devaluation and, a partial floatation of the currency. Today, Po-

11

Source: Freixas and Rochet (1997, p185)

land stands out as one of the most successful open transition economies. Change has provided Poland with a window of political opportunity, to change the entire socioeconomic system, via the institution of a new legal framework and, a corporate governance regime, supportive of a market based economic activity. The reform programme, however, coincided with the collapse of trade links in the CMEA.12 As in Zimbabwe, poverty reduction was a key concern in Poland at the onset of the economic reforms. Poland would, however, appear to have overcome her difficulties. The economy has grown at an average 5% since 1992, while inflation has declined from 70% in 1991, to below 10% by 1998.13 In Zimbabwe the reverse has occurred. Inflation is currently at about 113% and, the economy has shrunk. The private sector now accounts for 70% of economic activity in Poland, while in Zimbabwe this proportion marginally increased by nine percentage points in the ten years. In Zimbabwe, 70% of the population is classified as poor while

the population below the poverty datum line in Poland is around 24%. 14 The poor in Poland have access to the Labour Fund and Social Assistance programmes for poverty alleviation. There are no unemployment benefits in Zimbabwe to assist the poor. To redress colonial imbalances, Zimbabwe embarked on ambitious egalitarian polices at Independence in 1980. During the first decade of Independence, from 1980 to 1990, Zimbabwes economy was characterized by an extensive system of controls on wages, prices of goods and services, foreign trade, foreign exchange, credit and interest rates, as well as on free health services and education. These controls and regulations had far-reaching implications on the role of banks and, the private sector, in relation to

12 13 14

Common Market for Eastern European Countries (CMEA) Okrasa (2000) Zimbabwe has a population of 13 million compared to 39 million in Poland

corporate governance. The Economic Structural Adjustment Programme [ESAP] (1991 to 1995), dramatically transformed the economy from a quasi command to a marketbased economy. Notwithstanding this, the transition to a market economy was stalled by 1999. In 2000, Zimbabwe reverted to some aspects of a command economy. a.) Nature of Corporate Organizations in Zimbabwe and their Governance Corporate activity in Zimbabwe is based on common law, with some RomanDutch influences. Corporate law is embodied in the Companies Act (1951) and, in the Zimbabwe Stock Exchange Act (1996). All companies, whether private or public are subject to the Companies Act. Voting rights are based on the one share one vote concept. The Registrar of Companies and, the Minister of Justice are empowered to investigate potential violation of this Act. The Zimbabwe Stock Exchange (ZSE), a body corporate established by an Act of Parliament, has extensive regulatory powers. It is the second largest stock exchange in Sub-Sahara Africa, after the Joha nnesburg Stock Exchange. The ZSE is a self-

regulating authority under the direction of the Ministry of Finance. An Exchange Committee supervises its work. The Minister of Finance appoints two members of the committee while the stockbrokers appoint 5-7 members. Each member of the committee holds office for a renewable one-year term. The Minister of Finance has power to appoint investigators to examine the committee for any alleged misconduct. b.) Governance of Corporates: - Poland and Zimbabwe Mr. Ryszard Kokoszczynski discussed Polish reforms, which increased capacity of the banking sector to influence real activity through credit and monetary channels, as well as corporate governance. In fact, the Polish Enterprise and Bank Restructuring 8

Programme (EBRP), introduced in 1993, is considered one of the most innovative programmes ever introduced in the transition economies. The programme was designed to facilitate the restructuring of banks, companies, and to foster sustainable economic and political reforms. Banks were given quasi-judicial powers to enforce, out-of-court, loan workout agreements known as Bank Conciliation Agreements (BCAs) with financially distressed companies. It was mandatory, that workout departments were staffed with experts from outside the bank, who were represented in the bank at board level, to ensure transparency and accountability. Initiatives to sell or swap debt for equity were

meant to inject ne w skills, ideas, management styles, and technology into beneficiary companies. The creation of an optimal mix of insider and outsider shareholders was an excellent move. Active shareholders rely on voice unlike passive shareholders who rely on exit, as a way of disciplining company management.
15

The sale of debt also

enabled banks to rid themselves on non-performing loans without getting involved in complicated court processes. IV. Critique of the Polish EBRP When contrasted with insider privatisation prevalent in Russia, for example, the Polish BCA had many attractive features. In Russia, insider privatisation was blamed for rampant asset stripping and looting.16 The Polish privatisation approach was, however, slower than approaches adopted in Russia and the Czech Republic. BCA benefited large companies, at the expense of SMEs. Most SMEs in Poland relied on interenterprise sources of finance, rather than on bank loans. 17 In practice, the BCA proc-

ess involved the removal of delinquent loans from bank balance sheets to a governmen-

15 16 17

Gray (1996, p3) Black. Karakman and Tarassova (1999) Montes-Negret and Papi (1996, p24

tal resolution agency18. Critics argue that, The reform program focused heavily on working out bad debts, but that it did little to correct deficient lending procedures. 19 Weaknesses in traditional bankruptcy procedures were not addressed, therefore, limiting the development of financial intermediation and, contract enforcement. In general, however, the BCA was a successful programme. V. Zimbabwe In Zimbabwe, governance, by banks, has gone through two distinct phases. Banks operated under a semi-command economy, from 1980 to 1990. Corporate governance, while still important, was not given the adequate attention it deserved. Monetary policy and banking supervision functions were carried out in a low key fashion as the controls in place ensured that risks were kept at the very minimum. Obviously, the controls also implied a significant opportunity cost in terms of important banking activities that were not undertaken. While the Central Bank undertook minimal supervision of banks during this time, it is not surprising that there were no bank failures at all. Bank viability and profitability were guaranteed. There was no dynamic and meaningful competition in the financial sector. Low and negative real interest rates, which characterized the 1980s, underwrote economic activity. There was no incentive for efficient cash flow and, cost effective management systems.20 Corporate governance was, thus, not a material issue for banks, as their clients were guaranteed profit under a cost-plus pricing formula. Not sur-

18 19

Ibid (1996, p6) Gray and Hole (1996, p6) 20 Chimombe (1983) documents collusive pricing and several interlocking directorship among financial intermediaries, which further curtailed the ability of banks to exert sound corporate governance principles on banks.

10

prisingly banks had no incentive, therefore, to insist on sound corporate governance practices. The financial sector reforms introduced in 1991 entailed the removal of market segmentation and, facilitated the entry of more institutions into the sector. Trade liberalization was also designed to move the economy away from quantitative import controls, to a fully market-based system. Historically, the import control system, which had flourished over the previous three decades, had bred and sustained an inefficient and monopolistic private sector, which hardly paid any attention to sound corporate governance. As a result of these reforms, there was increased reliance on the role of market forces. This forced banks to revalue their loan portfolios, because their clients were no longer guaranteed a profit. Banks had to develop appropriate methods for loan origination, administration, monitoring and review. In this environment, companies were now

required to submit accurate, and reliable financial information, in order to enable access to loan facilities. The problem of non-performing loans is, however, the more evident with respect to locally owned banks. Because of stiff competition, such banks are often not able to influence the management of enterprises they lend to 21. This, of course, reduces their ability to exert effective corporate governance. In deserving cases, the Reserve Bank of Zimbabwe has permitted bank restructuring, curatorship, and regulatory forbearance approaches to resolving institutionspecific banking problems. Bank restructuring has involved the creation of loan work out

21

One merchant bank has failed because of this. Failure of the bank resulted in adverse repercussions on most indigenous financial institutions in the country.

11

departments, responsible for the bad book, legally separate from the good book. Two large commercial banks were rehabilitated successfully through this approach. Ideally, independent personnel should have staffed the Bad Book Departments, as was the case in Poland. This would have promoted transparency, accountability and good corporate governance. The Reserve Bank of Zimbabwe has, however, not hesitated to remove incompetent managers from troubled banks. In 1999, the Reserve Bank took over management and ownership of a building society, facing imminent collapse. Another merchant bank was placed under curatorship. New investors have now been identified to takeover that institution. In Zimbabwe, banks have tended to place great emphasis on security. Collateralized lending has, therefore, reduced the span for corporate governance and, market discipline. In addition, subsidized credit schemes, targeted at previously disadvantaged SMEs, have naturally increased, the level of moral hazard. Banks are sometimes, however, not concerned about corporate governance issues in such instances, because lending tends to be guaranteed by the State. To complicate matters, as elsewhere, and typical of emerging markets, shareholders in Zimbabwe are generally not sophisticated. They do not attend meetings, and those that attend fail to ask meaningful pertinent questions. And, as long as a company is making a profit, shareholders place less reliance on external auditors for additional financial information. Unlike developed countries, which have high concentrations of skills in government departments, civil services of developing countries, suc h as Zimbabwe, tend not to be as well endowed in this regard. are unable to bring the required supervision to bear. For this reason such countries

12

The legal framework in Zimbabwe needs to be improved to ensure that banks play a more active corporate governance role. Sociopolitical considerations, laws and regulations, particularly, those relating to bankruptcy, are difficult to enforce. Even where collateral is available, it is not easy for banks to realize such collateral. Repayment of government guaranteed loans tends to be a protracted process. Current regulations, however, do permit banks to control enterprises through share owne rship, where this involves debt/equity swap arrangements. Experience does show, however, that ownership of corporate shares by banks, does help reduce moral hazard, by influencing investment strategy, by bringing about management change earlier than bankruptcy laws allow and, by increasing the lenders ability to closely monitor the borrowers behavior 22. While the number of Zimbabwe banks has almost trebled over the last ten years, the level of competition has not been commensurate with this development. It turns out that numbers alone do not necessarily create high levels of competition. In theory, there is evidence that competition results in a fall in the price of financial services or in an increase in the variety and, quality of services provided at a given price. Falling spreads indicate competitive forces at work. In Zimbabwe, however, wide spreads between deposit and lending rates, for the entire bank industry, have continued to be a contentious issue ever since economic r forms were introduced, while the price of services has e tended to rise rather than fall. One school of thought holds that wide interest rate spreads reflect the relatively high level of non-performing loans, caused by unfavorable macroeconomic conditionsdeclining economic growth, high and volatile inflation, interest and exchange rates. The

13

other school, counters that the high spreads, between deposit and lending rates, are reflective of the lack of competition. To support this view, it is argued that, the level of competition, relative to savings, is moderate as evidenced by a high degree of bank concentration, and limited access by residents to foreign banking services. Opening the banking sector, to foreign ownership is clearly one way of addressing the problem of concentration. Such a development would complement the privatization programme still underway. Increased competition would also provide incentives for banks to exert better governance and, improve the efficiency of enterprises to which they lend. VI. Corporate Governance Developments in Zimbabwe and SADC Banks can not be expected to provide effective corporate governance unless they have competent governance structures themselves. The Reserve Bank of Zimbabwe has taken concrete steps, to encourage the adoption of sound governance practices at every banking institution. On-site examination was introduced in 1996. The primary focus, at inception, was on commercial and merchant banks. On-site examination, of non-banking institutions, which incorporates discount houses, finance houses and building societies, commenced in 1998. Risk based examinations were introduced in 2001. The supervisory plan, under this supervisory structure, is tailored to the institutions risk profile. Consolidated supervision was introduced in 2002. There are also plans to bring more non-financial institutions under this coverage. Because we believed that, a broader scope of supervision is

22

Dittus (1994, p40).

14

essential to ensure the safety and soundness of the entire financial and corporate system. There is no doubt that on-site examinations have improved the effectiveness of banking supervision in Zimbabwe. This has allowed examiners much greater access to actual Bank documents and, records. Supervisors can, therefore, make more informed judgments about the financial condition of the supervised banks and, by extension their corporate clients. In this way, it is possible for the Central Bank and, the banks it supervises, to know the real condition of their clients. When this happens and is done well, the soundness of the fina ncial system is assured. In terms of the Banking Act enacted in 2000, the Reserve Bank of Zimbabwe now has a strong legal basis for supervising banking institutions. It should be noted that the licensing function has been retained as a Government policy issue, although the Registrar of Banking Institutions is required in law to secure the concurrence of the Reserve Bank of Zimbabwe before approving an application for a banking licence. In terms the new legislation, banking institutions are required to disclose material information with respect to risk management and risk exposures. In this connection, banking institutions are required to publish financial statements, every six months, for the information of the public. This has helped significantly in instilling discipline and good corporate governance among the banking institutions. A Troubled Banks and Insolvent Banks Policy was also introduced in 2001. This policy provides a benchmark for early identification and prompt response to banking problems. This in turn has been reinforced by the requirement that banks and their boards of directors, accompanied by their external auditors attend an annual review of their operations at the Reserve Bank of Zimbabwe. This has, of course, improved governance in a very visible way. 15

VII. Other Corporate Governance Initiatives The King Report on Corporate Governance issued in South Africa in 1994 was the first code of conduct published on the continent23. The code came immediately after the Cadbury Report, issued in the UK in 199224. There have been also concerted efforts to enhance corporate governance in recent years, in Zimbabwe, partly encouraged by international social and economic developments. The Institute of Directors of Zimbabwe (IODZ) has naturally spearheaded the campaign, to adopt principles popularized in the Cadbury Report, of the UK, and the King Report of South Africa. Zimbabwe has received technical assistance, to enhance its corporate governance, from the International Finance Corporation (IFC), from the African Management Services Company (AMSCO), and from the Government of Denmark. A multi-pronged approach has also seen the adoption of The Principles for Corporate Governance in Zimbabwe: Manual of Best Practices. 25 High profile scandals in government and, the private sector have also galvanized support for good corporate governance. Valuable insights have also been drawn from

23

The King Committee issued the King Report in South Africa in 1994. The revised code identifies seven chief characteristics of good corporate governance, namely discipline or commitment to governance; transparency; accountability; board members independence; responsible management; fairness in dealing with stakeholder interests; and response to social issues. The code was entirely a private business initiative spearheaded by the Institute of Directors of South Africa. (IOD). The King Committee referred to the Cadbury Report, and received support from the Johannesburg Stock Exchange (JSE); South African Chamber of Business (SACOB); South African Institute of Chartered Accountants (SAICA); The Chartered Institute of Secretaries and Administrators (CIS); the South African Institute of Business Ethics; and various business organisations. 24 The Cadbury Committee issued the Cadbury Report in 1992 in the UK. Its primary focus was on financial reporting, accountability and the responsibilities of executive and non-executive directors. 25 Whereas implementation of the Principles of Good Corporate Governance in Zimbabwe is voluntary, the revised King Report 2001 also incorporates important corporate governance themes such as risk management; effectiveness of internal controls; assessment of the board performance, the chief executive and individual board members; and assessment of other non financial issues such as stakeholder interest. Financial Reporting Standards (LPFRSs) are also being developed to cover small enterprises, which are exempted from complying with International Accounting Standards (IAS).

16

the Principles for Corporate Governance in the Commonwealth 26 and from the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance.27 Other initiatives have been made through the Pan African Consultative Forum on Corporate Governance, The United Nations Economic Commission for Africa (UNECA), The African Development Bank, African Union, The Common Market for Eastern and Southern Africa (COMESA), SADC, and ECOWAS. In Southern Africa, South Africa, Malawi, Zambia and Zimbabwe have introduced codes of corporate governance. Ghana and Nigeria have led efforts in West Africa, while Morocco and Egypt have done the same in North Africa. The private sector, through the respective institutes of directors, and stock exchanges have been actively involved in the promotion of good corporate governance. In Kenya, the Private Sector Corporate Governance Trust (PSCGT) has pioneered corporate governance. The adoption of good corporate governance pri nciples in 1999 has seen the abolition of posts of Chairman and Managing Directors (CMDs) at state owned institutions such as the National Bank of Kenya. The position of government appointed executive chairman has been abolished in order to minimise chances of political patronage, including the influence of permanent secretaries, ministers and politicians. In Zimbabwe, two corporates, namely Anglo-American and Delta have led by example, by developing in-house corporate governance manuals. Vibrant civi l society

26

The Commonwealth Association for Corporate Governance (CACG) developed its own Principles for Corporate Governance in the Commonwealth in 2000 27 The OECD Ad Hoc Task Force on Corporate Governance issued the OECD Principles of Corporate Governance in April 1999

17

groups have, as a result, encouraged government and companies to adopt fundamental principles of corporate governance in the public interest as well. The primary responsibility for good corporate governance, however, rests with the board of directors and senior management. In Zimbabwe, listed companies are expected to have at least four directors. Banks must have a minimum of five directors, at least 60% of whom must be independent non-executive directors. Zimbabwe encourages disclosure and transparency, via adoption of international accounting standards; external audits; and dissemination of essential information, in line with international best practices. By addressing the judicial framework, composition of the board, role of auditors, contract enforcement, stakeholder participation, accountability and transparency, corporate governance is improved. The aim of these efforts is to improve wealth generation and efficiency in both the private and public sectors, through the adoption of best corporate practices. Corporate governance is, therefore, an essential tool for improved efficiency, prosperity, economic growth and, social progress. Sound corporate governance is, of course, characterized by transparency and accountability, while poor corporate governance is associated with rent seeking behavior associated with crony capitalism, characteristic of many developing countries. VIII. Concluding Remarks The foregoing suggests that if banks are governed well themselves, they can be relied on to exert sufficient pressure to ensure that corporates are properly governed too. The combination of increased competition, in the financial sector and, an increasingly effective banking supervision function, has provided the necessary incentives for 18

such a development. There is room for improving Zimbabwes legal framework, particularly, as it relates to enforcement of contracts and, bankruptcy laws and, other regulations, so as to ensure that banks effectively execute this very important function. In spite of the state of a countrys general economic standing, poor corporate governance manifests itself in several ways. On the one hand, public officials often fail to make the distinction between public and private resources. On the other, the private sector is often associated with excessive greed, conspicuous consumption, and getrich-quick schemes. These things, of course, suggest that banks will tend to overlook the very requirements of good corporate governance. Banks are, however, better

placed to, and, should be relied on and encouraged to spearhead programmes aimed at improving such governance. These programmes should strive to ensure that both shareholders and company directors do in deed measure up to their responsibilities. Information dissemination, however, has a cost, which someone must bear. The cost is higher in emerging economies, such as Zimbabwe than in developed countries. Expenditure incurred in promoting good corporate governance should, however, be viewed as an investment. Indeed, the sooner such investments are made, the higher the medium to long term benefits which will accrue to society as a whole, in terms of efficiency gains arising from the elimination of rent seeking activity, characteristic of crony capitalism.

____________ L. L. Tsumba, Governor Reserve Bank of Zimbabwe Harare, Zimbabwe

19

References Beck, Thorsten, Demirg-Kunt Asli and Levine Ross (2001) Law, Politics, and Finance. Working Paper. World Bank (January). Beck, Thorsten, Levine Ross, and Loayza Norman (2000) Finance and Sources of Growth. Journal of Financial Economics, 58 (1) Black, Bernard, Kraakman Reinier and Tarassova Anna (1999) Russian Privatisation and Corporate Governance: What Went Wrong. Working Paper No. 178. Sta nford Law School Chimombe, Theresa (1983) The Role of Banks and Financial Institutions in the Accumulation and Reinvestment of Capital in Zimbabwe. M Phil Thesis, University of Zimbabwe Chirozva, Gift (2001) Financial Intermediation and Economic Performance in Zimbabwe. Masters Thesis, Edith Cowan University: Western Australia Dittus, Peter (1994) Corporate Governance in Central Europe: The Role of Banks. Economic Papers No. 42 (August). Bank of International Settlements. Frexias, Xavier and Rochet Jean-Charles (1997) Microeconomics of Banking. Cambridge, MA: MIT Press Government of Zimbabwe Banking Act Chapter 24:20 (1999) Government Printers Government of Zimbabwe The Reserve Bank Act Chapter 22:15 (1999) Government Printers Gray Cheryl W. (1996) In Search of New Owners: Lessons o f Experience with Privatisation and Corporate Governance in Transition Economies. Working Paper No. 1595. World Bank Gray Cheryl W. and Hole Arnold (1996a) Bank-led Restructuring in Poland: An Empirical Look at the Bank Conciliation Process, World Bank Working No. 1650. World Bank

20

Gray Cheryl W. and Hole Arnold (1996b) Bank-led Restructuring in Poland: Bankruptcy and its Alternatives, Working Paper No. 1651. World Bank Harvard Business Review on Corporate Governance (2000) Harvard Business School Press Holmstrm and Tirole (1997) Financial Intermediation, Loanable Funds, And The Real Sector. Quarterly Journal of Economics 112, pp663 691 LaPorta, Rafael, Lopez-de-Silanes Florencio, Shleifer Andrei and Vishny Robert (2000) Investor Protection and Corporate Governance, Journal of Financial Economics, 58, pp 3-27 Levine, Ross, Loayza Norman, and Beck Thorsten (2000) Financial Intermediation and Growth: Causality and Causes, Journal of Monetary Economics, 46, pp 31 - 77 Lorenz Edward (1999) Trust, Contract and Economic Cooperation Cambridge Journal of Economics, 23, pp 301 315 Montes-Negret Fernando and Papi Luca (1996) The Polish Experience in Bank and Enterprise Restructuring. Working Paper No 1705. World Bank Okrasa Wlodzimierz (2000) The Dynamics of Poverty and The Effectiveness of Polands Safety Net (1993 1996), World Bank Working Paper Price Waterhouse (no date) The King Report on Corporate Governance: An overview and Commentary. Special Report Rajan, Raghuram G. and Zingales Luigi. (1999) The Firm as a Dedicated Hierarchy: a Theory of the Origin and Growth of Firms, Working Paper. University of Chicago. Shleifer, Andrei and Vishny Robert W. (1997) A Survey of Corporate Governance. Journal of Finance, Vol LII No. 2 (June) pp 737 781 Williamson Oliver E. (1988) Corporate Finance and Corporate Governance. Journal of Finance, Vol XL111 pp 567 591 Zingales Luigi (1997) Corporate Governance. NBER Working Paper then forthcoming in The Palgrave Dictionary of Economics and Law. 21