SOME THOUGHTS ONCORPORATE GOVERNANCE INETHIOPIA’S FINANCIAL SECTOR

INCLUDING SOME OF ITS IMPLICATIONS IN A GLOBALIZING ENVIRONMENT:

THE CASE OF THE INSURANCE SUB-SECTOR

I INTRODUCTION

Though there is no universal consensus on either the definition or applicable model of Governance,there is nevertheless general agreement that as a concept, it is an age-old phenomenon which has evolved over centuries and will continue to do so in the future. It is no more confined to the narrow meaning of the act or manner of governing, of exercising control or authority over the actions of subjects; or the exercise of political power to manage a nation's affairs. Driven by several factors, social, economic and environmental, it has come to mean the manner in which power is exercised in the management of economic and social resources for sustainable human development. And corporate governance as applied to companies/businesses and defined within local laws, regulations and national priorities are increasingly challenged by circumstances and events having an international impact partly coming from the globalization of the market place. It encompasses the entire exercise of power by a company/corporation in the stewardship of its total portfolio of assets and liabilities such that it maintains and increases shareholder value while satisfying the needs of all its other stakeholders: customers, employees, business partners, governments, local communities, the general public and the environment. The World Bank’s redefinition puts it as: the balancing of diverging interests like between creating shareholder value and creating wider economic, social and environmental value often(referred to as Triple Bottom Line). While it could be argued that the two are not mutually exclusive and there in fact exists a degree of osmosis taking place all the time, there is general agreement that where there exists good public governance, there is a fair chance that there will exist good corporate governance with one continuously reinforcing the other.

II STATE OF CORPORATE GOVERNANCE IN ETHIOPIA - GENERAL

According to some of the current literature I studied (ADB, World Bank, OECD's Principles of Governance, Public and Corporate, Suggested Best Practices in Kenya, New Zealand, etc.), it is clear that inspite of fully recognizable differences in legal, social and political structures of governments and differences in ownership, governance and board structures in different countries, governments and businesses managing people and companies anywhere in the world face decision choices that are not so radically different. Ours being the information/communication age, the age of globalization, there is incredible similarity between the core functions of boards no matter where on the globe the companies being managed by such boards may be located. Nonetheless, there exist enough subtle differences to render any effort at prescriptions for solutions unwise.

With your permission and because of my personal limitations, I prefer not to indulge in lecturing you on or about the state of public governance in Ethiopia. Suffice it to say that as in many African transition economies, for good corporate governance to take root and flourish in this country, it will require organic, societal transformation: political, legal and economic frameworks and processes which foster the creation and development of genuinely inclusive participation, a judicial system of clear laws, fair to all and uniformly applied, fair competition (same rules of the game and level playing field), public-private partnership (stakeholder-ship) based on shared goals and aspirations, transparency and accountability.

Assuming that you have no serious objection to my earlier assertion that, while good public governance would provide the most suited milieu for the emergence and flourishing of good corporate governance, absence of good public governance may not necessarily rule out the existence of pockets of the latter. Indeed, observations of empirical conditions in many transition economies (some domestic companies owned and managed by Ethiopians, some others with foreign shareholders/transactions, agencies/branches of transnational companies, foreign NGOs, UN agencies, etc.) amply attest to this assertion.

The Societal Framework - Cultural & Religious

In earlier days, the unwritten law was that power of whatever nature emanated from above. Emperors/Kings were all Elect of God and divine power was given to them to rule over their subjects. So, an Emperor/King ruled with absolute power and was only answerable to God. In turn, those to whom the Emperor/King gave power were answerable to him. Consequently, good governance was a function of the goodness of the Emperor/King and his appointees.Their goodness varied with their individual wisdom and/or fears: a) fear of God and his personal wisdom for the Emperor, and, b) fear of the Emperor and their individual wisdom for his appointees. Thus, while God-fearing and wise monarchs appointed persons of similar character and they all exercised good governance, inhuman and oppressive monarchs and their appointees ruled with cruelty and harshness. Ethiopia had its share of both.

The Legal Framework

Not much has been written on the subject of corporate governance in Ethiopia. However, this should not be surprising as it was not until the last part of the 90's that the subject began to attract the attention of economists and business executives, development bankers and corporate managers as well as researchers and academicians. However, the concept and practice of corporate governance in Ethiopia is as old as in any other country in the world. But perhaps, a more appropriate point of departure to study its development (or regression) may be from the time Imperial Ethiopia adopted its more modern Commercial Code back in 1960, a Code currently under serious review.

Except in very few areas where the very concepts themselves were not considered as issues then and about which no specific provisions are found, the Code which was modeled after European laws, was thought to be advanced for the society then. Even today, with certain amendments/harmonization or alignment to take into account the fundamental societal changes which had occurred over the last three decades, the legal framework for good corporate governance as contained in the Commercial Code of Ethiopia 1960 would appear to be sufficiently workable. It is the view of many that in fact the continued desires of recent revolutionary regimes to make a "clean-break-with-the-past" and consequently, the tendency to conveniently ignore, circumvent and/or contemptuously disregard the provisions of the Code had been posing and continue to pose the greater danger.

In the last two decades alone, we had witnessed several instances where the Commercial Code became a victim of this phenomenon where many of its provisions were either ignored or conveniently bypassed: numerous publications about the creation of or transformation of state enterprises into share companies with single shareholders; appointment of chairpersons of share companies in which they did not own shares; establishment of companies in which the registered shareholders and consequently the "elected" directors are only nominees and/or surrogates of those who own and/or exercise effective control of the company (Art. 387); so called share companies whose annual reports do not contain genuine Reports of Directors signed by the chairpersons; and, annual reports of share companies more distinguished by their solely commercial confidentiality than by decent transparency; and so on.

III STATE OF CORPORATE GOVERNANCE IN ETHIOPIA – CASE OF INSURANCE INDUSTRY

Private financial share companies came into being from 1994 following the issue of Proclamation No. 84/1994 - Licensing & Supervision of Banking Business and Proclamation No. 86/1994 - Licensing & Supervision of Insurance Business. Both Proclamations were replaced back in 2008 by Proclamation Nos. 592/2008 and 746/2008 respectively. A cursory glance at certain of the stipulations in those Proclamations would reveal that Ethiopia while enshrining the free market economy in its constitution, it explicitly prohibits foreigners from entering the sector in any shape or form. It does that a) by defining a bank and/or an insurer as: a company in which the capital is wholly owned by Ethiopian nationals and organizations wholly owned by Ethiopian nationals and registered under the laws of, and having its head office in Ethiopia (Art. 2(8) and Art. 2(5) of Proclamations No.746/2008 and No. 592/2008 respectively; and b) by stipulating that: foreign nationals or organizations fully or partially owned by foreign nationals may not be allowed to establish banks/insurers or branch offices or subsidiaries of foreign banks/insurers in Ethiopia or acquire the shares of Ethiopian banks.

Based on the power and authority granted to it under Article 3.5(7) to “license, and supervise banks, insurers and other financial institutions; and 3.5(8) “create favourable conditions for the expansion of banking, insurance and other financial institutions”, the National Bank of Ethiopia served and continues to serve as the Supervisory Authority for the sector.In the pursuit of its role as the Supervisory Authority and implementation of the Proclamations referred to above, the National Bank of Ethiopia had issued several Directives aiming, among others to protect the enterprises from the effects of bad/poor governance by their boards and management as well as from failure to fulfill their fiduciary and related responsibilities to their customers. What may be considered a very comprehensive directive onInsurance Corporate Governance (Directive No. SIB/42/2015) was issued and put into effect from 01 October 2015.

The Directive defines “Corporate Governance” under Article 2.3 (Definitions) as “the process and structure used to direct and manage the business and affairs of an insurer towards enhancing business prosperity and corporate accountability with ultimate objectives of realizing long-term shareholders’ value, as well as customers’ and other stakeholders’ interest”. Article 3 of the Directive stipulates that the directives shall be applicable to all insurers operating in Ethiopia except to an insurer owned by the government when its application may be with due consideration of other applicable laws. Such a discriminatory application notwithstanding, some of the major elements put in place by the Supervisory Authority in its attempt to foster good corporate governance in the insurance industry may be cited as follows:

1) no one shareholder, with spouse, dependents below the age of 18 and related to him by consanguinityother than the Federal Government of Ethiopia, shall own more than 5% of the equity of an insurer; 2) a shareholder owning directly or indirectly 2% or more of the total subscribed capital of an insurer is defined as “INFLUENTIAL” and is prohibited from owning shares in similar companies; 3) no shareholder and/or proxy or both shall represent more than 10% of the total subscribed/voting capital of the insurer at any General Meeting of shareholders; 4) an insurer shall have at least nine directors (maximum 12); 5) the board of an insurer shall comprise of non-influential shareholders whose number shall not be less than a) 1/3rd elected separately by such shareholders holding no less than 30% of subscribed capital, b) 1/4th of total board members elected separately by such shareholders holding no less than 30% of the insurer’s subscribed capital; 6) appointment of Directors is subject to approval by the Supervisory Authority; 6) a shareholder can serve as “Director” in only one bank or insurance company and is prohibited from serving for more than two consecutive terms of 3 years each; 7) an employee in a bank/insurance company is prohibited from serving as a Director on the Board of that bank/insurance company; 8) remunerations of Directors by way of profitability incentive and/or sitting fees prescribed by the Supervisory Authority); 9) the board of directors of an insurer or reinsurer is required to ensure that all shareholders of the insurer or reinsurer at all times are Ethiopian nationals or organizations fully owned by Ethiopian nationals; 10) persons with university education and with no less than 10 years experience in banks or insurance companies or related financial institutions shall be appointed chief executives; and, 11) Directors of such companies would be required to meet minimum standards of education and skills including the ability to read and understand financial statements; 12) boards of directors and board committees are required to meet at least once a month, and a host of other conditions including jail terms and financial penalties for breaches the Supervisor may consider punishable.

IV CONCLUDING REMARKS

It may not be entirely correct to make a blanket statement saying that the insurance industry in Ethiopia has not grown and/or developed as much as expected because it is being supervised by the National Bank of Ethiopia. I believe that the National Bank has done much better by and large in its supervision of banks because it could be said to have established reasonably good working competence in the industry. Having had the unparalleled opportunity of sincere and professional discussions with past Governors (including exchange of correspondence in my position as CEO of the African Insurance Corporation and several consultations with international professionals who consulted the National Bank on the subject matter, I continue to hold the view that to continue Insurance Supervision as a Department of the National Bank will simply perpetuate an already entrenched culture that considers insurance as no more than esoteric and not requiring any specialized knowledge to supervise.

Given the present dispensation of supervision Ethiopia’s insurance industry, I would hesitate to say much about the fate of our small and weak insurance companies were foreign competitors were to be allowed to enter the market. The subject deserves another presentation in its own right. It being a subject close to my heart and having made my first presentation to a distinguished gathering of an international but predominantly African insurance and reinsurance professionals back in 1992 (African Insurance Organization) in Nairobi, Kenya, allow me to mention the conclusions as they sound relevant today as they did some 25 years ago:

“ConcludingRemarks:

Insurance trade without or with least restrictions can only be a medium-term objective for Ethiopia. If the aim of liberalization of insurance trade is indeed that of promoting economic growth of all trading partners, then Ethiopia must first prepare itself adequately and position its companies in ways that will enable them share in the benefits expected to accrue from such liberalization.

As conditions differ from country to country the specific steps that need to be taken by each country will vary accordingly. This notwithstanding however, there are bound to be considerable similarities in the broader policy directions that countries like Ethiopia may need to follow to mitigate the possible dangers of sudden, wholesale liberalization of insurance trade:

Both those who wish to immediately liberalize as well as those who opt for progressive liberalization of the insurance trade need to modify5 their insurance legislations to meet the demands of the changed/changing circumstances. Even in countries where supervision of the industry has been knowledgeable and sophisticated, it has not been possible to avoid the disastrous consequences of serious insurance and reinsurance failures and frauds. Previous lessons from developed markets (cases both in the United States and the United Kingdom) that clearly indicated that stricter control and comprehensive supervisory regulations are needed more in "liberalized" than in restricted markets should not be lost on us. Prior modification of "the rules of the game" would appear even more urgent for a country like Ethiopia which may be contemplating full and immediate liberalization of its insurance market.

Under the option of "progressive liberalization", the government and insurance companies must agree to first liberalize fully the domestic market. While parastatals and parapartals may be immediately commercialized and de-nationalized, the domestic market may be fully liberalized for domestic companies (51% or more owned by indigenes and indigenous institutions). Such a regime could last for, say, up to five years during which time one hopes to see the emergence of a few domestic companies with the financial strength, competitive skills and business vision, ready and able to do "across-the-border" trade.

The next phase could be reciprocal liberalization of markets (sector-specific) at the level of the sub-region or region depending on the experience of the first phase. The harmonization of insurance laws and regulations, reciprocal relaxation, if not total removal, of exchange control and investment restrictions – an enabling environment for the emergence of regional multinationals – will be critical imperatives during this phase. The emergence of regional companies, capable of competing with similar enterprises from elsewhere may signal readiness to fully liberalize the insurance trade worldwide. Such a phase could conceivably last up to ten years.

While not wishing to infringe upon the much coveted right and domain of the Supervisory Authority, the National Bank of Ethiopia, to decide on what it thinks is best for our national interest, it must be pointed out clearly however, that full and immediate liberalization of insurance trade engenders grievous dangers not only to the domestic economies but also to the Country’s aspirations for more meaningful economic integration as more fully expressed in the African Economic Community Treaty that was signed in Abuja in 1991. Indeed, viewed from this perspective, full liberalization of trade in certain services, including insurance, and their possible domination by foreign transnationals could be out rightly detrimental to Africa's long term objective of some measure of "self reliance". For there cannot be self reliance when the vital sectors of the economies of Member States are in the hands and under the control of extra-regional transnationals. Only a cautiously planned, phased and strategically sequenced approach to liberalization appears to serve better both the short-run interests of individual countries and the long term objectives of the Continent.”(From r research paper written and presented by the writer at the AIO Sub-Committee On Liberalization of Insurance Trade that was convened in Nairobi, Kenya on 2 May 1992).

Besides, like in many so called transition economies, there are special features that affect the evolution of good corporate governance. In such environments, there is excessive reliance on government, which provides a fertile ground for rent-seeking initiatives, which could be more profitable than productive activities - more profits by obtaining privileges in a system characterized by continuing government intervention than by taking risks to restructure old, inefficient industries or starting up new ones.In such an environment, therefore, good corporate governance will have to be an outcome of organic transformation of society in which reward is earned by those who deserve it and not bestowed upon political cadres and loyalists.