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OVERVIEW OF CORPORATE GOVERNANCE IN ETHIOPIA: THE ROLE, COMPOSITION AND REMUNERATION OF BOARDS OF DIRECTORS IN SHARE COMPANIES

OVERVIEW OF CORPORATE GOVERNANCE IN ETHIOPIA:

THE ROLE, COMPOSITION AND REMUNERATION OF BOARDS OF DIRECTORS IN SHARE COMPANIES

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Hussein Ahmed Tura

(LL.B,  LL.M, Lecturer, Wolaita Sodo University, School of Law.

Email: hatura7@mail.com)

Abstract

Good corporate governance is an important pillar of the market economy and it enhances investor confidence. A strong and balanced board of directors is necessary as a supervising body for the executive management of a company with dispersed ownership. The Ethiopian company law does not have adequate legislative provisions on governance issues related to the separation of supervision and management responsibilities, and on the composition, independence and remuneration of board of directors in share companies. Besides, the draft Commercial Code has not yet been finalized. This article critically examines Ethiopia’s company law with specific reference to the powers, composition and remuneration of board of directors in light of internationally recognized best practices and principles of corporate governance. It argues that there is a need to distinguish between corporate governance and corporate management in Ethiopian company law, and that the board should be suitably composed of non-executive and truly independent members who should be professionally competent. Furthermore, directors’ remuneration should be incentive-oriented based on company and individual best performance, subject to the caveat against excessive amounts of remuneration that go beyond the achievement of this purpose.

Keywords:

Corporate governance, powers of board of directors, composition of board of directors, remuneration of board of directors, share companies, Ethiopia.

DOI http://dx.doi.org/10.4314/mlr.v6i1.2

Acronyms:

BIS Bank for International Settlement

CEO Chief Executive Officer

GTP Growth and Transformation Plan

LSE London Stock Exchange
MFI Micro Financing Institutions
NBE National Bank of Ethiopia
OECD Organization for Economic Cooperation and Development SEBI Securities and Exchange Board of India

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Introduction

Good corporate governance enhances the confidence of investors in the companies and positively contributes towards the overall business environment.1 Well-governed companies often draw huge investment premiums, get access to cheaper debt, and outperform their objectives.2 Good corporate governance requires competent board of directors as a supervising body for the executive management of a company. In companies with dispersed ownership, shareholders are usually unable to closely monitor management, its strategies and its performance for lack of information and resources.3 Hence, the function of non-executive directors in one-tier board structures and supervisory directors in two-tier board structures is to fill the gap between the uninformed shareholders as principals and the fully informed executive managers as agents by monitoring the agents more closely.4

The Commercial Code of Ethiopia (hereinafter the Commercial Code) incorporates provisions pertinent to the governance of share companies.5 However, such provisions are inadequate to address specific issues in corporate governance related to board of directors such as separation of roles of non-executive directors and CEOs, composition and independence of the board as well as director’s remuneration. Moreover, proclamations and directives governing financial share companies in Ethiopia do not sufficiently address the aforementioned issues.

This Article examines the law pertinent to the governance of share companies in Ethiopia with specific reference to the powers, composition and remuneration of board of directors with a view to identifying deficiencies in the company law and suggests the solutions in light of internationally recognized best principles and practices of corporate governance. It contends that the supervisory powers of the board should be separated from the management responsibilities of the executives of share companies in the relevant laws. It also argues that the composition and independence of directors should be reconsidered. Moreover, it examines the effects of quantum of directors’ remuneration on the integrity of share companies, independence of directors and the retention of competent and diligent directors. It further provides some conclusions based on the findings of the study.

 

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