DEVELOPMENT AND CHALLENGES OF CORPORATE

GOVERNANCE IN TANZANIA

Asheri Michael Wimile LLM

July 17, 2009 This is a Bucerius/WHU MLB thesis 14.643 words (excluding footnotes)

Supervisor 1: Dr. Markus Roth Supervisor 2: Dr. Carsten Jungmann

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TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................................... i

LISIT OF STATUTES AND SUBSIDIARY LEGISLATIONS ..................................iii

LIST OF ABBREVIATIONS ......................................................................................... iv

CHAPTER ONE ................................................................................................................. 1

INTRODUCTION AND HISTORICAL BACKGROUND .........................................1

1.1. Introduction ........................................................................................................1

1.2 Historical Background .......................................................................................2

1.2.2 Central Planned Economy..............................................................................3

1.2.3 Economic Reforms in Tanzania .....................................................................8

CHAPTER TWO .............................................................................................................. 10

PRINCIPALS AND RELEVANCE OF CORPORATE GOVERNANCE ..............10

2.1 Definition of Corporate Governance................................................................10

2.2 Separation of Corporation ................................................................................13

2.3 Principles of Corporate Governance ................................................................14

2.4 Corporate Governance in Developing and Transition Economies...................23

2.5 Relevancy of Corporate Governance to Economic Development ...................25

CHAPTER THREE........................................................................................................... 27

DEVELOPMENT OF CORPORATE GOVERNANCE IN TANZANIA................27

3.1 Political Development......................................................................................28

3.2 Legal Development ..........................................................................................29

3.3 Institutional Development................................................................................33

3.4 Conclusion .......................................................................................................37

CHAPTER FOUR............................................................................................................. 39

CHALLENGES TO CORPORATE GOVERNANCE IN TANZANIA ...................39

4.1 Listed Companies.............................................................................................39

4.2 Ownership Structure and Control ....................................................................40

4.2.1 Shareholders.................................................................................................42

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4.2.2 Board of Directors........................................................................................46

4.2.3 Annual General Meetings ............................................................................52

4.3 Lack of Strong Competition.............................................................................54

4.4 Outlook.............................................................................................................55

REFERENCES ................................................................................................................ 57

ANNEXURES .................................................................................................................. 64

iii

LISIT OF STATUTES AND SUBSIDIARY LEGISLATIONS

Tanzanian Legislations

The Audit and Accountants (Registration) Act, No. 33 of 1972

The Banks and Financial Institutions Act, No. 5 of 2006

The Bank of Tanzania Act, No 6, 2006

The Capital Markets and Securities Act, No. 4 of 1997

The Capital Markets and Securities (Foreign Companies Public Offers, Eligibility and

Cross Listing Requirements) Regulations of 2003

The Companies Act, No. 12 of 2002

The Constitutional of United Republic of Tanzania, 1977 as amended

The Executive Agency Act, No. 3 of 1997

The Industrial Shares (Acquisition) Act, No. 5 of 1967

The Industrial Shares (Acquisition) (Amendment) Act, No. 1, 1971

The Industrial Shares (Acquisition) (Amendment) Act, No. 13, 1973

The Industrial Shares (Acquisition) (Amendment) Act, No. 32, 1974

The Tanzania Interim Constitution of 1965

The Tanzania Investment Act, No. 26 of 1997

Non Tanzanian Legislation

The Germany Stock Corporation Act, 2001

The UK Company Act of 1985

The UK Company Act of 2006

iv

LIST OF ABBREVIATIONS

AGM Annual General Meeting

ASP Afro Shiraz Party

BEST Business Environment Strengthening Program for Tanzania

BRELA Business Registrations and Licensing Agency

CA Company Act

CCM Chama cha Mapinduzi (Revolutionary Party)

CEO Chief Executive Officer

COB Chairman of the Board

CIPE Center for International Private Enterprise

CMSA Capital Market and Securities Authority

CRDB Cooperative and Rural Development Bank

DCB Dar es Salaam Community Bank

DSE Dar es Salaam Stock Exchange

FDI Foreign Direct Investment

GDP Gross Domestic Product

IMF International Monetary Fund

IPO Initial Public Offer

NESP National Economic Survival Programme

NMB National Microfinance Bank

OECD Organization for Economic Co-operation and Development

PSRC Presidential Parastatal Sector Reform Commission

ROSC Reports on the Observance Standards and Code

SAP Structural Adjustment Programme

TANU Tanganyika African National Union

TBL Tanzania Breweries Limited

TCC Tanzania Cigarette Company

TOL Tanzania Oxygen Limited

TPCC Tanzania Portland Cement Company

v

UK United Kingdom

URT United Republic of Tanzania

US United States of America

UTS University of Technology Sydney

V Versus

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CHAPTER ONE

INTRODUCTION AND HISTORICAL BACKGROUND

1.1. Introduction

Corporate Governance is a crucial ingredient in the process to encourage

domestic investment and ensure inflows of foreign direct investment (Estrin 2003)1. It

has emerged as an issue of international concern and debate in the early 1980s through

1990s and continued into the twenty-first century (Melyoki 2005)2. However, this is not

a new concept; it existed since the incorporation of business began (Vinten, 2003). It

was Adam Smith, in his famous book “the Wealth of Nations 1776” who discussed

corporate governance in the context of incentives to managers when he said:

The directors of companies, being managers of other people’s money rather than

their own, it cannot be expected that they should watch over it with the same

anxious vigilance with which the partners in the private copartnery watch over

their own3

Two essential characteristics of corporations is their ability to have separate

existence different from their owners (Melyoki 2005) and the separation of management

from ownership, which result in the transfer of control of corporations from owners to

professional managers (Scott 1997). The positive and negative externality of the

separation of management and ownership in the modern corporation makes corporate

governance an important issue (Okeahalam 2003). This leads to a number of issues

related to efficient control of asserts of corporations in the interests of all stakeholders.

Tanzania is one of the African least developed countries. It started to transform

its economy from state controlled to market economy in 1986. This transformation goes

1 Saul Estrin was a Deputy Dean (Faculty and Research) and Research Director, Centre for New and Emerging Markets of the London Business School. 2 This was a PHD dissertation (Determinant of Effective Corporate Governance in Tanzania) by Lemayon Melyoki in 2005 at the University of Twente, Neitherlands available at http://doc.utwente.nl/50856 accessed on May 9, 2009. 3 Smith, A. The Wealth of Nations quoted by Tricker, R. I. History of Management Tough: Corporate Governce.

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hand in hand with restructuring the ownership of means of production including

corporations hence development of corporate governance. Any transformation will

always encounter problems and challenges; therefore this thesis reviews the

development of corporate governance in Tanzania and ascertains its challenges.

It has been observed that despite the concerted efforts to develop corporate

governance in Tanzania, there are no studies developed to ascertain country’s specific

characteristics to facilitate the development of corporate governance system suitable for

Tanzania while adhering to international agreed standards.

1.2 Historical Background

1.2.1 Colonialism and Its Impact on Legal System and Corporations

Before colonialism, most African nations were not known by their names we

know them today. This was the same for Tanzania; the name Tanzania was formulated

in 1964 following the union of two independent territories: Tanganyika and Zanzibar.

The first colonial master for Tanganyika was Germany, followed by United Kingdom in

1920, and the proctorate under the League of National in 1946. During German era, it

was known as German East Africa comprising also the current Rwanda and Burundi.

The World War I that ended the German interests in East Africa; the territory was taken

by the United Kingdom and its name changed to Tanganyika. However, the new

territory under Britain was without Rwanda and Burundi which went to Belgium.

Although it was a proctorate under the League of National from 1946, Tanganyika was

remained under the United Kingdom until her independence in 1961.

Zanzibar received her independence on 12th

December 1963 from the United

Kingdom as a constitutional monarchy under the Sultan from Oman. This state of affairs

was short-lived, the Sultan’s government were overthrown on 12 January 1964 by the

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Zanzibar Revolution led by Sheikh Abeid Amani Karume who became president

thereafter.

Djankov (2003) asserts that “when European powers conquered and colonized

other nations, they brought with them their political system, legal and regulatory

institutions, and most important their laws”. As a consequence of this colonial

transplantation, legal origin became an important factor shaping the legal and regulatory

institutions of many countries. With respect to corporate governance, laws constitute the

main way in which colonial experience influences prevailing corporate governance

practices in colonized countries. However, the influence of German law and corporate

governance is non existent in Tanzania. It is the British with its common law system that

greatly influenced the Tanzanian law and corporate governance as they are seen today.

In additional to the legal system, systems of economic coordination are important

determinants of corporate governance practices (Gilpin 2001). They reflect assumptions

about social life in different societies, and how economic activities are coordinated.

Corporate governance practices are embedded in systems of economic coordination. The

cultural, legal and institutional aspects of different societies influence corporate

governance (Tricker, 2000).

1.2.2 Central Planned Economy

Tanzania inherited the market economy system from her colonial masters

(Kiondo, 1993). On the other hand, the constitution history of Tanganyika traces its

background from the 1961 Independence Constitution, followed by Republic

Constitution adopted in 1962 and lasted until 1965. These two constitutions based on the

traditional Lancaster style of constitutions negotiated at independent by the British upon

handover of state power to newly independent states. In 1965, Tanganyika adopted an

Interim Constitution while waiting for a new constitution to be drafted. It was the

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Interim Constitution that abolished multy-party system by declaring that Tanzania is a

one party state4. This was the beginning of the changes the post independent government

started to take. The abolition of multy-party system was an important stage for the

government to accumulate powers needed for the next steps it was going to take. It

should be noted that during all this period, Zanzibar was not having Constitution; it was

being led by Decrees passed by the Revolution Council5.

Bagachwa et al (1992) explains that “the genesis of the ideas for a centrally-

planned system of economic coordination in Tanzania is to be found in the early

experiences following independence: a lack of capital to finance social and economic

development and the lack of a sufficient number of local entrepreneurs able to finance

economic activities”. The post-independence government, under the leadership of

Nyerere (1961-1985), identified three related problems that confronted the country:

ignorance, poverty and diseases. Following those problems and many others like poor

infrastructure and low level of literacy, the government proposed various solutions

including changes of the economic coordination system. It was accepted that economic

development based on private capital would benefit only a small number of people,

probably foreigners, at the expenses of the already disadvantaged indigenous (Melyoki,

2005). The best option thought at that time was the adoption of state controlled economy

system on assumption that it would be just and could potentially achieve equality.

The Arusha Declaration 6 , introduced in 1967 summarized Tanzania’s

commitment to socialism and the significant role that it was to play in the country’s

development. It gave the effect to the ideology of socialism and self-reliance known as

“Ujamaa na Kujitegemea” in swahili, as the cornerstone of the country’s sociopolitical

4 Article 3 of the Interim Constitution declared that there shall be one political party in Tanzania. Article 3 (2) stated that TANU will be the only political party for Tanganyika and Afro Shirazi Party will be the only party for Zanzibar until when the two parties will unit to form one party which then will be the sole party for Tanganyika and Zanzibar. In additional, the first schedule to this Constitution contained the Constitution of TANU. 5 Revolutionary Council was a council involving some prominent people who actively involved in the revolution of 1964. This later changed to became known as the Revolutionary Government of Zanzibar. 6 This declaration made in the city of Arusha (Northern Tanzania) therefore called by the name Arusha.

5

and economic policy7. This declaration emphasized self-reliance, frugality, and self-

denial. It stated that everyone in the state, regardless of his or her actual occupation, was

a worker and that all means of production would be nationalized for the people. The

Tanganyika African National Union (TANU)8, the major political party before and after

independence, established the principles which guided the Declaration. TANU leaders’,

who were mostly civil servants, teachers, farmers, or traders, welcomed the statement. In

fact there were few capitalists in Tanzania in the early 1960s to challenge the document

supporting a socialist model of economic development9.

Part one of the Declaration emphasized beliefs of TANU which included the

following interest beliefs10:

(g) That all citizens together possess all the natural resources of the country in trust

for their descendants;

(h) That in order to ensure economic justice the state must have effective control

over the principal means of production; and

(i) That it is the responsibility of the state to intervene actively in the economic life

of the nation so as to ensure the well-being of all citizens, and so as to prevent

the exploitation of one person by another or one group by another, and so as to

prevent the accumulation of wealth to an extent which is inconsistent with the

existence of a classless society

7 Melyoki, p. 36. 8 TANU was a political party formed in 1954 to coordinate and spearhead the struggle for independence of Tanganyika. It was declared the only Political Party allowed to operate in Tanganyika by the Interim Constitution of 1965. In 1977 TANU merged with Afros Shirazi Party (ASP) the only Party allowed in Zanzibar and formed Chama cha Mapinduzi (CCM) which is still ruling the Tanzania to date. 9 Quintard Taylor et el, An online Reference Guide to African American History available at http://www.marxists.org/subject/africa/nyerere/1967/arusha-declaration.htm accessed on May 4, 2009. 10 The Arusha Declaration and TANU’s Policy on Socialism and Self-Reliance. Avalaibe at http://www.marxists.org/subject/africa/nyerere/1967/arusha-declaration.htm accessed on May 4, 2009.

6

In additional to beliefs, the Declaration enunciated principles of the party and leadership

ethics which later became the leadership code. Both principles and ethics forms part of

this thesis as annexure A.

Following the beliefs, principles and leadership ethics of provided by the

Arusha Declaration, the system of economic coordination changed completely. This

was possible because in principle it was necessary to be a member of TANU in order to

have development. Although the code of ethics were said to aim leaders of the party

and government, all Tanzanians were highly affected during its implementation. All

major means of production were controlled by the state under TANU which was having

supremacy over the government. TANU defined major means of production to include

land, forest, mineral resources, water, oil and electricity, communications, transport,

banks, insurance, import and export trade, wholesale business, steel, machine tools,

arms, motor cars, cement and fertilizer factories, textile industries and any other large

industry upon which a large section of people depended for their living and which

provides essential components for other industries, and large plantation especially those

produced essential raw materials11

.

Various laws were enacted to empower the government to take control of the

economic activities, including the Industrial Shares (Acquisition) Act12. According to

its preamble, this was an Act to empower the Minister for Industries, Mineral

Resources and Power to acquire compulsorily a majority shareholding in certain

Tanzanian industrial companies. Section 3 provided as follows:

3.-(1) The Minister may by order published in the Gazette, declare that, upon a date

specified in the order, shares in a company specified in the Schedule to this Act,

in number not exceeding sixty per cent of the issued share capital of the company,

shall be vested in the Treasury Registrar.

11 Melyoki, pp 37-38. 12 Act No.5 of 1965.

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The schedule to this Act contains all important companies that existed at that

time which are: The Metal Box Company of Tanzania Limited, Kilimanjaro Breweries

Limited, Tanzania Breweries Limited, B.A.T. Tanzania Limited, Tanganyika Extract

Company Limited, Tanganyika Portland Cement Company Limited, East African

Tobacco Company (Tanzania) Limited and Tanzania Bata Shoe Company Limited. The

process did not end with this stage, after acquiring sixty percent, the government went

on acquiring the remaining shares in some companies that it deemed necessary to do so.

The acquisitions of the remaining shares were achieved though amendment to the

Industrial Act. There were amendments in 197113

, 197314

and in 197415

By the late 1970s, Tanzania was a state with a highly controlled economy

pursuing socialist ideologies. As a result, it had an inflexible economic system that was

characterized by monopolistic and heavily regulated production structures in all sectors

of the economy. Tanzania’s rigid economic system of state-interventionist policies, the

Kagera war with Uganda16

, and external shocks during the late 1970s resulted in major

macroeconomic imbalances, economic stagnation, and a decline in per capita income

that lasted over 15 years. As GDP shrank, shortages of basic consumer goods appeared,

and agricultural exports collapsed17.

Corporate governance stands a chance to be highly affected by changes in

economic coordination structure; such changes always affect ownership structure of

corporations. This was vivid in the case of Tanzania where private corporations were

nationalized. According to Melyoki, corporate governance in Tanzania under the state

controlled economy was characterized with corruption (embezzlement, nepotism)

13 Through Act No. 1 of 1971, the government acquired all shares of Tanzania Bata Shore Company Ltd and the name of the Company changed to Tanzania Shoe Company. 14 Act No. 13 of 1973, this amendment was for Tanzania Portland Cement Company Ltd. 15 Act No. 32 of 1974 which was specific for Tanganyika Extract Company Ltd. 16 The Kagera war was a war between Tanzania and Uganda (November 1978- April 1979). It is estimated by Wars of the Word that the war was costing Tanzania US$ 1million per day. http://www.onwar.com /aced/data/tango/tanzaniauganda1978.html. Accessed on 8th May 2009. 17 Volker Treichel,2005, IMF Working Paper WP/05/35 Tanzania’s Growth Process and Success in Reducing Poverty (page 3).

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managerial incompetence; political interference and government subsidization of failing

enterprises18.

Following the critical economic crises, there were different views among

Tanzanians on which policy to follow. Some were proposing that the country should

allow private and market economy to exist and lead economic development while other

especially government leaders were against. “The crises deepened as the debate

continued. The government attempted to introduce partial market oriented reforms in a

bid to address the crisis. It introduced the National Economic Survival Program (NESP,

1981-1982) to mobilize the resources to defend the system through austerity measures

and an export drive. This programme failed and was replaced by another, more liberal,

the Structural Adjustment Programme (SAP, 1983-1985) which also failed. This

necessitated comprehensive reforms towards a market-based system of economic

coordination”19

.

1.2.3 Economic Reforms in Tanzania

Having experienced a steady economic decline in the late 1970s and a financial

crisis in the early 1980s, Tanzania formally adopted an economic recovery program in

1986. This adoption was mainly controlled by the agreement with IMF and Word Bank.

On the other side, this was the reflection of the worldwide victory of the classical

liberalism which advocates market’s coordination of economic activities. Tanzania’s

adjustment and reform process has been gradual and cautious but steady, deep, and

sustainable. Subsequent to the temporary setback in macroeconomic policy during the

first half of the 1990s, the government achieved macroeconomic stability in the late

1990s. Acceleration of structural and institutional reforms, as well as creation of new

institutions, led to improvement in the investment climate, increased foreign direct

investment (FDI) flows, and job creation. The balance of payments improved

significantly reflecting large donor inflows and increased export earnings, mainly from

18 Melyoki p.vii. 19 Melyoki p 43.

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non traditional exports20

. As part of reforms, Tanzania witnessed the privatization of the

state owned corporations including those nationalized under the Arusha Declaration.

OECD21

asserts that privatization needs to go hand in hand with liberalization, or

in the case of natural monopolies with an effective regulatory system which later must

be clearly independent of both government and the firms and must provide surrogate

competition when successful entry by new private firms is not feasible. This was the

case for the economic reforms in Tanzania as there were both liberalization and

privatization. In this context, liberalization included rolling back of the government from

active involvement in economic activities: trade sector reforms, agricultural policy

reforms, monetary reforms, credit and financial sector reforms, civil service reforms,

social sector reforms and institutional reforms22

. The discussed history reflects the

changes and transformation of corporation and the development of corporate governance

in Tanzania.

20 Tanzania’s Economic Reforms and Lesson Learned: Shanghai Poverty Conference Case Study Summary. http://www.tanzaniagateway.org/docs/tanzania_economic_reforms_and _lessons_learned_shanghai_summarycase.pdf accessed on 9 May 2009. 21 OECD Proceedings: Corporate Governance, State Owned and Privatization 1998, OECD Publications, 2 rue Andre-Pascal, 75775 Paris Cedex 16. Printed in France 1998. p. 27. 22 Melyoki p.43.

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CHAPTER TWO

PRINCIPALS AND RELEVANCE OF CORPORATE GOVERNANCE

2.1 Definition of Corporate Governance

There is no consensus about what corporate governance means, because the

breadth and systemic complexity of the involved institutions can be viewed from

different perspectives 23 . Schmidt and Spindler 24, asserts that corporate governance

means different things to different people, especially if they gain their academic and /or

practical experiences in different countries with different business culture and economic

philosophies. Fortunando25 explains that there are three levels of viewing corporate

governance: narrower level which views corporate governance from the agency problem,

intermediate level (relational) which views corporate governance in the perspective of

institutional arrangements that define the structure of rights and responsibilities of the

stakeholders, and how risks and income are allocated between them. The upper level

approaches corporate governance as a nexus of institutions.

Anglo-Saxon consider corporate governance to be only about assuring that

managers act in the interest of the owners or shareholders of a corporation, while

observers from most of continental Europe countries, Japan and other parts of the world

(not influenced by UK) it is about the distribution of rights and opportunities to

influence important decisions taken in large corporations. But both the broader and

narrow view have in common that corporate governance includes the function of

monitoring management such that the letter does essentially what it is supposed to do,

but they differ with respect to what management is supposed to do.

Tanzania26

, defines corporate governance as the process and structure used to

direct and manage business affairs of the company towards enhancing prosperity and

23 Fortunato A. Meanings of Corporate Governance, p. 143. 24 Journal of Interdisciplinary Economics (2006) quoted by Jungmann in his class notes for MLB 2009 on Legal Aspect of Corporate Governance. 25 Fortunato, A. Meanings of corporate governance. 26 Guidelines on Corporate Governance Practices by Public Listed Companies in Tanzania.

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corporate accounting with the ultimate objective of realizing shareholders long-term

value while taking into account the interest of other stakeholders.

The Kenyan Private Sector27

defines corporate governance by referring it to the

manner in which the power of a corporation is exercised in the stewardship of the

corporation’s total portfolio of assets and resources with the objective of maintaining

and increasing shareholder value and satisfaction of other stakeholders in the context of

its corporate mission. It is concerned with creating a balance between economic and

social goals and between individual and communal goals while encouraging efficient use

of resources, accountability in the use of power and stewardship and as far as possible to

align the interests of individuals, corporations and society.

Farrar28

explains that corporate governance is a term that has been in circulation

for the last twenty years and its presence emanates from America although it is now

international … In its narrower and most usual sense, it refers to control of corporation

and to systems of accountability of those in control. It refers to companies’ legislation

but it also transcends the law because we are looking not only at legal control but also de

facto control of corporation. In additional, we are looking at the accountability not only

in terms of legal restrains but also in terms of system of self-regulation and the norms of

the so called best practice. In broader approach it can also cover corporate finance,

labour law, listing rules etc.

OECD 29 defines corporate governance as a set of relationship between a

company’s board, its shareholders and other stakeholders. It also provides the structure

through which the objectives of the company are set, and the means of attaining those

objectives, and monitoring performance, are determined.

The Centre for Corporate Governance of the University of Technology Sydney

(UTS)30 gives a more elaborate and explanations of corporate governance by stating that

27 The Private Sector Initiative for Corporate Governance, Principles of Corporate Governance in Kenya and sample code for corporate governance best practice. 28 Farrar J. Corporate Governance: Theories, Principles and Practice p. 1. 29 Organization for Economic Cooperation and Development (OECD) 1998. 30University of Technology Sydney (UTS Centre for Corporate Governance) available at http://www.ccg.uts.edu.au/ accessed on 11 May 2009.

12

“it is the system by which business corporations are directed and controlled. The

corporate governance structure specifies the distribution of rights and responsibilities

among different participants in the corporation, such as the board, managers,

shareholders and other stakeholders, and spells out the rules and procedures for making

decisions on corporate affairs. By doing this, it also provides the structure through which

the company objectives are set, and the means of attaining those objectives and

monitoring performance."

Moreover, UTS elaborates that corporate governance has wider implications and

is critical to economic and social well being, firstly in providing the incentives and

performance measures to achieve business success, and secondly in providing the

accountability and transparency to ensure the equitable distribution of the resulting

wealth. It is concerned with holding the balance between economic and social goals and

between individual and communal goals. The governance framework is there to

encourage the efficient use of resources and equally to require accountability for the

stewardship of those resources. The aim is to align as nearly as possible the interests of

individuals, corporations and society.

It should be remembered that corporate governance is defined basing on the

theories developed depending on the governance problems to be addressed. Basing on

this, Nganga looking on corporate governance in Africa defined it to mean ‘the set of

mechanisms through which outside investors are protected against expropriation by

insiders’3. Insiders include managers, major shareholders (individuals, other firms,

family interests and/or governments) as well as large creditors (e.g. banks). Outsiders

include equity investors, providers of debt, minority shareholders etc31

.

Looking on the few definitions above, we can immediately understand special

characteristics of corporations, i.e. its legal existence separate from all other

stakeholders on one hand and its inability to exist without the existence of the other

stakeholders on the other hand.

31 Nganga, S. et el, Corporate Governance in Africa: A Survey of Public Listed Companies. P 7.

13

2.2 Separation of Corporation

One of the immediate effects of incorporation is the corporations’ acquirement of

their own legal personnel separate from their owners and hence becomes legally

recognized with ability to act in their own names32

. The concept of separation was not

clearly recognized until 1897 when the House of Lords (UK) elaborated it in the case of

Solomon v. Solomon & Co. Ltd33

. In this case Lord Macnaghten stated that:

“The company is at law a different person altogether from the subscribers to the

memorandum and, though it may be that after incorporation the business is

precisely the same as it was before, and the same persons are managers, and the

same hands receive the profits, the company is not in law the agent of the

subscribers or trustee for them. Nor are subscribers as members liable, in any

shape or form, except to the extent and in the manner provided by the law.”

As a separate entity, the owners’ liability towards the corporation will be limited

to the commitment/shares they have to the corporation. During the industrial revolution,

there were needs for large amount of capital. It was the limited liability principle that

enabled the corporations to raise the required money for large projects like building

railways. As the corporations were addressing the problem of capital from individuals,

those individuals became shareholders and their private capital transformed the company

to be their property. As shareholders become owners, it was difficult for them to run the

day to day business affairs of the corporation something brought another aspect of

separation; separation of ownership and control. In modern corporations in which

separation of ownership from control has taken place, corporate managers have replaced

the entrepreneur34

.

The outcomes of separation of corporation create several questions that need to

be addressed for good corporate governance systems. If the corporation is regarded as a

separate legal person, what does it entail in terms of institutional frameworks for

32 Farrar, J., Corporate Governance: Theories, Principles and Practices, p. 22. 33 [1897] AC at 51. 34 Berle, A., The Modern Corporation and Private Property.

14

decision making?35

Such a kind of questions has contributed to the development of

principles of corporate governance basing on the underlying objectives of corporations

and the relationship of its key stakeholders. Clark36

elaborates this point by saying that

to comprehend the reality of corporate governance in any country there is a need to

understand the relationship between owners, managers and the board of directors, other

scholars broadens the key actors in corporations to include customers, creditors,

employees, suppliers, community and the relevant authorities.

2.3 Principles of Corporate Governance

Principles of corporate governance are standards of best practices developed in

various jurisdictions regarded as cornerstones for best corporate governance. Their main

purpose is to improve good corporate governance practice by increasing management’s

responsibility and promoting openness and transparency of business37. These principles

are living instruments offering non binding standards and good practice as well as

guidance on implementation, which can be adapted to the specific circumstances of

individual countries and region. Although they are non binding, principles are useful

tools in the evaluation of legal, institutional and regulatory framework for corporate

governance in their countries and provide guidance and suggestions for stock exchanges,

investors, corporations and other parties that have role in the process of developing good

corporate governance38

.

Development of corporate governance was much influenced by number of issues

relating to corporations including the collapse of large corporations and hostile takeovers

particularly in UK and US, the increasing power of some corporations and the anti-

social behavior of some corporations. The collapse of major corporations in UK has

contributed significantly to raising the profile of corporate governance in UK itself and

35 Farrar, J,. Corporate Governance: Theories, Principles, and Practice, p.21. 36 Clark, T,. Theories of Corporate Governance, p. 8. 37 Hahn, D., Concentrated Ownership and Control of Corporate Reorganisation, .p. 288. 38 OECD, Principles of Corporate Governance.

15

gradually around the world39

. Principles of corporate governance are always in the form

of codes.

Business prosperity cannot be commanded. People, teamwork, leadership,

enterprise, experience and skills are what really produce prosperity. There is no single

formula to weld these together, and it is dangerous to encourage the belief that rules and

regulations about structure will deliver success. Accountability by contrast does require

appropriate rules and regulations, in which disclosure is the most important element40.

All concerned should then apply these flexibly and with common sense to the varying

circumstances of individual companies. It implies on the one hand that companies

should be prepared to review and explain their governance policies, including any

special circumstances which in their view justify departure from generally accepted best

practice, and on the other hand shareholders and others should show flexibility in the

interpretation of the code and should listen to directors’ explanations and judge them on

their merits41

.

Although principles are implemented on voluntary bases, Wymeersch42 mentions

six mechanisms used to ensure adherence to the principles. The mechanisms are self

regulation, self regulation monitoring by a panel composed of business representatives,

external monitoring by auditors, external monitoring by security markets supervisors and

comparative elements. Companies are required to let their stakeholders know if they are

complying with the principles or not43. Some countries like UK has incorporated their

codes in the listing rules while other nations like Germany44

and Netherlands45

comply

or explain is a legal requirement. Companies always give detailed explanations for non

39 Melyoki, p 2 40 Hampel, Report on Corporate Governance (Combine Code) 1998 p. 7. 41 Hampel, Report on Corporate Governance (Combine Code) 1998, p 10. 42 Wymeersch, E, Implementation of Corporate Governance Codes, 2005. 43 Mallin, C., Corporate Governance, p. 22. 44 Following the introduction of German Code Corporate Governance Good (GCGC) on February 26, 2002, the German Stock Corporation Act (AktG) was amended on July 19, 2002 by inserting a new section 161 which imposes statutory duty on the supervisory boards and management boards of all listed German companies to state that they comply with GCGC as published electronically from time to time by a Standing Commission (the Regierungskommission Corporate Governance) or explain if they do not comply with the Code. 45 Wymeersch, E., Implementation of Corporate Governance Codes p.416.

16

compliance because stakeholders including shareholders and future investors are

interested to know why the company is not complying with best practice. It should be

remembered that untrue or false statements in annual reports may expose the board

members to civil and sometime criminal liabilities46

. Generally, codes are implemented

at the pressure of markets.

Many scholars prefer this voluntary compliance system which is also known as

self regulation. Hahn, to the contrary argues that, voluntary codes of self regulatory

nature will not have major impact in transitional economies with corporate environment

characterized by insider and high concentrated ownership, owner managed companies

and a legacy of heavy state involvement in corporate relations. He went on explaining

that regulation of block-holders is the main issue in corporate governance reform,

however, block-holders are also the key obstacle to the reform. In additional, lack of

institutional foundation for well-developed securities markets, together with other

obstacles make the job to improve corporate governance through codes to be more

difficult. However Hahn supports the existence of codes for informative roles47.

2.3.1 Development of Principles of Corporate Governance

Development of principles of corporate governance originated from the United

Kingdom following the work of several committees established to study various

problems relating to corporate governance that were happening in the UK and

worldwide. The first Committee (Cadbury Committee48

) was established in 1999 to

address the financial aspect of corporate governance49

. The Committee looked into the

performance and rewards of boards and insisted on transparency and accountability in

boardroom proceedings. It also recommended that board should have three non-

executive directors and the role of chairman and chief executive should be held by

46 Wymeersch, E., Implementation of Corporate Governance Codes p.409. 47 Hahn, D., Concentrated Ownership and Control of Corporate Reorganisation, p 286. 48 This Committee was chaired by Sir Adrian Cadbury, hence named after his name. 49 The Cadbury Committee’s report of December 1999.

17

different people. The Committee’s report was attached with code of best practice with

guidelines for behavior and disclosure.

The second committee (Greenbury Committee50) was formulated in 1995 in

response to public and shareholder concern about the pay and other remuneration of

company’s directors in the UK51. The committee recommended for the appointment of

remuneration committee and nominations committee by boards. Also, it recommended

that remuneration packages in UK companies offer must, be sufficient to attract, retain

and motivate directors and managers to the highest quality.

The third committee was the Committee on Corporate Governance established to

review the implementation of the recommendations made by the two former committees.

It was chaired by Ronnie Hampel52

. The committee reported that good corporate

governance is not just a matter of prescribing particular corporate structures and

complying with number of hard and fast rules, but rather a need for broad principles.

This committee emphasized that business prosperity cannot be commanded. People,

teamwork, leadership, enterprise, experience and skills are what really produce

prosperity. There is no single formula to weld these together, and it is dangerous to

encourage the belief that rules and regulations about structure will deliver success.

Accountability by contrast does require appropriate rules and regulations, in which

disclosure is the most important element. The final work of this committee was the

formulation of the Combined Code which took into consideration the codes prepared by

the former committees. The Combined Code of corporate governance has played a

tremendous role in the development of internationally recognized Principles of

Corporate Governance. The report also made a distinction between principles and

detailed guidelines, where in guidelines, one asks how far are they complied with while

with principles, the right question is ‘how are they applied in practice‘.

50 This Committee was Chaired by Sir Richard Greenbury and therefore named after his name. 51 Report of the Directors’ Remuneration of July 1995 (Greenbury Report). 52 Report of the Committee on Corporate Governance (Hampel Report).

18

As discussed above, the combined code has been the catalyst for the

development of internationally recognized principles. The Organization for Economic

Co-operation and Development (OECD) and the Commonwealth both developed

principles that are widely referred to.

2.3.2 The OECD Principles of Corporate Governance

OECD is an inter-governmental international organization bringing together the

most industrialized countries of the market economy. Member compares experiences,

seek answers to common problems, and work to coordinate domestic and international

policies to help members and non-members deal with an increasingly globalised world.

It is internationally recognized as a reliable and comprehensive source of comparable

economic and social data.

The OECD Council Meeting held on 27-28 April, 1998, called for the

development, in conjunction with national governments and other relevant international

organizations of a set of corporate standards and guidelines. The principles were adopted

in 1999. These principles have formed the basis for corporate governance initiatives in

OECD and non-OECD countries. They have been adopted as one of the twelve key

standards for sound financial systems by the Financial Stability Forum, and forms the

basis of the corporate governance component of the World Bank/IMF Reports on the

Observance of Standards and Codes (ROSC) 53 . OECD and the World Bank are

undoubtedly the two authoritative international institutions regarding policy dialogue on

corporate governance reform. They set the tone of the debate, define what amounts to a

“good” standard or practice, and enjoy the highest credibility in advising governments,

policy makers, companies, investors, and supervisory authorities. Such leadership role

53 OECD Principles of Corporate Governance.

19

has gained importance as the governance of corporations has become a policy issue on

its own, both within the OECD and in developing, transition and emerging economies54.

OECD principles recognizes the different circumstances within members states

including difference models of corporate governance (stakeholders model versus

shareholders model), different board structures, cultures, legal system (common law

versus civil law) and the different roles played by various stakeholders in contributing to

the long term success and performance of corporate governance. Principle recognizes

that no single model of good corporate governance, though there are common elements

that underlie good corporate governance which they are build on and formulated to

embrace the different models that exist. No particular board structure advocated by the

principles and they are non binding, not aiming for detailed prescriptions for national

legislation, but they serve as a reference point.

OECD Principles were revised in 2004. The revised version added one area to

the previous principles. The five areas dealt by the older version are “the rights of

shareholders”, “the equitable treatment of shareholders”, the “role of stakeholders”,

“disclosure and transparency”, and “the responsibilities of the board” while the revised

version added the area of “ensuring the basis for an effective corporate governance

framework”. Annexure B comprises the detailed OECD Principles.

There are several criticisms advanced against to OECD principles. According to

Habbard the Principles were, and remain, very shareholder-rights oriented55. While their

preamble does recognise that there are alternatives to the shareholder value model56

,

such recognition of diversity is regrettably lacking in the principles themselves. For

example, it is stated that directors should act in the “best interest of the company and

shareholders”57

in an apparent attempt to reconcile common law jurisdictions (duty to

54 ILO, Mapping out the World Bank Approach to Corporate Governance Reforms in a Trade Union Perspective, 2006, p. 1. 55 Creating Alternative Routes to the World Bank Highway (2006), discussion paper. pp 19-21. 56 For instance, it states that corporate governance is not “simply an issue of the relationship between shareholders and management” and that “in some jurisdictions, governance issues also arise from the power of certain controlling shareholders over minority shareholders” and “in other countries, employees have important legal rights irrespective of their ownership rights.” 57 OECD 2004- Principle VI A.

20

act in the interest of the shareholders) and civil law jurisdictions (the company has a

stand-alone interest). However in the first paragraph of the annotation (i.e. the text

meant to give further explanation and background to the principles), the reader is

immediately warned that “acting in the best interest of the company should not permit

management to become entrenched”. One could have expected a more engaging

statement on regulatory frameworks that formally recognize a company’s own interest.

Luca Cerion58 shares the same view with Habbard.

Habbard puts more critics to the principles by showing that principles are silence

on responsibilities that shareholders may have with respect to their investment, except

for institutional investors with fiduciary duties (i.e. pension funds), who are required to

disclose their potential conflicts of interest and voting policies. No provision requiring

the separation of the CEOs functions from those of the Chair as well as the issues of

interlocking directorships and cross directorships. Also, the principles do not require

auditors to declare if they have other interests with the company they are auditing. It is

also argued that, while the principles emphasizes on the important of directors

remuneration and need for disclosure, there is however no mention of consistency of

boards remuneration scheme with general remuneration policy of the firm 59 . In

additional, the principles mentions the need to protect stakeholders interests but no

mechanisms provided for board to meet with key stakeholders to discuss the

stakeholders interests, also, the principles are silence on the role of legal advisors

regardless their impact to corporate governance60

.

On the other hand, Habbard articulates how Word Bank, IMF and OECD jointly

promotes and forces the adaption of the principles by non- OECD countries especially

those in developing and transition economies. It is explained that, although voluntariness

adaption and use of the principles is one of the principles’ underlying philosophies,

58 Corporate Governance: The OECD Principles, The Scope for a “Model of the Successful Company”, and a New Challenge for the Company Law Agenda and The Broader Regulatory Agenda. Luca Cerion is a Lecturer in Commercial Law, Brunel Law School, Brunel University (West London). 59 This was a discussion paper for ILO so it was important to highlight such a problem of OECD. 60 Legal advisors plays a vital role to corporations especially if there is merger or acquisition.

21

Word Bank and IMF uses their capacity to ensure that they are adapted61

. He concludes

by pointing that OECD does not have mechanisms to ensure adherence to the principles

by its members.

2.3.3 The Guidelines Principles for Corporate Governance in the Commonwealth

Commonwealth comprises a unique collection of nations – ranging from the

developed economies through to vastly differing levels of emerging economies at

varying stages of transition. Many rich and diverse cultures are to be found throughout

the Commonwealth but all have common features which mean that consensus on a

global scale is more easily achieved than among equally diverse countries which do not

enjoy such commonalities. Therefore in the midst of growing international pressure for

adherence to good corporate governance standards, Commonwealth is well placed to

play an influential role. Following that fact, commonwealth developed their own

principles of corporate governance basing on their historical background and economic

development in many of its member states. During the development of these principles

Commonwealth benefited from existence of OECD principles and other codes within its

member states62.

The emphasis of Commonwealth Guidelines is on both private sector and state

owned enterprise, with the possibility to apply to other forms of enterprises such as non-

governmental organizations and agencies. Inclusion approach is another feature of these

guidelines where the requirement of all relevant stakeholders should be included in the

governance system; however, it is difficulty for a board to be accountable to all

stakeholders as this will end up making them accountable no one at all. Boards are urged

to identify the corporation’s stakeholders and to agree a policy as to how the relationship

61 There are several mechanisms used by World Bank and IMF to force adaption of OECD principles including the offering financial and technical support, provision of loans and aids all with conditions that corporate governance issues should be given high priority. They sometimes uses consultants hired by them to supervise the adaption process. 62 See Commonwealth Guideline Principles for Corporate Governance.

22

with those stakeholders should be advanced and managed in the interests of the

corporation.

There are 15 principles developed by the Commonwealth that requires board of

directors to spearhead their implementation63

. The principles apply equally to boards of

directors of all business enterprises-public and private, family owned or state owned.

They are applicable to both executive and non executive directors and they advocate for

the separation of the CEOs’ responsibilities from that of the Chairman of the board

(COB). Annexure C comprises the detailed Commonwealth Principles.

2.3.4 Guidelines on Corporate Governance Practices by Public Listed Companies

in Tanzania

The Tanzanian Guidelines (the Code) was developed by the Capital Markets and

Securities Authority for the purposes of strengthening corporate governance practices by

listed companies in the country and promoting the standards of self-regulation so as to

bring the level of governance in line with international standards64. They are developed

as a response to the growing importance of governance issues both in emerging and

developing economies and for promoting domestic and regional capital markets growth.

The development of these principles benefited from the existence of corporate

governance codes in UK, Malaysia, South Africa, Commonwealth and OECD. As other

codes in the world, these codes recognizes the need to nurture and encourage to evolve

as a matter of best practice but certain aspects of operation in body corporate must of

necessity require minimum standards of good governance.

The document is divided into two sections, i.e. (1) Principles of Good Corporate

Governance Practices and (2) Recommended Best Practices in Corporate Governance by

Public Listed Companies. The principles as provided by part 3 covers four areas which

are directors, role of chairman and chief executive, shareholders and accountability and

audit. On the second part, all except one recommendation are explanations/elaborations

63 Most of Commonwealth countries are influenced by the common law system hence have unitary board systems. 64 Guidelines on Corporate Governance Practices by Public Listed Companies in Tanzania.

23

of the principles mentioned in the first part. The best practice relating to conduct of

general meeting is the recommendation that does not elaborating any principle. The

Tanzanian code left out many aspects covered by the commonwealth or OECD. While

OECD provides for the requirement to ensure basis for an effective corporate

governance and disclosure and transparency, these issues are not covered in the

Tanzanian document. On the other hand, Commonwealth principles speaks about

strategies and values, company performance, compliance, technological issues, etc, all

those issues are not considered by the Tanzanian principles.

2.4 Corporate Governance in Developing and Transition Economies

There is a lot of literatures and researches on corporate governance, however,

until recently, these studies were exclusively concerned with corporate governance in

mature economies with highly developed markets for the external financing of

corporate, yet the problem of corporate governance is arguably even more serious, and

even more of an imperative in transition and emerging economies65

. Studies on

transition economies indicate several characteristics/challenges of corporate governance

in these countries (Pistor66

, Hihn67

, Lin68

and Nganga69

). Concentration of ownership

together with block holders is common corporate governance system in transition

economies. Shortage of capital and underdeveloped financial market are other problems

because of constraints in mobilization of capital. According to Lin weak corporate

governance undermines the ability to attract external sources of capital in increasingly

comparative international financial markets. He asserts that public policy or national

economic developmental aspects of corporate governance are more pronounced in

transition and development countries than in developing ones.

The broader objective of corporate governance is creating robust micro

foundations of macro economies stability and growth which is particular relevant to

65 Lin C, Public Vices in Public Places: Challenges in Corporate Governance Development in China p.1 66 Pistor, K., Law and Finance in Transitional Economies. 67 Hahn, D., Concentrated Ownership and Control of Corporate Reorganization. 68 Lin,C., Challenges in Corporate Governance Development in China. 69 Nganga, S., et el, Corporate Governance In Africa: A survey Report.

24

transition and developing economies faced with the challenge of establishing efficient,

market based economic institutions. Also, developing economies have large and

inefficient public sector with corporations still dominated by governments; family

founded companies etc while depending much on debt instead of equity capital70

. There

are underdeveloped policies, institutions, legal and regulatory frameworks and poor

contract enforcement.

Auditing and transparency standards are lower than the acceptable international

standards. There are no stable markets to discipline firms and non competitive

procedures for appointing senior officials, appointments bases on political or kinship

ties71. In most countries there is no protection of minority shareholders. In countries with

strong shareholder protection, investors can afford to take a minority position rather than

controlling stakes72. As a result firms tend to have dispersed shareholders as owners and

capital markets are rather liquid. Protection of minority shareholders from block holders

is equally important for development of equity markets as the protection against

management.

Transition economies are also characterized with improper law enforcement

where various good laws are not enforced. Assessment of legal environment concludes

that quality of law enforcement is at least equal importance than the extensiveness of the

law. It is argued that corporate governance in development and transitional economies

have two classical areas of concern; control of managers by dispersed outsider owners;

and the protection of minority shareholders from block holders73

.

Researches on corporate governance in transition economies do not cover much

about Africa; they concentrate on Eastern Europe, Eurasia, Middle East and Asia74

. Even

if some characteristics are similar to all transition economies, Africa have its special

challenges including lack of awareness among shareholders and directors. Another

challenges is the fact that listed companies represents small proportional of total

70 Lin and Hahn. 71 Lin, C. Public Vices in Public Places: Challenges in Corporate Governance Development in China. 72 La Porta, R. et el, Legal Determinants of External Finance. 73 Hahn, D. Concentration of Ownership and Control of Corporate Reorganization. 74 Nganga, S., et el, Corporate Governance in Africa; A Survey Report.

25

economic activities with the market capitalization to GDP rations of less than 20% in

most countries, while, these listed corporations have the most developed regulation and

system of corporate governance.

2.5 Relevancy of Corporate Governance to Economic Development

Corporate governance is an important consideration for investors around the

world, especially in Africa and other emerging markets. An investor survey by

McKinsey & Co in 2002 showed that 85% of investors interviewed considered corporate

governance in Africa and Eastern Europe to be ‘equally, or more, important than

financial issues … in deciding which companies to invest in75

’. Therefore if countries

are to reap the full benefits of the global market and if they are to attract long – term

“patient” capital, corporate governance arrangements must be credible, well understood

across boarder and adhere to internationally accepted principles.

Good corporate governance increases and attracts both foreign investment

(source of capital) and improves the confidence of domestic investors by reducing cost

of capital, underpinning the good functioning of capital markets and ultimately induce

more stable source of financing76

. It also increases business efficiency which is

necessary to compete in the global economy and hence create employment. Good

corporate governance improves company’s performances and competitiveness,

contributes to financial stability, facilitates the establishment of new business and

increases shareholders value which brings about economic development77.

In many societies, companies are providing many basic services such as

electricity, water, transport, communication etc, so their functioning provides quality

products and services desired by the society. Good corporate governance is a weapon in

the fight against social vices like corruption and fraud to bring about economic

development as well as establishment of other corporations. It is an important factor for

business ethics and contributes to accountability. Collapse of large corporation like

75Estrin, S., Corporate Governance In Africa p. 4. 76 La Porta, R, et el, Legal Determinants of External Finance. 77 Estrin, S.

26

Enron leaves behind big disaster to the society because people looses employment,

pensions, social services offered to employees, families enters into big financial

problems, government looses its expected taxes and worse enough, the industry and the

country looses reputation78

.

78 Many scholars have documented the importance of good corporate governance in political social and economic development. Documents with such benefits includes the OECD Principles, Commonwealth Principles, Report on Corporate Governance (Combined Code UK) etc.

27

CHAPTER THREE

DEVELOPMENT OF CORPORATE GOVERNANCE IN TANZANIA

Chapter one discussed how Tanzania entered in the state of controlled economy

in mid 1960s and its adoption of economic reforms twenty years later, i.e. mid 1980s.

The reform aimed at widening the role of private sector in economic development

process and limiting the government role in the productive and commercial

undertakings. The process involved both economic liberalizations and privatization of

state owned enterprises including those nationalized following the Arusha Declaration.

It is clear that problems of corporations in state controlled economy are mainly

caused by poor corporate governance. Corporations underperform because of

mismanagement, corruption, lack of capital, lack of competition, lack of incentives for

directors as well as lack of monitoring. However, in most cases, reform processes tends

to ignore corporate governance issues; the focus is on the sale of state controlled

corporations without thinking on how they will be run thereafter. For the purposes of

having sustainable development of privatized corporations, several questions need to be

answered; how do privatization and corporate governance frameworks interact? Are

there specific forms of privatization that are more attractive in weak corporate

governance settings? What are the dynamic relationships between corporate governance

changes and changes in degree of state-ownership of commercial enterprises?79

In order for corporate governance measures to have a meaningful impact on any

economy, a set of core democratic, market institutions, including legal system to enforce

contracts and property rights, needs to be up and running. Yet, in most developing

economies, even the most basic democratic, market institutions may be weak. Given

these circumstances, instituting corporate governance in developing and emerging

markets requires more than merely exporting well-established models of corporate

79 Claessens, S., Corporate Governance and Development, p. 27.

28

governance that function within the developed economies80

. Special attention needs to

be given to establishing the necessary political and economic institutions that are

tailored to a country’s specific needs and that give corporate governance some teeth81

.

3.1 Political Development

Many policies and reform programs were introduced in Tanzania after 1986 to

back up economic reforms. According to Melyok82

liberalization reforms in Tanzania

included ones that rolled back the government from active involvement in economic

activities: trade sector reforms, agricultural policy reforms, monetary reforms, credit and

financial sector reforms, civil service reforms, social sector and institutional reforms,

legal sector reform, private sector development strategies etc. Reforms were guided by

the National Development Vision 202583

. The trade sector reform addressed the

liberalization of trade through the removal of price controls and adoption of a de-

confinement policy to encourage competition.

Financial sector reform involved the privatization of state-owned banks, free

adjustment in the exchange rate and free fluctuation of currency depending on the

market. However, there have been so many reform and programs without proper

coordination something hinders the attainment of intended results. For example, within

the legal sector there is the Legal Sector Reform Program aiming at increasing access to

justice and rule of law coordinated by the Ministry of Justice and Constitutional Affairs.

On the other side, the Ministry of Industry and Trade coordinates the Business

Environment Strengthening Programme for Tanzania (BEST) aiming at reducing

barriers to business with a component of commercial dispute resolution. It was reported

80 CIPE, A Handbook on Instituting Corporate Governance in Developing, Emerging and Transitional Economies, 2002, available at http://www.cipe.org/programs/corp_gov/pdf/CGHANDBOOK.pdf accessed on June 18, 2009. 81 Ibid.

82 Melyok p. 43. 83 The National Vision 2025 is the national strategy providing for social and economic development. It is imbued with five attributes: high quality livelihood; peace, stability and unity; good governance, a well-educated and learning society and competitive economy capable of generating sustainable growth. It is expected to achieve its goals by the year 2025.

29

that the Ministry of Justice focuses mainly on Legal Sector Reform Program without

putting much efforts to BEST Program84.

Although reforms started in 1986, it was 1992 when there was major political

declaration of the new economic coordination in Tanzania. This was through the

Zanzibar Declaration85 that turned down most of the principles laid down by the Arusha

Declaration. The adoption of the Zanzibar declaration is viewed as a move to realize

individual rights in liberal economy including the right to own property86. However,

apart from these changes, the ruling party insists that the Zanzibar Declaration only

clarifies the former Declaration and not abolishing it. The party claims continuation of

socialism policies87. The Zanzibar Declaration was followed by the abolition of one

party regime in 1992.

3.2 Legal Development

One of the most important institutions of a democratic, market-based economy is

an independent and well-functioning judiciary. Few, if any, measures would have impact

without a sound judicial system that enforces laws consistently, efficiently and fairly

maintaining rule of law88

. Country-specific circumstances and institutional features

mean that global findings do not necessarily apply directly to each and every country

situation. Local data need to be used to make a convincing case for change. La Porta

asserts that legal rules protecting investors and the quality of their enforcement differ

greatly and systematically across countries. In particular, these rules vary systematically

by legal origin, which may be English, French, German, or Scandinavian. English law is

common law made by judges and subsequently incorporated into legislature. In the area

84Hagar Russ, Role of Judicial and Legal Sector Reforms in Business Environment Reform Programmes- A Tanzanian Case Study. Hagar Russ was the Legal Advisor of BEST Program. 85 The Executive Committee of the ruling Party (CCM) met in Zanzibar and made historical changes to the principles laid down by Arusha declaration. Through this declaration, almost everything that was barred by the Arusha Declaration was now permitted. 86 Right to own property as per Zanzibar Declaration includes government and part leaders to buy and own shares, as well as being directors in private corporations. 87 This stand was announced by the then Chairman of the Party who was also the President of the United Republic of Tanzania in his speech delivered after the Zanzibar Declaration. 88 Claessens, S., Corporate Governance and Development p. 27.

30

of protection against expropriation by insiders, common law countries protect both

shareholders and creditors the most, French civil law countries are the least, while

German civil law and Scandinavian civil law countries are somewhere in the middle.

Also, richer countries enforce laws better than poorer countries while French Civil law

countries have the lowest quality of law enforcement89.

The Tanzanian judicial sector is not well developed. According to Russ90

, the

sector is underfunded91. By June 2007, there were 13,227 cases pending in the High

Court, contributing to delay of justice. The bankers association estimated that there was

$100,000,000 bad debts tied up cases pending in courts. Also, foreign investors often

structures their commercial transactions offshore, or exclude the jurisdiction of

Tanzanian courts because they hesitate to use local courts. Majority of businessmen have

low confidence in the quality, transparency and verity of judgments with exception of

commercial court. On the other side, legal profession is poorly regulated and the

evidences of misconduct are clearly documented. In additional, Tanzania does not have

developed alternative dispute resolution institutions. However, government’s effort to

strengthen the judiciary is recorded. Examples between 2008 and July 2009 more than

thirty High Court judges were appointed. Also, the existence of commercial court

reduces the problem of commercial cases, helping Tanzania to score well in the world’s

doing business report92

.

The Constitution93 of United Republic of Tanzania was amended in 1984 to

include Bill of Rights and in 1992 to re-introduce the multi-party democracy. Like the

ruling party, the Constitution still maintains that Tanzania is pursuing socialism and self

89 La Porta, R., et el, Legal Determinants of External Finance, p. 1132. 90 Russ, H., Role of Judicial and Legal Sector Reforms in Business Environment Reform Programmes- A Tanzanian Case Study. 91 Russ reports that in 2007, the judiciary budget account for only 0.46% of the total government budget, this quite small compared to other sectors like education which sometimes take 15%. 92 The World Bank’s 2008 Doing Business Report indicators for contract enforcement placed Tanzania at 35 position while Kenya was 107 and Uganda 119. The report is available at http://www.doingbusiness.org/EconomyRankings. 93 The Constitution of the United Republic of Tanzania of 1977.

31

reliance policies with emphasizes to socialist principles94

though in reality there is

nothing like socialism in Tanzania. The existence of such Articles is a bad sign for the

development of market economy.

Contrary to the Constitution, laws were either enacted or amended as part of

economic reforms. They include the Bank of Tanzania Act, the Banks and Financial

Institutions Act, the Insurance Act, the Tanzania Investment Act, the Executive Agency

Act, the Auditors and Accountants (Registration) Act, the Public Corporations Act, the

Capital Markets and Securities Act and the Companies Act. The Companies Act, Public

Corporations and the Capital Market and Securities Act are the leading legislations in

corporate governance issues. The Public Corporations deals with state owned

corporations i.e. where the government has the minimum of 51% of share capital.

3.2.1 The Companies Act

The major legislation governing corporations in Tanzania is the Companies Act

(CA) of 2002. Prior to this Act, there was the Companies Ordinance which existed for

77 years from 1929 covering several historical periods ranging from colonial era, state-

planned economy to liberalization. The new Act enshrines various common law

managers’ duties including a duty to act in good faith and in the best interests of the

company. In addition, the CA 2002 imposes new duties; to have regard to the interests of

employees, to exercise powers for proper purpose, a duty of care and a minimum age of

21 years for appointment as a director together with a duty to disclose one’s age. The

new Act prohibits tax-free payments and offering loans to directors of the company or

its holdings company or any connected persons, also it provides for procedures to

remove directors.

The Company Act regulates both Public and Private Companies. One of the

limitations of Private Company is the number of members95

. The Act provides for the

94 Article 3 (1) declares that Tanzania is a democratic and socialist state which adheres to multi-part democracy. Also, Article 9 insists that the country is governed according to the principles of democracy and socialism and economic activities should not be conducted in a manner capable of resulting in the concentration of wealth or the major means of production in the hands of few individuals.

32

regulatory framework for issuance of shares96

. Although director’s liabilities depend on

the company’s memorandum, the CA restricts any clauses that exempt directors from

liabilities attached to them by law. Minority shareholders are entitled to apply for court

intervention if they believe that they are oppressed or the company is being

mismanaged. Furthermore all companies must appoint auditors at the annual general

meeting, who will incur civil liability for professional negligence if the audited accounts

are inaccurate, and will be criminally liable if they intentionally circulate false accounts.

The impact of Sarbanes Oxley Act to Companies Act includes the ban of

personal loans to directors, requirement for independent auditing firms and disclosure

and transparency of financial statements. Other aspects of Sarbanes Oxley like Audit

Committees are taken care by the principles of corporate governance.

On regulation of public corporations, the CA works together with Capital

Markets and Securities Act especially on publication of prospectuses and to affect the

depository by approved stock exchange97

. The next chapter will discuss the provisions of

CA relating to shareholders, directors, Annual General Meetings etc.

3.2.2 The Capital Markets and Securities Act

The Capital Markets and Securities Act98

was enacted for the purpose of

promoting and facilitating the development of an orderly, fair and efficient capital

market and securities industry in Tanzania, to make provisions with respect to stock

exchanges, stock brokers and other persons dealing in securities. Also, it provides for the

establishment of Stock Exchanges and Fidelity Funds, regulation on licenses,

registration of interests in securities, conduct of securities business, accounts and

auditing, trading in securities, collective investment schemes, public offer of securities,

advertisements relating to securities business etc.

95 Under Section 27 the maximum number of members for private company is 50. 96 Sections 46-57. 97 S. 49. 98 Cap 79 of the Laws of Tanzania.

33

Technical assistance in the formulation of the Act was provided by the

Commonwealth Secretariat and later supplemented by the International Finance

Corporation. The Act was extensively amended in 1997 when certain issues of a

fundamental nature in securities business (relating to public issue of securities and

conduct of business) as well as market development were introduced.

3.3 Institutional Development

In analyzing corporate governance in a cross-country perspective, the question

arises whether the framework extends to rules or institutions. In reality, both institutions

and rules matter, and the distinction, while often used, can be misleading. Both

institutions and rules evolve over time. Institutions do not arise in a vacuum; they are

affected by the rules in the country or the world. Similarly, laws and rules are affected

by the country’s institutional setup 99 . In the end, both institutions and rules are

endogenous to other factors and conditions in the country. Among these, ownership

structures and the role of the state matter for the evolution of institutions and rules

through the political economy process100.

Roe101

mentions ten institutions for corporate governance: markets, boards,

compensation, gate-keeping professionals, and coalescing share-holders (via takeovers

and otherwise), information distribution, lawsuits, capital structure, and bankruptcy.

Another scholars explains that a country's corporate governance institutions comprise

both formal and informal rules ("informal" rules notably include a country's generally

accepted business practices and ethical standards, though these are normally unwritten)

that are established among private actors as well as by the state or other public

authorities. An indicative list of formal corporate governance institutions and key actors

includes: Corporate law, in particular legislation that: 1) gives corporations juridical

personality, 2) determines corporate chartering requirements; and 3) limits the liability

of shareholders to the value of their equity; securities laws which authorize and regulate

99 Claessens, S. Corporate Governance and Development, p. 5 100 Ibid. 101 Roe, M., The Institutions of Corporate Governance, page 6, available at

http://www.law.harvard.edu/programs/olin_center/papers/pdf/Roe_488.pdf accessed on 19 June 2009.

34

the issuing and trading of corporate equity and debt securities (including laws on the

responsibilities an liabilities of both securities issuers and market intermediaries such as

brokers); the government body (securities commission) that has legal authority,

materials and human resources to regulate the issuing and trading of corporate

securities102 . Institutions discussed in this chapter are the institutions established to

facilitate corporate governance during and after economic reforms in Tanzania.

Government and private institutions plays a big role in the development of

corporations and corporate governance. Government institutions established in Tanzania

include BRELA, Capital Market and Securities System Authority (CMSA), Presidential

Parastatal Sector Reform Commission (PSRC), the Commercial Division of the High

Court, Insurance Supervisory Department, Tanzania Investment Centre and Dar es

Salaam Stock of Exchange. Private institutions are Banks, Insurance Companies,

companies, financial brokers and dealers as well as business organizations like the

Private Sector Foundations, The Tanzania Association of Employers, Tanzania National

Business Council, Tanzania Chamber of Commerce, Industry & Agriculture etc.

3.3.1 The Business Registrations and Licensing Agency

The Business Registrations and Licensing Agency (BRELA) was established

under the Government Executive Agency Act103 for the purposes of administering laws

governing companies, business names, industrial licensing and intellectual property.

Also BRELA is responsible for stimulation of innovation, scientific and technological

development.

BRELA is the Registrar of Companies; therefore, it has a big role to play in

corporate governance development. Before its establishment, companies’ affairs were

administered by a department within the Ministry of Industry and Trade. Although

BRELA is at infant stage it is assigned with a lot of responsibilities that needs a lot of

102 OECD, Business for Development, Paris, 2007, pp 151-152. 103 Act No. 30 of 1997.

35

resources. However, it is underfunded, does note have enough human resources,

operating only from Dar es Salaam and not yet full computerized.

3.3.2 The Parastatal Sector Reform Commission

The parastatal sector reform policy was pronounced in January 1992, followed

by the establishment of the Presidential Parastatal Sectors Reform Commission (PSRC)

in 1993. PSRC was an autonomous organ responsible for supervision, monitoring and

enforcement of restructuring procedures and agreements. The restructuring process was

outlined to include phasing out of government subsidies, complete and partial

privatization of public sector holdings; and liquidation of unprofitable entities.

According to Mbowe 104 , secretariat and its technical committees were involved in

complicated issues of asset valuation, preparation of enterprise profiles and bidding

documents, invitation of bids, pre-selection of investors, valuation of bids, negotiation

with prospective investors, etc.

The role of PSCR was to spearhead reform or restructuring of state owned

corporations. However, PSRC concentrated on privatizing state owned corporations

without considering corporate governance issues. Tanzanians were not prepared to

participate in the reform and there was shortage of local capital resulting in the strategic

investors’ approach. According to Ngemera105

, strategic investor approach would end up

creating an economy which is either foreign dominated or locally dominated by few

people. The outcome is that most of the profits making companies were privatized to

foreigner. In additional, though PSRC said to be independent, there was serious

government interference in the process. In one case, PSRC was ordered by the State

House to revoke a tender to purchase a hotel awarded to local businessmen and grant it

to a foreign company that never participated in that tender. PSRC obeyed and signed the

104 Mr. George Mbowe was the first Executive Chairman of PSRC. 105 Ngemera, A. R. Parastatal Performance in Tanzania Quoted my Melyoik p. 57.

36

contract with the foreign company without even knowing the price. The local investor

took the matter to court and he was finally compensated by the government106.

3.3.3 Capital Market and Securities Authority

In 1995 the government established the Capital Markets and Securities Authority

(CMSA) to coordinate, promote and facilitate the development of an orderly, fair and

efficient capital markets and securities industry in Tanzania. Its vision is to develop a

sustainable capital market which is efficient, transparent, fair and equitable to all

participants. CMSA endeavors to ensure proper functioning of Dar es Salaam Stock

Exchange, increase the number of listed securities in exchange, improve corporate

governance and companies’ performance, improve public awareness, create and enable

long term investment, supervise and enforce as well as attract new products for the

market107

.

CMSA has power to register, license, authorize and regulate stock exchanges,

investment advisers, security dealers and their agents. It controls and supervises their

activities to maintain proper standards of conduct and professionalism in the securities

business. Also, it has power to review, approve and regulate takeovers, mergers,

acquisitions and all forms of business combinations. CMSA collaborates with BRELA

in regulating public companies especially during the listing process and supervises listed

companies to ensure good corporate governance.

CMSA board has ten members of whom five are ex-officials108

, and one is a

Member of Parliament. Decisions are made by simple majority vote. The CMSA board

indicates how the government interferes with institutions that ought to be autonomous.

CMSA as supervisor of corporate governance ought to have the best board structure.

106 The Sunday Observer of 19 April 2009 available at http://kurayangu.com/ipp/observer/2009/04/19/135282html accessed on 19 June 2009. 107 CMSA annual reports 1997-2000. 108 Ex-official members are members who became members by virtue of their position. The Ex-official members of CMSA are the Attorney General, Permanent Secretary of Ministry of Finance, Governor of Central Bank, Director General of BRELA and the CMSA CEO.

37

3.3.4 The Dar es Salaam Stock of Exchange

The Dar es Salaam Stock Exchange (DSE) was incorporated in September 1996

as a private company limited by guarantee without share capital109. It is a non-profit

making body created to facilitate the Government implementation of the economic

reforms and to encourage the wider share ownership of privatized and all the companies

in Tanzania as well as facilitating the raising of medium and log-term capital.

DSE was created to perform seven major functions which are; to provide a

market for listed securities especially to enable those who wish to join or exit the

market; to facilitate price discovery by providing information of demand and supply; to

facilitate transparency and to facilitate privatization and wider ownership of resources.

Other roles of DSE are to facilitate the raising of capital by firms and to contribute to the

cultural transformation of Tanzanians110

.

In May 2003 Tanzania opened DSE111 market to foreign investors. Foreigners

are allowed to participate only in the secondary market by buying shares from local

investors except where local investors are not able to buy all IPOs. Moreover,

foreigners’ ownership is limited to 60% of shares floated at DSE. However, the 60%

limit does not affect those who were holding more than 60% shares by May 2003. From

its establishment, DSE managed to list fifteen companies including four foreign

companies cross listed at DSE. One of the obstacles to the market is lack of liquidity

within the country.

3.4 Conclusion

The practical challenge facing policy makers is how to formulate governance

principles across a wide variety of systems whilst maintaining the underlying principles

of fairness, transparency, accountability and responsibility112

.Corporate governance

reforms have been country specific, thus understanding the specific corporate

109 DSE is established by the Companies Act, Cap 212. 110 S. R. Mohamed, Ten Years of DSE: Achievements and Challenges, DSE Journal, Issue No. 35, April 2008, pp 65-70. 111 Public notice issues by Bank of Tanzania on May 2003 titled Tanzania Opens the DSE to Foreign Investors’ Participation. 112 Graham, M. et el. Contemporary Issues in Corporate Governance Reforms: The Case of Ghana. P 128

38

governance requirements for a particular country is imperative. In response to this

requirement, many countries formulated specific committees to study their country’s

requirements. Examples are the committees established in UK and Kings Committee in

South Africa.

It has been observed in this chapter that Tanzania has been putting a lot of efforts

to develop corporate governance. Several laws enacted and institution established

together with several reforms. However, as observed, corporate governance issues were

not primary in all reforms, and even those institutions that were to spearhead it like

PSRC concentrated with other issues leaving behind corporate governance. Also, there is

no clear understanding of the country’s specific corporate governance issues that ought

to be addressed. This happened because no intensive study was carried out for that

purposes and nor special committee established to develop corporate governance

standards for Tanzania. As a result, Tanzania ended up transplanting laws and systems

from developed countries without scientific adaption to her specific situation and

circumstances.

39

CHAPTER FOUR

CHALLENGES TO CORPORATE GOVERNANCE IN TANZANIA

In the previous chapters we have seen that the need for corporate governance in

developing, emerging and transitional economies extends far beyond resolving problems

stemming from the separation of ownership and control. Developing and emerging

economies are constantly confronted with issues such as the lack of property rights, the

abuse of minority shareholders, contract violations, asset stripping and self-dealing. To

make matters worse, these acts often go unpunished because of inadequate political and

economic institutions in order for democracy and markets to function. Without these

institutions, corporate governance measures will have little impact.

Tanzania as many other African countries encounters several challenges to her

efforts to develop corporate governance. The challenges Tanzania facing includes

ownership structure and control, lack of strong competition, predominance of small

corporation, political and government interference and weak enforcement of laws and

corruption. This chapter will discuss ownership structure and control and lack of strong

competition.

4.1 Listed Companies

DSE have listed fifteen companies since its incorporation in 1996. Among the

fifteen companies, eight companies were parastatals, four foreign companies cross listed

at the DSE113

and three are companies established Tanzanians themselves or by joint

venture with foreigners. The Listing Rules114 requires all listed companies to undertake

to comply with the corporate governance principles, to have Audit Committees and have

at least one third non executive directors.

113 The Capital Markets and Securities (Foreign Companies Public Offers, Eligibility and Cross Listing Requirements) Regulation of 2003 requires foreign company inter alia to adhere to corporate governance principles (Code). 114 DSE listing rules contained in the DSE Handbook, 2008

40

4.2 Ownership Structure and Control

The essence of agency problem in corporations is the separation of ownership

and finance or ownership and control. A corporation’s ownership structure affects the

nature of the agency problems between managers and outside shareholders, and among

shareholders115

. According to CIPE116

, all corporate governance systems revolve around

four core principles: fairness, accountability, responsibility and transparency. The

specific challenges of upholding these principles depend on the ownership structure of

the corporate sector.

There are two general types of corporate ownership structures: concentrated and

dispersed. In concentrated structures, ownership and/or control is concentrated in the

hands of a small number of individuals, families, managers, directors, holding

companies, banks and/or other non-financial institutions117

. Since these individuals or

groups often manage, control or strongly influence the running of the company, they are

called insiders. Most countries, especially those governed by civil law, have

concentrated ownership structures. Large shareholders address the agency problem

because they have both general interests in profit maximization and enough control over

management118

. It is argued that under such structure of ownership, the agency problems

shifts from manager against shareholder to minority versus controlling shareholders119.

Also, dominant owners can bully or collude with management to expropriate firm asserts

at the expenses of minority shareholders. In additional, when managers are large

shareholders they may use their power to influence decisions for their benefits at the

expenses of the company. Therefore, countries in which insider-held firms dominate will

115 Claessens, S., Corporate Governance and Development, Global Corporate Governance Forum, Focus 1, Word Bank, 2003 p 11. 116 Centre for International Private Enterprises CIPE:A handbook for institution Corporate Governance in Developing, Emerging and Transitions Economies (2002) available at http://www.cipe.org pp. 7-8. 117 Claessens, C. ibid 118 Shleifer and Vishny, R., “A Survey of Corporate Governance” in Corporate Governance Around the World: A European Perspective, Routledge (Taylor and Francis Group), London and New York, 2008. (Edited by Ruud A Van Frederikslust et el, p 65. 119 Claessens, S., Corporate Governance and Development, p 12.

41

have different requirements in terms of corporate governance framework than those with

dispersed ownership120.

Dispersed ownership is a scenario where companies have large number of

owners each holding few shares. These shareholders are called outsiders and the system

is called outsider systems. Common law countries such as the UK and the US tend to

have dispersed ownership structures, but concentrated structure is common even to

commonwealth countries that are emerging or at transition economies. Free rider is one

of the major problems in this structure because shareholders do not have incentives to

participate in managing the corporation121

.

Both systems have inherent risks. Corporate governance systems are designed to

minimize these risks and to promote political and economic development. An effective

corporate governance system relies on a combination of internal and external controls.

Internal controls are arrangements within a corporation that aim to minimize risk by

defining the relationships between managers, shareholders, boards of directors, and

stakeholders. Discussing corporate governance in Africa, Nganga views corporate

governance as the mechanisms through which outside investor are protected against

expropriation by insiders122. Following these contradictions, many scholars propose that

corporate governance in developing and transition economies should involve both legal

protection and ownership control123

. Most corporate governance systems therefore rely

on a combination of legal protection, ownership concentration, and the threat of hostile

takeovers through an active market for corporate control124

.

120 Claessens , S. page 12. 121 Shleifer, Survey of Corporate Governance, p. 8 122 Nganga, S. et el Corporate Governance in Africa p. 7. 123 Andrei Shleifer et el, CIPE, Nganga et el all are of the opinion of having both legal and ownership protection. 124 Nganga et el p. 7.

42

4.2.1 Shareholders

Statistic indicates that Tanzania as many other transition economies have

concentrated ownership structure125

. The method of privatization chosen in each country

determines to a large degree the ownership structures that evolve subsequently126 .

Strategic investor approach was the method used by Tanzania resulting in concentrated

ownership. For big companies, the process started by joint venture agreement between

the government and foreign companies, then the government sold some or all of her

shares to the public. The privatization of Tanzania Portland Cement Company

(TPCC) 127 is an example. The process started by a joint venture with two foreign

companies: Scancern International 13% and Swedfund International 13%. Later,

Scancern increased its share to 41%, then 50.4% and finally it acquired Swedfund shares

ending up with 69.3%. Employees owned 0.7%. Eventually TPCC went public trading

30% shares owned by the government128

. On the other hand, concentration is contributed

by the historical background of the company before going public where key

stockholders will ensure that they retain control129

.

The Company Act provides for several rights to shareholders in Tanzania

including the right to dividends130

, appoint auditors131

, require auditing132

, vote at

AGM133

, right to require poll134

, right to require extraordinary meetings135

, information

during AGM136, vote in changes of share capital137, rights to be furnished with annual

125 Melyoik. 126 Simeon Djankov, Ownership Structure and Enterprises Restructuring in Six Newly Independent States, Word Bank p. 8. 127 Information available at TPCC webpage http://www.simbacement.co.tz accessed on 29 June 2009. 128 This mode of privatization applied as well to Tanga Cement, TCC, TBL NMB etc. 129 This is a situation of Tanzania Tea Packers Limited where the founders owns substantial amount of shares and TOL where the government also retained substantial amount of shares. 130 Section 180. 131 S. 170. 132 S. 173. 133 SS 133-150. 134 Ibid. 135 Ibid. 136 Ibid. 137 SS 64 and 68.

43

accounts and directors report138

and right to institute legal action139

. Some of those rights

require threshold of 10% of share or special resolution that requires ¾ of votes to be

passed.

It is accepted that concentrated ownership improves control of management

because they have both incentives and ability to monitor the management. The situation

is the same to Tanzania where block holders (most of them foreigners) asserts effective

control over managements. For example, the management of TBL delivers daily report

to the major shareholder situated in South Africa140

, a situation which usurps the roles of

management and directors. In fact it is the block holder who runs the company.

Speaking of the situation, one officers of CMSA said that;

“The different between companies in developed countries and companies in our

country is that companies in the West are better supervised while ours are poorly

supervised. In that sense the companies which have controlling shareholders,

which are now being better supervised are doing well. One does not have to

discourage the phenomenon of controlling shareholders”141.

The above observation does not take into consideration the fact that where there

is concentrated ownership, the agency problem shifts to concentrated ownership versus

minority shareholders142

. It is also true that most of the companies that are doing well

still enjoy the monopoly that existed during the central planned economy and always

fights new market entrants143.

138 S. 165. 139 SS 8 and 73. 140 Melyoki, pp 203-205. 141 Statement by CMSA officer quoted by Melyoki at p. 204-5. 142 Scholars like Hahn, Andrei Shleifer, Estrine, Ayogu and others view the agency problem in a new dimension when there is concentrated ownership. 143 TBL once engaged in share swap with a competitor to avoid competition in the market. This was done at the expenses of minority shareholders whose their stake was reduced from 10.2% to 8.2% regardless teir effort to oppose the deal.

44

Table 1: Ownership Structure of Listed Corporations

Company 1st Major shareholder 2nd Major shareholder General

Public

TCC 75% (foreigner) 3% 19.5%

TBL 52.8% (foreigner) 20% (foreigner) 27.2%

Tanga Cement 62.5% (foreigner) 0.5% (employees) 37%

Twiga Cement 69.3% (foreigner) 0.7% (employees) 30%

CRDB 30% (foreigner) 22.6% (Institutions) 47.4%

NMB 34.9 (foreigner) 30% (Government) 35.1 %

Swiss Port 51% (foreigner) 8% (local) 41%

DCB144

58.33%

TOL 74.4% (Government) 25.86

NICOL145 100%

Source: Data collected by the author from various sources mainly websites. This data excluded

companies cross listed at DSE and those that do not display such information on their websites. It

should be noted that some of the data may have been changed but they can still provide the picture.

Shleifer argues that a good corporate governance system should combine both

large investor control and legal protection. But most of poor and developing countries

lack mechanism for legal protection of investors146 . OECD states that one way for

shareholders to enforce their rights is through legal and administrative proceedings

against the board and members. Important determinant of the degree to which

shareholders’ rights are protected is whether effective methods exist to obtain redress for

grievances at a reasonable cost and without excessive delay. Minority confidence is

when the legal system provides for minority shareholders to bring law suits.

144 DCB shareholders include municipal councils holding almost equal shares and institutions 145 NICOL is a National Investment Company established to unite Tanzanians by selling its shares to the people to acquire capital for various investments. 146 Shleifer, A., et el, A Survey of Corporate Governance p. 54.

45

Section 233147

provides for the right of any member to petition in court

challenging company’s action which is unfair and violates his interests. However,

sections 8(2) and 73(1) sets threshold of 10% for petitioners challenging alteration to the

memorandum (Constitution of the Company) and variation of rights attached to any

class of shares respectively. This show how narrow is the road to court. Most

shareholders including institutional does not have even 5%. In a situation where

Shareholders Associations do not exist regardless the code’s requirements148, the right to

court is equally denied. On derivative actions, section 234 requires the applicant to seek

leave from the court before petitioning, a process which is cumbersome, expensive and

time consuming. It is not surprising that no single case registered at courts relating to

corporate governance since the economic reforms in Tanzania. It is my opinion that the

mentioned reasons coupled with factors like mistrust to court149, costs, delay etc are the

reasons behind this situation. This remains the challenge to corporate governance to

Tanzania.

The Tanzanian code of corporate governance requires equal treatment of all

shareholders including the minority as the best practice of corporate governance. As

discussed above, this principle can not be observed because controlling shareholders

gets more advantage including controlling and usurping the management and the board

as well as getting daily information about the company while minority depends only on

AGM.

147 CA 2002 148 Principles requires listed companies to encourage and facilitate establishment the establishment of Shareholders’ Association, no company has established and I am of the opinion that these Associations are not at the interests of block holders, therefore they will always oppose their establishment. 149 It was stated by one retired Judge of High Court of Tanzania that Tanzanian does not like to go to court because they do not trust courts. He said most will go there only if they know the judge or magistrate. (Hon. Mihayo, J, quoted by local newspaper, “Tanzania Daima” of 27 June 2009).

46

4.2.2 Board of Directors

There are mainly two board structures existing globally today: the two tier

system which is famous in some civil law countries like Germany and unitary system

existing in Anglo-Saxon countries like UK, US and other commonwealth countries.

Boards come into existence as outcomes of separation of ownership and management of

corporations. Because of their incapacity to run the day to day affairs of the corporation,

owners delegate their powers to professional managers who become their agent.

Raheja classifies three types of players on the board: the CEO, the insider

directors (executives) and outsiders (non-executive directors)150

. However, sometimes

the CEO and Insiders can grouped together. Outsiders are independent of CEO but less

informed about firms’ projects. Insiders are important source of firm’s specific

information and their inclusion on the board can lead to more effective decision-making.

However, they may require motivation to reveal information because of private benefits

as well as possible lack of independence from the CEO151

. Information asymmetry

problem increases because always CEO determines which information to reveal and

which agenda to discuss152

. Another challenge faces boards is interlocking members. It

was observed by Justice Brandeis that “interlocking is the root of many evils. It offends

the laws, human and divine. Applied to rival corporations, it suppresses competition and

violates Sherman law” 153

. Mizruch concludes that board members regardless of their

reputations need to be monitored something which is difficult for dispersed

stakeholders154

.

Linck et el defines board size by looking on the number of members while

independence is defined by looking the proportion of the board composed of non

150 Raheja, C., Determinants of Board Size and Competition: A Theory of Corporate Boards, Journal of Financial and Quantitative Analysis, Vol. 40. No.2, p 6. 151 Fama and Jensen, Separation and Control, Journal of Law and Economics, Vol. 26 (1983) 152 Melvin Ayogu, Corporate Governance in Africa p 7. 153 Brandeis, L.D. Other Peoples Money p. 35. 154 Mark Mizruch, Berle and Means Revisited: The Governance and Power of Large US Corporations, p.586

47

executive directors, and board leadership whether CEO also chairs the board (COB)155

.

According to Linck, boards plays two major roles: monitoring and advising. On the

other hand Raheja contents that the optimal board structure is determined by the tradeoff

between maximizing the incentives for insiders to reveal their private information,

minimizing the coast to outsiders to verify projects and maximizing outsiders’ ability to

reject inferior projects.

Appointment of board is one of shareholders means to influence corporations and

is their basic rights156

. For the election to be effective they need to participate in the

nomination and voting process. It is however asserted that in practice board members are

chosen by senior executives who prepare a list to be voted by shareholders157. It should

be noted that some companies’ constitution allows shareholders owning a certain

percentage of shares to appoint members of the board158.

According to the Tanzanian Code of corporate governance, there are mainly two

groups of directors: executive and non executive. The non executive group is further

subdivided to independent directors and non independent. Independent directors are

directors that do not have any link with the company in whatsoever circumstances159

.

This categorization is identical to Kenyan and UK codes160. However, contrary to UK

Code, the Tanzanian code does not provide mechanism on how independent directors

will be determined hence depending on the directors themselves to declare. UK code

elaborates the functions the board and sets specific responsibilities for non executive

155 Linck, J.S., et el, The Determinants of Board Structure, Journal of Financial Economics Vol. 87, 2008, pp 308-328 at p311 156 OECD Principles of Corporate Governance. 157 Melvin Ayogu, Corporate Governance in Africa: The Record and Policies for Good Governance: African Development Bank, p. 8. 158 It is stated by Aman Sulaiman that in Malaysia a person with larges shareholding block would either ne appointed as a director or be able to appoint a director or representative, (Responding to Concentrated Ownership: The Related – Party Transaction Provisions of Some Asian Countries, The Corporate Governance Law Review (2007), Vol 3 No. 1 pp 70-92). 159 Independent directors are people that haven’t been employed by the company in executive capacity for the past five years, no personal contract with the company or senior member of the company, do not work in a company where CEO is a director, not member of immediately family member of any executive and does not affiliated to an advisor or consultant to the company, senior managers, significant customers, suppliers etc. 160 UK Combined Code 2008

48

directors, appointment and removal of CEO, succession plans as well as requirement of

the board to have three committees: Audit, nomination and remuneration, most

comprising independent directors. Moreover, UK code requires for non executive

directors to meet at least once a year without executive directors, also to meet without

the COB to appraise the COB’s performance.

The UK and Kenyan codes require companies to ensure directors get formal

training to enable them to perform their duties and to get consultation services at the

expenses of the company as well as receiving advise from the Company Secretary who

is inter alia responsible for ensuring that boards operates according to rules and ensures

flow of information. To the contrary, the Tanzanian Code does not mention the

Company Secretary at all although the Company Act161

recognizes the Company

Secretary.

To improve the current level of corporate governance in Tanzania, it is

imperative for the Tanzanian Code of Corporate Governance to be reviewed. Some key

issues to be included are Company’s succession plans, meetings of non executive

directors without executives, training and consultations for directors, recognition of

company secretaries and stipulate their functions on corporate governance and company

boards. Other matters to be included are rights and duties of shareholders, mechanisms

of getting independent members and disclosure issues.

In Tanzania, directors are invested with all powers necessary for managing,

directing and supervising the management of the company162

. Directors are required to

act honestly and in good faith to ensure the best interests of the company163. They are

also required to exercise power for proper purposes, duty of care, skills and diligence.

They are to approve annual accounts to be laid before the AGM164

. Also, the law

requires disclosure of the directors’ remunerations and other payment they receive from

the Company including when they offered other services. The law also requires director

161 Section 187 of the CA. 162 Section 181 of the Company Act (CA 2002). 163 Section 182. 164 Section 158.

49

to take regards the interests of employees in additional to interests of shareholders. Here

the law tries to recognize interest of other groups than shareholders; however, there is no

mechanisms provided on how those interests will be regarded. It is clarified that such

duty is owed to the company therefore we don’t see how such a section functions for

employees165. Where there is an obligation, there should be an obligation to account

otherwise there is no obligation at all166

.

Consideration of employee’s interests’ has been an issue of discussion in

corporate governance due to the fact that employees are one of the important

stakeholders. It was stated by the Canadian Supreme Court that ‘in determining whether

[directors] are acting with a view to the best interests of the corporation it may be

legitimate, given all circumstances of a given case, for the board of director’s to consider,

inter alia, the interests of shareholders, employees, suppliers, creditors, consumers,

governments and the environment”167

. In UK the Company Act of 1985 was having the

same provision like that of Tanzania168

. It was observed that such a provision does not

give employees locust stand to enforce it. In 2006 the UK law was amended putting

more elaborations on the important of companies to consider other stakeholders than

shareholders including employees, however, still the duty is towards the company169.

Germany has also introduced such a requirement through its Code of Corporate

Governance170

. Contrary to Tanzania and UK, the Germany co determination system

may facilitate the implementation of this requirement.

Appointment of the board depends on the Company Act and companies’

constitutions. Most of big corporation distributes directors according to the number of

165 Section 183. 166 Amao, O.O. et el, Corporate Social Responsibility (CSR), Company Law and Employees Interests: The Case of Irish Company Law: A note. 167 People’s Department Stores Inc v Wise (2004) 244 DLR (4th) 564. 168 Section 309 of UK Companies Act of 1985 169 Section 172 (2) (b) of the UK Company Act of 2006. 170 The German Corporate Governance Commission at its meeting held on May 2009 resolved that management boards should also consider the interest of employees. Although it is the Management Board that is required to take action, this requirements will be easily implemented because under the German system, the management board reports to supervisory board which composes employee representatives who always defends and protects the interest of employees.

50

shares one is having. CRDB171

constitution empowers any shareholder with 10% or

more shares to appoint a director for every 10% he has. DANIDA (the major shareholder

30%) has three directors. After DANIDA the second shareholder has 8% so can not

appoint a director. The remaining shareholders have to jointly elect one director for

every 10% shares. For TBL172, a shareholder with 8% can appoint one director, 25-40%

two director, 40-49% three and above 50% 4 directors. This system of appointing

shareholders enables block holders to dominate boards.

Table 2: Director’s structure of listed companies

Company Dire

ctors

Executive

Directors

Non

Executive

Directors

Separati

on of

COB

and

CEO

Tanzanian

s

Foreigners Audit

Comm

ittee

TBL 9 6 3 Yes 4 5 Yes

TCC 6 3 3 No 2 4

Tanga

Cement

8 2 6 Yes 5 3

Twiga

Cement

6 1 5 Yes 4 2 Yes

NMB 8 2 6 Yes 6 2 Yes

DCB 7 1 6 Yes 7 0 Yes

NICOL 11 0 11 Yes 11 0

Swissport 6 0 6 Yes 2 4 Yes

CRDB 12 2 10 Yes 9 3 Yes

Total 73 17

(23.28%)

56

(76.72%)

50

(68.49%)

23

(31.51%)

Source: data collected by the author through company’s websites. These data does include four

foreign companies cross listed at DSE and two companies that their data could not be obtained

171 CRBD Annual Report for 2008 172 Melyoki L. pp 165-167

51

OECD principles require that boards should not be viewed as assembly with

individuals representing constituents. Also, interests and equitable treatment of all

shareholders have to be observed by boards as well as boards independent. On the other

side, the Tanzanian Code of Corporate Governance requires listed companies to have

boards that are; effective, balanced (executive and non executive), treating all

shareholders equally and capable of controlling the company. On balanced board the

Guidelines explains that boards should reflect broad shareholders’ structure and not

biased toward representation of substantial shareholders. However, the appointment

system of boards does not reflect what the principles require. Boards are not

independence of their appointing shareholders, there is no equitable treatment of all

shareholders and they are unbalanced. Balancing a board for place like Tanzania should

be more than just executive and non executive, the Code should deal with a balance that

will ensure protection of minority from majority within boards. It does not make sense

for a board to have more than half members appointed by one shareholder.

Boards are also required to supervise and control the management, however, as

we have seen, some companies are directly managed by the shareholders making the

board useless. One CEO was once quoted saying:-

“I do not require strong board in terms of being able to control me: I need a

board that is more able to advise me with regard to local conditions like tax

issues, markets etc”173

Looking critically to some board members, you will get impression that they are

appointed not for corporate governance but for corporate business. Companies will

appoint people who can influence their market, policies, laws and even regulatory

authorities.

The Code of corporate governance requires for the separation of Chairman and

CEO. It provides that in case combined, there should be reasons for that, approved by

the shareholders and for a short time with clear plan to separate them. To the contrary

TCC haven’t complied with this guide, though it was one of the first companies listed at

173 Melyok, p. 199.

52

DSE. It is not believable that it has justifiable reasons for not separating and if they are

still in transition. This undermines the development of corporate governance and

indicates how some big companies can ignore the guidelines. If they can not comply

with this simple thing of separating these two positions, will they comply with more

sensitive matters?

It is also worth to recognize some board with good structure according to the

principles, especially those of companies formed by Tanzanians like NICOL. This

justifies the observation that privatization of state corporations didn’t consider corporate

governance issues.

4.2.3 Annual General Meetings

Annual General Meetings are another important tool for shareholders to monitor

and control their corporations. Laws require that all major decisions of the Company

should be decided at AGM. There is no standard definition of major decisions, but most

legislation will specify matters that should be decided at AGM. Matters like changing

company’s name, increasing or decreasing share capital, alteration of memorandum of

incorporations, mergers and acquisition, appointment of directors, appointment of

Auditors etc.

Functions of AGM include discussing annual accounts, directors’ report,

appointment of auditors, election and re-election and confirmation of appointed

directors174. In special circumstances, the Minister175 or the Court can order the calling

of AGM176

. Also, members holding 10% shares can request for extra ordinary meeting.

In case of special resolution, the law requires ¾ of votes177 . Members can inspect

minutes of the past AGM at the company or they can request a copy after paying a

reasonable amount of fees178

. The requirement of paying for minutes is an obstacle for

right to information, it ought to be a shareholders’ right to get minutes free of charge,

174 Section 133 of CA 2002. 175 The Minister means Minister responsible for Industry and Trade. 176 Sections 133 (4) and 137. 177 S. 143. 178 S. 150.

53

after all it was their meeting hence need to know what was recorded and be able advice

corrections and follow implementation. The Code of Corporate Governance requires

shareholders to be given enough time to ask questions, given information on voting

rules, opportunity to question management, and to place item on the agenda. However,

the right to place item on agenda should be regulated by law instead of guidelines to

enable shareholders’ to enforce it in court if violated.

Attendance is one of the challenges to AGM where only few shareholders attend.

Poor attendance is contributed by lack of activist shareholders, lack of Association of

shareholders and cost of attending (costs are contributed by transport problems because

you may be required to use at least three days to attend one day meeting, that is why

some shareholders requests the company to reimburse them). Although the Code

requires directors to consider shareholders costs in setting AGM, there is no criteria

whether they should consider costs by looking where many shareholders are living or

where the most disadvantaged are located. Another problem is lack of other structures

like conference halls in some place something that makes most AGM to be held in Dar

es Salaam and Arusha. One company in Kenya will hold its AGM at the football

stadium as they can not find a hall that will accommodated all expected attendance179.

On the other side possible conflicts may rise at AGM especially between major and

minority shareholders, institutional against individual shareholders and between

creditors who are also shareholders and none creditors shareholders.

Developed countries have started using information technology in conducting

AMG to address poor attendance and other problems. Use of IT could be a solution for

the country like Tanzania, but it will take time for such countries to reach such stage

because of low technological development.

179 http://www.nation.co.ke/business/news/-/1006/617342/-/item/0/-/idyxa6z/-

/index.html

54

4.3 Lack of Strong Competition

Competition is one of the effective external factors that influence corporate

governance. Competition and corporate governance seems to improve firms’ efficiency

by reducing agency costs or producing additional growth180

. In monopolistic industries,

controlling shareholders tend to prevent leakage of specific knowledge and information

to competitors, so as to avoid potential competition and new rivalry, therefore,

shareholders providing capital to firms in low competition industrial structures incurs

relatively higher adverse information181. Competition enhances corporate governance by

regulating markets for products, market for managerial jobs and takeovers. However,

Grosfeld and Tressel182

argue that competition and corporate governance should not be

treated as alternatives to each other but as complements. They assert that with fierce

competition managers have to work harder to avoid a loss of firm’s market share, which

could lead to manager’s dismissal. On the other hand, good corporate governance laws

increases the probability of an efficiency improving takeover (by a rival) which often

leads to the dismissal of target managements. The managers’ incentives to increase their

effort level in both cases driven by the fear to lose job. It is evidenced that corporate

takeovers generate positive gains that target firms shareholder benefit and the bidding

firm do not lose183.

In Tanzania, competition for market control is at a very low level. Some of the

listed corporations have market monopoly which they inherited from the controlled

economy system. Most of the listed companies enjoy monopoly of the market although

others like banks and cement manufacturers have competitors184

. The market for

managerial post is growing but not very much a situation contributed by the fact that

controlling shareholders appoints foreign CEOs and other senior officers like CFOs and

180 Grosfeld, I., et el, Competition and Corporate Governance: Substitutes or Complements?, Evidence from Warsaw Stock Exchange, William Davidson Institute Working Paper No. 369, p 24. 181 Chu Ei Yet, Insider Ownership and Industrial Competition: Causes and Consequences of Information Asymmetry , University of Technology, Mara, Malaysia, p 6. 182 Competition and Corporate Governance: Substitutes or Complements? 183 Michael Jensen , et el, The Market for Corporate Control: The Scientific Evidence, Journal of Financial Economics, Vol II, 1983 pp 5-50. 184 Although there are three factories manufacturing cement in Tanzania, demand for cement in Tanzania and East Africa in general is higher than the production, hence reduces competition.

55

jeopardizing the local market for top jobs. On the other hand, Tanzania has not yet

witnessed hostile takeovers or major merger and acquisition. In general, under the

current situation, Tanzania should not rely on competition as a corporate governance

improvement mechanism; however, concerted efforts are needed to build environments

for proper competition.

4.4 Outlook

A practical challenge facing corporate governance reformers is how governance

principles across wide variety systems could be developed to reflect the underlying

principles of fairness, transparency, accountability and responsibilities185

. The

governance mechanism in developed markets provides practical guidelines to be

followed in fledging emerging economies. Notwithstanding the merits of advocating

high global standards of corporate governance and regulation, there should be carefully

measures against the capacity of countries to absorb such a requirements186

Tanzania transplanted the Anglo-Saxon model of corporate governance which is

a market based system. The main theoretical outlook for this system is the agency theory

addressing principal/agency problems. The prerequisites for this system to work include

availability of accurate and reliable information, existence of highly liquid capital

markets where shares would be readily and freely traded and a vibrant market for

corporate control and functioning judiciary to protect shareholders against illegal wealth

transfer and insider trading.

It is observed in this thesis that corporate governance in Tanzania is

characterized by concentrated ownership, fragile investor protection, infant stock market

and non-existence of market for corporate control as well as poor enforcement of laws

and limited access to justice. This observance suggests that the system Tanzania

transplanted/adopted from her colonial master will not work and it take long time to

develop it. This is a clear indication that the system was adopted without considering the

countries’ specific situation and characteristics.

185 Graham, M. et el, Contemporary issues in Corporate Governance Reforms: The Case of Ghana, p. 127 186 Armstrong, P. et el, Corporate Governance in South Africa, p. 228

56

It was suggested that Institutional based corporate governance can work better

for Africa187. Ownership structure shows that most block holders in Tanzania are foreign

companies therefore it can be argued that Tanzania may follow the system working in

developed countries; however, this also will not work for this country. It is difficult to

suggest what can work for Tanzania without having detailed research, however, I do

think that a combination of market based system and institutional system can work. But

in whatever circumstance a detailed research is needed to ascertain a better system for

Tanzania.

187 Rwegasira, K., Corporate Governance in Emerging Capital Markets: Wither Africa?, Corporate Governance International Review, Vol. 8 Issue 3, 2000

57

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64

ANNEXURES

ANNEXURE A

Part One and Five of Arusha Declaration of 1967

PART ONE

The policy of TANU is to build a socialist state. The principles of socialism are

laid down in the TANU Constitution and they are as follows:

WHEREAS TANU believes:

(a) That all human beings are equal;

(b) That every individual has a right to dignity and respect;

(c) That every citizen is an integral part of the nation and has the right to take an

equal part in Government at local, regional and national level;

(d) That every citizen has the right to freedom of expression, of movement, of

religious belief and of association within the context of the law;

(e) That every individual has the right to receive from society protection of his

life and of property held according to law;

(f) That every individual has the right to receive a just return for his labour;

(g) That all citizens together possess all the natural resources of the country in

trust for their descendants;

65

(h) That in order to ensure economic justice the state must have effective control

over the principal means of production; and

(i) That it is the responsibility of the state to intervene actively in the economic

life of the nation so as to ensure the well-being of all citizens, and so as to

prevent the exploitation of one person by another or one group by another, and so

as to prevent the accumulation of wealth to an extent which is inconsistent with

the existence of a classless society.

NOW, THEREFORE, the principal aims and objects of TANU shall be as

follows:

(a) To consolidate and maintain the independence of this country and the

freedom of its people;

(b) To safeguard the inherent dignity of the individual in accordance with the

Universal Declaration of Human Rights;

(c) To ensure that this country shall be governed by a democratic socialist

government of the people;

(d) To co-operate with all political parties in Africa engaged in the liberation of

all Africa;

(e) To see that the Government mobilizes all the resources of this country

towards the elimination of poverty, ignorance and disease;

(f) To see that the Government actively assists in the formation and maintenance

of co-operative organizations;

(g) to see that wherever possible the Government itself directly participates in the

economic development of this country;

66

(h) To see that the Government gives equal opportunity to all men and women

irrespective of race, religion or status;

(i) To see that the Government eradicates all types of exploitation, intimidation,

discrimination, bribery and corruption;

(j) To see that the Government exercises effective control over the principal

means of production and pursues policies which facilitate the way to collective

ownership of the resources of this country;

(k) To see that the Government co-operates with other states in Africa in

bringing about African unity;

(l) To see that Government works tirelessly towards world peace and security

through the United Nations Organization.

PART FIVE

The Arusha Resolution

Therefore, the National Executive Committee, meeting in the Community Centre at

Arusha from 26.1.67 to 29.1.67 resolves:

(a) The Leadership

1. Every TANU and Government leader must be either a peasant or a worker,

and should in no way be associated with the practices or capitalism or

feudalism.

2. No TANU or Government leader should hold shares in any company.

67

3. No TAN U or Government leader should hold directorships in any privately

owned enterprise.

4. No TANU or Government leader should receive two or more salaries.

5. No TANU or Government leader should own houses which he rents to

others.

6. For the purposes of this Resolution the term ‘leader’ should comprise the

following:

Members of the TANU National Executive Committee; Ministers; Members of

Parliament; senior officials of organizations affiliated to TANU; senior officers of par-

statal organizations; all those appointed or elected under any clause of the TANU

Constitution; councilors; and civil servants in the high and middle cadres. (In this

context ‘leader’ means a man, or a man and his wife; a woman, or a woman and her

husband.)

(b) The Government and other Institutions

1. Congratulates the Government for the steps it has taken so far in the

implementation of the policy of socialism

2. Calls upon the Government to take further steps in the implementation of our

policy of socialism as described in Part Two of this document without waiting

for a Commission on Socialism.

3. Calls upon the Government to put emphasis, when preparing its

development plans, on the ability of this country to implement the plans rather

than depending on foreign loans and grants as has been done in the current

Five-Year Development Plan. The National Executive Committee also resolves

68

that the Plan should be amended so as to make it fit in with the policy of self-

reliance.

4. Calls upon the Government to take action designed to ensure that the

incomes of workers in the private sector are not very different from the

incomes of workers in the public sector.

5. Calls upon the Government to put great emphasis on actions which will raise

the standard of living of the peasants, and the rural community.

6. Calls upon NUTA, the co-operatives, TAPA, UWT, TYL, and other

Government institutions to take steps to implement the policy of socialism and

self-reliance.

(c) Membership

Members should get thorough teaching on Party ideology so that they may

understand it, and they should always be reminded of the importance of living up

to its principles.

69

ANNEXURE B

The Detailed OECD Principles

1. Ensuring the Basis for an Effective Corporate Governance Framework sets out the

broad objectives of the regulatory framework, including integrity, transparency,

consistency and enforceability of the regulatory framework, as well as the respective

responsibilities of the various authorities.

2. The Rights of Shareholders and Key Ownership Functions lists key basic

recommendations regarding the organisation of the Annual General Meeting

of the shareholders (AGM), the nomination and remuneration of directors, rules on

corporate control22, institutional investors active ownership (transparency policies

regarding AGM voting and conflict of interest prevention), communication between

shareholders.

3. The Equitable Treatment of Shareholders follows on the previous chapter in

addressing the specific situation of concentrated ownership and the opposition

between controlling shareholders (who may take undue profit from dominant

position) and minority shareholders (who may not). It requires equality of right per

class of shares, calls for prevention of direct or indirect abuse by controlling

shareholders (disclosure of conflicts of interests by shareholders, and by directors),

and protection of minority shareholders.

4. The Role of Stakeholders in Corporate Governance defines the basic rights of

employees, creditors and other stakeholders to participate in corporate governance.

Most of it, however, relates to employees’ rights to participate in corporate

governance, including their rights to information and consultation, the right of

redress for violation of their rights, and the right to whistleblower protection. The

version revised in 2004 expands on the sources of rights – they go beyond law, to

70

include any form of mutual agreements (including collective agreements). It also

“permits” the development of employee participation mechanisms.

5. Disclosure and Transparency includes management and board disclosure

requirements of financial and governance information (conflict of interests,

remuneration, nomination process, other directorship). The chapter also addresses

broader market integrity issues, such as the duties of auditors (they should be

accountable to shareholders, but also owe a duty to the company), and the integrity

of market information and analysis.

6. The Responsibilities of the Board touches upon the heart of corporate governance,

through the issue of the transparency of board nomination and remuneration (to be

“aligned with the longer term interest of the company”), board organisation and

independence (from management). In an attempt to conciliate civil-law and common

law systems, the chapter requires the board to act in the interest of the company and

the shareholders.

71

ANNEXURE C:

Detailed Commonwealth Principles of Corporate Governance

The board should188:

Principle 1 – exercise leadership, enterprise, integrity and judgment in directing the

corporation so as to achieve continuing prosperity for the corporation and to act in the

best interest of the business enterprise in a manner based on transparency, accountability

and responsibility;

Principle 2 – ensure that through a managed and effective process board appointments

are made that provide a mix of proficient directors, each of whom is able to add value

and to bring independent judgment to bear on the decision-making process;

Principle 3 – determine the corporation’s purpose and values, determine the strategy to

achieve its purpose and to implement its values in order to ensure that it survives and

thrives, and ensure that procedures and practices are in place that protect the

corporation’s assets and reputation;

Principle 4 – monitor and evaluate the implementation of strategies, policies,

management performance criteria and business plans;

Principle 5 – ensure that the corporation complies with all relevant laws, regulations and

codes of best business practice;

Principle 6 – ensure that the corporation communicates with shareholders and other

stakeholders effectively;

188 Note that all the responsibilities of the principles are focused to board because it is believed that it is the responsibility of the Board to ensure good corporate governance.

72

Principle 7 – serve the legitimate interests of the shareholders of the corporation and

account to them fully;

Principle 8 – identify the corporation’s internal and external stakeholders and agree a

policy, or policies determining how the corporation should relate to them;

Principle 9 – ensure that no one person or a block of persons has unfettered power and

that there is an appropriate balance of power and authority on the board which is, inter

alia, usually reflected by separating the roles of the chief executive officer and

Chairman, and by having a balance between executive and non-executive directors;

Principle 10 – regularly review processes and procedures to ensure the effectiveness of

its internal systems of control, so that its decision-making capability and the accuracy of

its reporting and financial results are maintained at a high level at all times;

Principle 11 – regularly assess its performance and effectiveness as a whole, and that of

the individual directors, including the chief executive officer;

Principle 12 – appoint the chief executive officer and at least participate in the

appointment of senior management, ensure the motivation and protection of intellectual

capital intrinsic to the corporation, ensure that there is adequate training in the

corporation for management and employees, and a succession plan for senior

management;

Principle 13 – ensure that all technology and systems used in the corporation are

adequate to properly run the business and for it to remain a meaningful competitor;

Principle 14 – identify key risk areas and key performance indicators of the business

enterprise and monitor these factors;

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Principle 15 – ensure annually that the corporation will continue as a going concern for

its next fiscal year.