In order to achieve its transformational agenda, Africa will need to rely heavily on its private sector.
As recently noted by economist Dani Rodrik, sub-Saharan Africa is less industrialised today than it was in the 1980s. In addition, private investment in Africa's modern industries remains too low to sustain structural transformation.
If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere
One reason private investment has remained low is that African companies face serious financing challenges. For example, compared to other regions, bank credit remains low and capital markets remain shallow.
Good corporate governance can help remove some of these financing challenges.
As Arthur Levitt, the former chairman of the United States Securities and Exchange Commission, once noted, "If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere [...] All enterprises in that country – regardless of how steadfast a particular company's practice may be – suffer the consequences."
A number of sub-Saharan African countries have recently developed corporate governance codes.
In October 2013, the Africa Governance Network was launched with the aim of encouraging best practices and building capacity in corporate governance in Africa.
Building deep capital markets takes time. As a result, standards for good corporate governance in Africa should go beyond the traditional focus on publicly listed domestic companies to include privately held firms, the public sector and foreign firms.
There are at least three issues that African policymakers and standard-setters could address:
1 Strengthening public governance will benefit corporate governance. In most countries, the government is not just a regulator but also a customer or a business partner. According to a PricewaterhouseCoopers survey, 73% of African managers are concerned about over-regulation and 63% said that bribery and corruption were threats to their companies' growth prospects. This points to the role of governments in supporting the credibility of corporate governance practices.
2 Good corporate governance should be a standard for foreign firms too. Foreign direct investment often results in large financial outflows from tax evasion, the underpricing of concessions and trade mispricing. African policymakers should work with developed countries and require full public disclosure of the beneficial ownership of companies as well as strengthen multilateral rules on taxation.
3 The role of accountants and auditors as gatekeepers should be encouraged but monitored. In a context where boards of directors are often the only institution able to reduce conflicts of interest between shareholders and managers it is crucial for directors to be able to count on reliable information provided by external accountants and auditors. It is therefore important to uphold high standards of quality on these gatekeepers and provide the proper incentives for their independence. ●
Amadou Sy, Senior fellow, Africa Growth Initiative, Brookings Institution