News Column

Stamp Out Mismanagement

January 27, 2014

Linda Tsarwe

With a depressed economy, most companies are finding it hard to remain afloat. Several reports for this year alone indicate that company closures are on the rise, with some having failed to reopen at the beginning of the year. Under such conditions, it is easier to mask certain unethical corporate elements and use the deteriorating economy as a scapegoat for failure. Of course the economic environment is one of the major determinants of poor business performance, but there is a strong case of mismanagement and unethical behaviour that cannot be ignored. Arguably, a number of our struggling companies have gotten to where they are due to a lack of proper leadership. Going back to the banking crisis of 2003-2004, a number of unethical practices were unearthed when the sector plunged into a crisis. Trust Bank was accused of abusing depositors' funds by undertaking risky "investments" as well as some that are non-permissible under the Banking Act. During the same period, Intermarket Bank was also found guilty of exposing depositors' funds to excessive risk. Arguably, the crisis was man-made and was a case of business decisions driven by greed and excessive profit motive. On the other hand, it is important to note that such business decisions should not have been made, even in the event that they had turned out profitable. Banks are heavily regulated, as they have a fiduciary duty to their depositors. Over exposing their money to risk, is clear violation of that duty and of governing rules. However, the bank exposed depositors to undue risk and justifiably blame is put on the management that made those decisions. Although years have passed since the crisis, lack of corporate governance remains rife. Banks are continually found guilty of abusing depositors' funds. There are reports that Interfin Bank , which is currently under curatorship, has a significant value of insider loans that are non-performing. Simply put, some related parties siphoned depositors' money to pursue their own personal interests, and depositors were prejudiced. Furthermore, despite having bounced back in the market after the 2003 crisis, Trust was again caught on the wrong side and accused of abusing depositors funds. Towards the end of last year, the bank got its licence cancelled. The unethical acts as well as mismanagement in the corporate world are not only limited to the banking sector. Since the beginning of this year, the media has revealed shocking salary packages of certain executives working for some of the ailing parastatals. The organisations they lead are some of the worst performers in their industries, and yet the people at the helm of these organisations are rewarded 10 times more than the average of their fellow peers. It begs the question of what exactly is peculiar about their leadership that deserves to be rewarded so off-range from the rest of the market. In fact, there is a general outcry on poor service delivery from the same companies. Ironically, some of these companies have blamed their operational bottlenecks on cash-flow constraints. Yet, every month, they are able to fund exorbitant wage bills, which if shaved off to market averages, could give their companies the much need cash-flow relief. Another prevalent case is that of debt distressed companies. After dollarisation, a number of companies resorted to using short-term expensive debt to fund recapitalisation. However, this clearly is unsustainable. Of course, currently we are likely to be guilty of speaking in hindsight, but nevertheless borrowing short-term to recapitalise the business was a poor business decision. It can be argued, though, that due to lack of capital and cheap financing, most businesses had no choice. However, a company such as Rio Zim raises eyebrows as far as debt accumulation is concerned. The company is over borrowed and is indebted to number of banks in the market. Regardless of the magnitude of debt, no significant mining projects were carried out since they started borrowing. In fact, the company was making losses until a few years ago. Therefore, even if business was capitalised with the wrong type of funding, the fruits of such were not seen. What can only be seen is a business riddled with debt and a significant interest bill, yet nothing significantly tangible can justify why a company is bearing such a burden. It is sad how our corporate ethics as well as decent management seem to have been washed away. Certain unethical actions, which are possible regulatory violations, go unpunished, and this somehow motivates would-be violators to dare do the same. Unfortunately minority shareholders and depositors in banks, suffer the brunt. There is a conflict of interest, especially in a case where major shareholders have operative positions in the company. A good example is the concept of executive chairman, where the chairman of the board is also the person manning the operations of the business. It defeats the whole purpose of having a board of directors, whose role is to independently evaluate the operations of the business. Revisiting regulation and enforcing compliance to corporate governance codes will be necessary to curb unethical business practices. The revision of the Banking Act is a good example of a move meant to address the loopholes in the industry's regulation. Shareholding by a single individual or entity for banks is expected to be restricted to a maximum of 10 percent in order to avoid concentrated ownerships that have undue control. It is hoped that this will reduce the undesirable influence on depositors' funds and therefore minimise abuse. For other industries, focus should be made on bringing white collar criminals to book. Perpetrators should be made accountable for their actions, and this will go a long way in clipping the wings of leaders who were probably thinking of doing the same. Currently, there is a tendency of offering a golden handshake as a means of getting rid of senior management that is no longer desirable. Yet those are most likely the same people who are responsible for destroying company value. Which means the market is rewarding mismanagement! If we reach a point where we can make managers accountable across all industries, then we can restore the dignity of business and protect victims of bad management and unethical behaviour. Feedback:

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Source: AllAfrica

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