Corporate Governance in Emerging Capital Markets: whither Africa?

Corporate Governance in EmergingCapital Markets: whither Africa?

Kami Rwegasira*

Having debated the pros and cons of alternative governance models in the developed marketeconomies, a case is made for Africa's choice to be in the direction of the institutionally-basedmodel. It is emphasized however that the African economies which are restructuring need toadapt the model to the peculiarities of specific economies and that the inputs from more thana single model will be necessary to provide for globally competitive capital markets in theseeconomies.

Introduction

T he goal of this article is to review brieflybut critically the major corporate govern-

ance models currently available and proceedto tentatively recommend in which directionshould African economies lean. The recom-mendation is tentative because it is largelyintended to trigger off a debate about govern-ance systems in the African economies whichhave so far been largely neglected in the inter-national governance debate. With the debateabout the merits and demerits of socialism vs.capitalism in Africa having been carried to itsfinality, the next big debate in future willfocus on what brand of capitalism (includingcorporate governance system) best suits Africa.Corporate governance in Africa may be ofinterest not only to management and govern-ments in Africa but also to internationalinvestors and financial regulators (includingthe multinational corporations, IMF and theWorld Bank) who are involved in the con-tinent. The question at stake here is whatcorporate governance model tends to suit bestthe contemporary African economies whichare undergoing restructuring in order to befully integrated in the global market system?

Essence of corporate governance

Governance is a cybernetic concept. Cyber-netics originates from the ancient Greek word

kybernetikos (`̀ good at steering'') referring tothe skills of a helmsman. The science ofcybernetics, established by N. Wiener (1894±1964), a US mathematician, nowadays standsessentially for control theory as applied tocomplex systems which could be mechanical,electronic, biological or social (Pasani 1990).Cybernetics critically refers to the feedbackand control mechanism by which a system,and any system for that matter, keeps itselforiented towards the goals for which it wascreated.

Corporate governance thus is concernedwith structures within which a corporateentity or enterprise receives its basic orienta-tion and direction. According to Monks andMinow (1995), corporate governance seeks todeal with systems, mechanisms and modal-ities of exercising power and control overthe corporation's direction, behaviour andperformance. Corporate governance as anindependent field of study is a recent phe-nomenon because it is an amalgam of severaldisciplines including law, economics, finance,organizational behaviour, management,ethics and politics.

There are various players or actors in thegovernance game.The primary players areshareholders, board of directors and topmanagement. The secondary players are allother stakeholders including workers, cus-tomers, creditors, government and society atlarge. But in as much as there are variousplayers, the focal point in the corporate

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* Address for correspondence:Professor Kami Rwegasira,Maastricht School of Manage-ment, PO Box 1203, 6201 BEMaastricht, The Netherlands.Tel: 31 43 387 0808; Fax: 31 43387 0800; [email protected]

CORPORATE GOVERNANCE258

governance process has always been theboard of directors, an organ which in somecases represents most of the stakeholders andstill in others acts primarily as a fulcrum ofaccountability to shareholders. The boardturns out to be the arena in which differentplayers in the governance game meet todecide on how the corporation will begoverned and for whose interests. The roleof the board is summarised by Tricker (1994)as assurance of conformance and perform-ance of an organisation. In the performancerole the board focuses on strategic and policyissues for the future, setting the enterprisedirection and contributing to the ongoingperformance of the organisation. In the con-formance role the board directs its attention tosupervising management, ensuring that thecorporate entity is conforming to predeter-mined policies, procedures and plans andis achieving the performance required as wellas demonstrating proper accountability forthe company's activities. In short, while themanagement runs the corporation, the boardgoverns the corporation and seeks to ensurethat it is run well. There has been demon-strated evidence for a relationship betweengood governance and economic performance(Feinberg 1998). Good governance can alsoaccord a corporation competitive advantage(Johnson and Neave 1994). Good governancetherefore is supportive to good economicperformance and global competitiveness.

Africa's emerging markets andcorporate governance

The heat of the debate about corporategovernance in emerging capital markets allover the world including Latin America, Asia,and Russia was given new fuel by thegeneralised liberalisation going on aroundthe world and was accentuated further by theimpact of the 1997 Asian financial crisis(Alison Warner 1998; IMF 1998; and Goldstein1998). The Asian crisis revealed widespreaddeficiencies in corporate governance andmonitoring as well as in the ability ofregulators to supervise and control financialinstitutions in that region. The 1990's wit-nessed also the same wave of liberal thoughtsweeping through Africa after the collapse ofthe Berlin Wall in 1989 and triggering offmassive denationalisation and privatisationof what used to be public enterprises.Corporate governance is certainly likely tobe differentially important to different coun-tries in Africa depending on socio-economicstanding and performance. Table 1 and 2indicate a socio-economic comparison of

selected economies which may be slightlyahead of the rest in market development andeconomic restructuring. However whatmakes corporate governance important isobviously not what Africa is today but whatAfrica is urgently evolving into. The global-isation of financial markets offers Less Devel-oped Countries (LDC's) and Africa inparticular extra opportunities to increaseprivate investment, modernise technology,raise productivity, raise employment andaccelerate economic growth. Net investmentinto the developing world rose from US$3.2bn. in 1990 to $45.8bn in 1996 before it settledat $32.5bn. in 1997. As economic liberalizationspread through out the globe, emergingmarkets share of the world stock marketcapitalisation rose from 3.7% in 1985 to12.7% in 1996 (Moin Siddiqi 1998) and it isexpected to increase substantially over thenext decades. In as much as, if one goes by theWorld Bank definition of an emerging marketas one where per capita income is less thanUS$8626 p.a.., Africa is the seat of emergingmarkets, the ability of Africa to participate inthis future growth will depend on howquickly and effectively governments canresolve issues of socio-economic and politicalstrifes, bureaucratic controls, corruption, un-supportive legal infrastructure in general andwith special reference to capital markets andcorporate governance in particular. It is onlywhen deregulation is properly paced andimplemented that capital markets attractive toforeign investors could develop in Africa(Annibale, 1993)

South Africa which is the developingworld's third largest stock market (second toHong Kong and Taiwan) capitalised in 1998at about US$261 m. was doing much better toattract future investment than the rest partlybecause of its sophisticated corporate govern-ance and highly regulated banking sector aswell as its low private external debt (Siddiqi,1998). J. Sargent (1997) indicated for examplethat S. Africa was one of the few most diligentcountries along with Canada and UK thatadopted best-practices codes concerning cor-porate governance as part of their listing rulesand further more require disclosure and ex-planation of how corporate policies measureup to them. South Africa is the leader inthe pack on the continent. Yes. But there areother 16 operational stock exchanges acrossthe continent including Cairo, Nairobi,Harare, Lusaka, Ghana, Botswana, Mauritius,Morocco and Nigeria (Anonymous, 1994).And more are on the way as the wave ofprivatisation and marketisation takes hold.They include Dar-es-salaam, Abidjan,Kampala, Mozambique and Madagascar.

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# Blackwell Publishers Ltd 2000 Volume 8 Number 3 July 2000

Indeed privatisation and marketisation ofeconomic activities are becoming a new sourceof growth for fledging African stock markets,particularly as international investors areseeking to partially diversify their portfoliosout of Asia. However it is also becoming clearthat privatisation and free markets in them-selves are not enough as a basis of good cor-porate governance and economic performance.The self-regulating power of the free market

itself depends on the effectiveness with whichits signals embed themselves into the feed-back and control systems i.e. governance struc-tures. . . of economic agents (Boisot 1994).Further this issue cannot be solved by hur-riedly and simply commissioning lawyers torevise and draft new laws for capital marketsregulation and corporate governance withouta broad and strategic conceptual frame withinwhich these laws are drawn and redrawn.

Table 1. Selected country socio-economic comparisons ± 1997

South Africa Nigeria Morocco Egypt

Population (Millions) 38.3 117.9 27.5 60.3

GNP (US$ billions) 130.2 30.7 34.4 71.2

GNP per capita (US$) 3,400 500 1,250 1,180

Poverty (% ofpopulation belownational poverty line)

± 34 13 ±

Illiteracy Rate (% ofpop. age 15+)

18 43 56 49

Total Exports (fob)(US$ millions)

30,935 15,208 7,039 4,930

Total Imports (cif)(US$m)

28,074 10,246 9,521 14,718

Structure of theeconomy (majorsectors as % of GDP)

Agriculture 4.5%Industry 38.5%(Manufg 23.9%)Services 56.9%




Source: Derived from The World Bank ± Country at a glance tables.

Table 2. Stock market performance of selected countries at end-1996

South Africa Nigeria Morocco Egypt Ghana Kenya Cote d'Ivoire Botswana Zambia

Number oflistedcompanies

626 183 47 646 21 56 31 12 5

MarketCapitalization(US$M)

241,571 3,560 8,705 14,173 1,493 1,846 914 326 229.3

TradingValue (US$M)

27,202 72 432 2,463 17 67.1 19.5 31.2 2.8

Source: Derived from Emerging Stock Markets Factbook 1997 (International Finance Corporation, Washington).


Volume 8 Number 3 July 2000 # Blackwell Publishers Ltd 2000

Alternative major corporategovernance systems

The classification of corporate governancesystems can conceivably be carried to differ-ent degrees of refinements (See: Weimer &Pape, 1999). But for the purpose of thediscussion in this paper, it is consideredadequate to settle for and focus on the majoralternative systems in the developed marketeconomies. The survey of the literature in themature and developed world of marketeconomies quickly suggests that there aretwo major corporate governance systems,the market-based system as opposed to theinstitutionally-based system of governanceand control (Prowse' 1994). Sometimes thetwo systems are termed respectively as `̀ in-sider'' vs. `̀ outsider'' models (Dickerson &Gibson et. al. 1995).

Institutionally-based system

The institutionally-based system of corporateand control is what is sometimes termed as`̀ bank-based'' system (Nunnemkamp 1995). Itis a system which has been observed inGermany and Japan as well as several otherOECD economies. This system relies on closer

contact between shareholders and managersas well as between managers and workersand suppliers. This model of governanceexplicitly recognises stakeholders other thanshareholders, including workers, financialand non-financial organisations with whichthe corporation maintains close relationship,and government. The interests of most ofthese stakeholders are represented on theboard of directors. It is in turn the board,which is expected to play a strong monitoringand disciplining role vis-aÁ-vis what manage-ment does. The system is broadly charac-terised by weak market in corporate control,which essentially means hostile take-overs.The system is not perfectly uniform in itsexistence in every economy. There are severalvariants.

In Germany, for example, the generaliseduse of a 2-tier board structure distinguishesoversight and overall supervision on the onehand and management, on the other. Thesystem relies on the supervisory board (con-sisting of members not in the management ofthe firm) for oversight and disciplining ofmanagement and flexible conflict resolutionof problems between shareholders and man-agement and workers. The management orexecutive board which in some cases has alsobeen referred to as the management team

Ghana Kenya Cote d'Ivoire Botswana Zambia

18.0 28.0 14.7 1.5 9.4

6.7 9.3 10.1 4.9 3.6

370 330 690 3,260 380

31 42 ± ± 86

36 22 57 30 22

1,511 2,100 4,015 2,695 1,100

1,964 3,294 3,506 2,383 1,151








focuses on running the company business.The link pin between the two boards usuallyis the chief executive officer (CEO) who headsthe management team and attends the super-visory board meetings but in this case usuallywithout any voting power or in some casessimply as a secretary to that board and in-variably with the principal role of providinginformation needed for the deliberations anddecisions of the supervisory board.

In Japan however the system has evolvedslightly differently (Sheard 1989). The modelhere is characterised by large associations ofinterrelated companies (keiretsu). These firmsoften act as subcontractors and suppliers toeach other. Sometimes banks and otherfinancial institutions are members of the samegroup. In this context the management of thecompanies within each group are largely freefrom external monitoring and make decisionspredominantly on the basis of consensus.

In Japan and Germany, where this systemexists, the banks constitute a major source oflong-term finance. But besides this role, thebanks are considered also as actual monitorsof corporations on behalf of shareholders. InGermany big banks are still represented onsupervisory boards of companies. This phe-nomenon is enabled by the the legalisedproxy voting system under which share-holders hold regularly shares on deposit at abank and allow the bank to vote with theshares held in fiduciary custody. Accordingto Dickerson et al.(1995) in 1992 private banksin Germany were present in 54 supervisoryboards of the 85 biggest Germany firmshaving a supervisory board.

The bank-based system of corporate govern-ance and control has sometimes been creditedwith being a shield against short-term earn-ings pressure from the capital markets, thusallowing managers to invest in projects withlonger payback periods. The system howeveris by no means immune to fragility, like the1993 German Metallgesellschaft derivativesloss scandal illustrated. The loss almostbrought the company to bankruptcy. Andthe shareholders demanded the resignation ofthe supervisory board. (Olivier 1994). Thesupervisory board in this case claimed thatinformation about the hazardous oil deriva-tives trading losses had been withheld by themanagement board and as a result the super-visory board which had two representativesof the two largest Germany banks did notknow about the hovering near-bankruptcy. Inthe meantime in Japan where the manage-ment is insulated from the shareholders andtakeovers, the failures of this model ofgovernance has been reflected partly in theform of expansive over-investment in fixed

capacity which cannot be profitably utilised,procrastinated restructuring and rising unitlabour costs. (Hanke 1994).

Market-based system of governance

The market-based system of corporate govern-ance and control is what is called the `̀ out-sider'' model of governance (Dickerson 1995).It is the system found largely in US and UK.This is the Anglo-American model. Conti-nental European governance systems whichare close to this model are found in severalcountries including Switzerland, Sweden andThe Netherlands (. . . with variations, ofcourse). In this case the company shares areusually owned by widely dispersed owners.In as much as board members are elected byshareholders to oversee the activities of thecompany management, the managers arerelatively free from the close scrutiny andcontrol because the board is closely allied totop management, more often than not, in aone-tier board leadership structure.

One of the determinants of corporategovernance is structure of domestic finance(Williamson 1988; Blair 1991). In countrieswhere the market-based system is prevalent,traditionally a big percentage of long termfinance is in form of equity shares placed andtraded in the market and not in the form ofdebt like it is in Germany and Japan wherethe debt/equity ratios are relatively higher(Nunnemkamp 1995). The role of the com-mercial banks in these countries has been thatof providing short-term working capital andbridging finance like it has mostly beenobserved in much of the English-speakingworld including countries like USA, UK,Australia, Canada and New Zealand.

Corporate control by shareholders isthrough the discipline of take-overs, mergersand acquisitions. If a company with a givenproductive asset base performs poorly and /or if the shareholders value is neglected bymanagement's decisions and behaviour, in-vestors tend to react by selling the shares ofthat company in their portfolios with theresultant falling share price exposing thatcompany to a hostile take-over by otherinvestors who certainly assume they can getbetter performance and value for share-holders from the same assets base if bettermanagement were introduced. A hostile take-over is consequently usually followed by thechange of top management.

For such a system to operate effectively,several assumptions are implied. The systemassumes accurate as well as reliable andtimely information flow and disclosure about



the business and financial affairs of thecompany to all concerned in an unbiasedway as well as the existence of highly liquidmarkets where shares are readily and freelytraded. The system also needs a good andwell developed legal infrastructure to protectdifferent constituents of the company againstwealth transfer and inside trading.

Note however that take-overs as a mech-anism of disciplining management may notalways work well if there are anti take-overdevices like `̀ poison pills'' or requirements tocompensate existing managers and workersin case of a take-over. But when take-oversare possible, corporate restructuring andadaptability are likely to be faster than viathe internal procedures of a managementboard. The American-British corporate govern-ance model has been attacked for otherreasons. These have included sometimesweak performance of some corporations, lackof accountability of senior management andthe issue of management compensation un-related to corporate performance, like whenthe CEO gets more money and perquisites in(self-) compensation while the firm's perform-ance is lackluster or declining.

Africa must choose

The inevitable but rather unfortunate conclu-sion from the above discussion is that neitherof the two systems is decidedly superior tothe other in guaranteeing economic perform-ance or economic development. This remainstrue despite the fact that both systems havebeen dragged in one form or another into thecorporate governance systems of variouscountries on the continent emerging fromcolonial legislative legacy or parastatal en-terprise culture which had very limited freemarket orientation and the continent which isundergoing radical restructuring by market-ising and liberalising economic and businessactivities. This is so partly because manyother factors come to influence the economicperformance of any economic entity, apartfrom governance. At the moment there are asmany influences in the evolution of corporategovernance structures in Africa as there weredifferent colonial powers. This means thatmost of English-speaking Africa is aligned tothe British model, the French speaking to theFrench model and the Portuguese speaking tothe Portuguese version of governance. Africain this case is in a similar predicament likesome of the former eastern European econ-omies (Marinov, 1996).

The outsider model represented by theUS-UK systems of corporate governance and

finance depends largely on equity finance andwidely scattered ownership of shares tradedin liquid and efficient markets. The German-Japanese model, though still in the freemarkets framework, relies heavily on debtfinancing, interlocking stock ownership,banker/directors, and worker/shareholdersrights. German and Japanese managements,unlike their American and British counter-parts, are protected from hostile take-overbids. Another point to recall is that each ofthese systems is changing and being modi-fied. Thus none of them is a stationary modelfor emulation. Left on their own would thesesystems converge to one on the basis ofmarket mechanism and evolution? Even morerelevantly in the case of the African debate,should Africa intervene to explicitly influencethe direction of the development of thegovernance systems or should it leave thenature of market forces and evolution toresolve that over time?

If history has any lesson to give in this case,even the American-British vs. German-Japanese systems we have been debatingwere not left to emerge naturally but mayhave been an outcome of conscious politicaldecisions in the relevant countries. Mark J. Joe(1994) of Columbia University graduate lawschool suggests that the structure and oper-ations of economic institutions in marketeconomies especially the corporate govern-ance structures, are not necessarily an out-come of the interplay of economic forces andevolution but of laws which were an end-result of a political process and therefore adeliberate political choice. He shows througha well documented analysis of history howthe USA, for example chose through legis-lation to have weak financial intermediaries(banks, insurance cos. etc.) which were pre-vented from playing an active role in corpor-ate governance because of the long politicaltradition in the USA eliminating concentra-tion of financial power and how the Germanand Japanese financial institutions were delib-erately allowed to hold significant amounts ofthe firm's equity and accord effective controlof management in the interests of the share-holders. With the absence of active financialintermediaries in the USA system, the strat-egies and policies of public corporations havecome to be dominated by management withthe power increasingly concentrated in theCEO resulting in what was much earlieridentified to be the separation of ownershipand control (Berle & Means 1932) which hasover time led to emergence of distant share-holders, divided ownership, short-termism ofAmerican business management, moral hazardand in short the agency-principal problem.



Africa could learn also in this case fromsome of the Western countries which havegone through restructuring. Privatisation inItaly for example was conducted with theassumption that banks should assume anactive role in corporate governance andprovision of long-term finance. In Italy,state-owned enterprises suffered from short-age of investment funds and the control ofcorporate managers was declining because ofgovernment instability. Under these circum-stances, banks were privatised first (OECD1995). According to the model of corporategovernance which might be not quite thesame as either `insider' or `outsider' model, inmost companies there is usually a coalition ofshareholders who exercise control of the firmand therefore can choose and remove man-agement. Financial institutions play a smallrole. The changes which were consciouslyintroduced to strengthen governance in thecontext of privatisation included new stockmarket laws meant to strengthen and enforcesafeguards for market participants morerigorously, fiscal and regulatory measures towiden instruments of finance and introduc-tion of new institutions. (Goldstein andNicoletti 1995). Privatisation and liberalisa-tion of the economies of Africa therefore callsfor conscious political choices to be madeabout the pattern of expanding private sectorcorporate ownership and monitoring that willreplace state control.

The African economies which are comingfrom the tradition of socialism, parastatalism,as well as rural and cooperative enterprisesmay have something to learn from China. Inorder to restructure the premises and legalframework within which economic transfor-mation and restructuring was to take place,the Chinese government introduced a com-prehensive company legislation, the Com-pany Law of The People's Republic of Chinaof December 23, 1993. The law replaced allprevious legal documents and was to over-ride all local legislation in the provinces. Thislegislation was thoroughly thought out. It wasnot merely a Chinese version of the variouscorporate laws of developed market econ-omies, but as law designed to guide China'seconomy from state ownership of means ofproduction in a state planned economy to amixture of state and private ownership in anemerging market economy (Nee, 1994). Thespecific goal to review and overhaul thecorporate governance legal framework wasnot to merely encourage foreign investmentbut to restructure an economy on a differentfooting and with a different socio-economicgrand vision. There are two basic forms forcorporate organisation under the new Chinese

company law: limited liability company andthe company limited by shares. The avail-ability of limited companies allows thepossibility of doing joint ventures or whollyforeign owned companies in China under aframework different from that provided byprevious legislation in the country. Stockcompanies whose formation requires theapproval of the state Council authorizeddepartments or by relevant provincial govern-ment, can list their securities in Chinese stockexchange or subject to certain rules, onforeign stock exchanges. The law thereforecan accommodate a wide range of owner-ships currently observed in China includingstate-owned enterprises, rural enterprises,private individual-owned firms, cooperativesand foreign companies (Clarke and Yu Xing1998). The Chinese company law does nothesitate to borrow several notions fromdifferent corporate law traditions. It borrows,for example the notion that company shouldhave at least two shareholders and unless astock company less than 50 from the British/Hong Kong model, the concept of an inde-pendent supervisory board from the Germantradition and the American concept that thedirectors and mangers can be personallyliable for breaches duty to the corporationand the shareholders. But in as much as thislegislation borrows, there are sections whichare distinctly unique and original to China.For example, Western legislators restricttransferability of stock so as to force com-panies and their promoters to go through thedisclosure process required by a public issue.In China promoters are prevented from sell-ing their shares even where there has beenfull disclosure in a public issue, so thatChinese holders representing the state main-tain control of the new company for a threeyear period with a vested interest in thecompany's continuing profitability. What isobserved therefore in the case of China is thecomprehensiveness of the corporate govern-ance legal framework renewal in the contextof a specific vision, goals and strategies ofeconomic restructuring. And this is whatcould be needed also in the case of Africabefore specific pieces of legislation aredrafted, debated and passed by nationalparliaments.

Choice: market-based orinstitutionally-based system?

Let it be made clear here that what we aretalking about is not the choice of a system ofcorporate governance to copy in Africa butthe choice of a system from which most of the



inspiration could be drawn when deciding inwhich direction should corporate governancesystems in Africa lean. Africa has in fact threechoices from which to choose: market-based,institutionally-based and diversity.

The choice for diversity means largelyleaving the determination of corporate govern-ance to evolve from the uninterrupted mech-anisms of the market forces on the basis ofwhich system establishes itself through superiorperformance over time. This may be too costlyfor the African economies which are in ahurry to put their corporations and capitalmarkets in order. This option may be dis-carded outright since apparently it was notchosen even by the developed market econ-omies.

There are, at the same time, several reasonswhy the outsider system cannot be put on topof the list of the most inspirational models forAfrica. This market-based system assumes orpresupposes a number of characteristicswhich are not readily realizable in Africa, atleast for the time being. The market-basedsystem and the supportive mechanisms ofcorporate governance and control as de-scribed earlier presuppose a low degree ofconcentration of ownership of companyshares trading in liquid markets, limited bankshare holding, less intercompany sharehold-ings and a faster turnover of controllingblocks in the companies as well as freeflowing reliable and timely information aboutthe business and financial affairs of thecompany. The system has been associatedwith low debt/equity ratio corporate capitalstructures with bank credits constituting arelatively low proportion of total liabilitiesbut with wide use of securitized bondfinancing wide spread among many bond-holders. The financial market structure withinwhich such governance model thrives isusually associated with high degree of sophis-tication and ample opportunities for diversi-fication.

And there are good reasons why theinstitutionally-based system may be a prefer-able model for Africa's inspiration. Thesophistication of African capital markets isstill low and so is that of the majority of thecurrent and upcoming shareholders. Bankfinancing as opposed to securities is likely tobe predominant in corporation business af-fairs; thus the degree of credit concentration islikely to be high, given the limited level ofpersonal savings in many African countriesindividual shareholding is likely to be low.Companies in Africa are more likely to besmall and medium-sized, and more depen-dent on borrowed funds. Because banks andother financial institutions will be more able

to pool individual savings, they will havecapacity to hold significant shareholdings inthe companies in as much as this may lead tohigh concentration of shareholdings. Underthese circumstances banks can easily play asignificant and positive role in corporategovernance for some of the shareholders,particularly those who may not have theskills or time and resources to follow thedevelopments in the corporate world. Minor-ity shareholders can actually benefit from thepresence of a powerful controlling coalition ofshareholders, since controlling groups rarelyallow their companies to fail.

Finally one aspect of the institutionally-based system may be particularly attractivefor Africa, a continent which has beeninfested with strife, social turmoil and civilwars. That single aspect may ultimately beresponsible for tilting the balance of prefer-ence. Africa does not need only development.Africa needs specifically balanced and equit-able socio-economic development in order toguarantee politico-economic stability. With-out dialogue and continuous mutual consul-tation as well as consensus amongst allstakeholders in the economy this stabilitycannot be achieved. Stability in the financialand capital markets critically needs socio-economic stability; and economic stability aswell as prosperity require political stability.Past experience in Africa and elsewhereseems to suggest that strife and conflict inorganisations and economies erupt moreoften than not when an individual or onegroup seeks to selfishly dominate and sub-jugate others in order to unfairly take advan-tage of them beyond tolerable limits in theabsence of a framework which could bringpeaceful change through dialogue and con-sensus. Since it is the institutionally-basedmodel which can bring together all majorstakeholders rather than focusing exclusivelyon the shareholders of the corporation, it ispossible within such a framework of govern-ance for Africa to develop economically withsocial equity and thus minimize the fre-quency and intensity of future political aswell as socio-economic turmoils and conse-quent financial instabilities and crises whichwould undermine the attractiveness andglobal competitiveness of African capitalmarkets. It is hereunder therefore broadly andrather controversially hypothesized tenta-tively that

The institutionally-based system of cor-porate governance and control is a morepreferable model from which to draw mostof the inspiration for corporate governancerestructuring in Africa.



The successful evolution of a bank-basedcorporate governance system in Africa willneed however that the banks and otherrelated financial institutions are restructured,better staffed, better managed and bettersupervised in their operations to avoid whatwas experienced in the case of the Asiancrisis. But since it is difficult to strengthenfinancial sectors overnight, policymakers inAfrica will need to restructure and open theirfinancal systems in a systematic and orderlyfashion.

Conclusion

Future economic development in Africa willcritically depend on, among other things, thecapacity of the continent to attract investmentand capital funds. One of the major determi-nants of this ability will be the comprehen-siveness with which past inefficient structuresin the economy will be restructured in orderto provide opportunities for the developmentof effective and efficient economic agents andcapital markets. It is in this respect thatdecisions and issues pertaining to securitiesand company law as well as corporategovernance will be important. It may not bewise for Africa to wait passively for appro-priate governance systems and structures toevolve. When Russia, for example, was per-ceived to have neglected during the transitionproperty rights issues and in particularproperty rights environment necessary toensure adequate corporate governance result-ing in incomplete ownership structures typi-cal of Russian firms, capital flew out of Russia(Wintrobe 1998). Africa needs to make poli-tical decisions which will guide legal choicesin the design of the new governance archi-tecture. Africa should feel free to borrow thebest features of governance from any othersystem already in existence on the globalscene, including the OECD proposals for acode of good practice of corporate governance(OECD,1999) and the proposals for globalcodes of corporate governance published bythe USA institutional investors (CalPERS1998). But Africa should also not forget thatall these borrowed elements can only bereassembled in a coherent manner with someof the work which is already going on inAfrica (see: King, 1994 and CACG, 1999), ifthere is a broader framework rooted in thesocio-economic history and culture of theAfrican societies. It is suggested here thatthe institutionally-based governance systemcan provide that loose framework for Africa'sfuture socio-economic stability in as much asit is expected that the specific system of

governance to be found in each country willbe a reflection of a mixture of economic forces,laws as well as institutional peculiarities ofeach country.

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Corporate Governance in Emerging Capital Markets: whither Africa?