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Stock Exchange: Platform For Corporate Governance Enforcement 

By Kennedy Abang

CameroonPostline.com — The Stock market is an anti-thesis to the culture of secrecy, opacity and corporate malfeasance prevalent in many sub Saharan African economies.

Corporate governance is the system by which companies are directed and control. It encompasses the broad spectrum of the relationship between the board, shareholders and other stakeholder groupings posited on the tenets of transparency, integrity and probity to safeguard the competing interests of directors and shareholders within the context of the stewardship function of management and the agency role of directors.

Financial markets thrive on information. Information is the lifeblood of every well performing and efficient stock market. The incessant need for timely, relevant and reliable information by stock market participants is in sync with the guiding principle of transparency advocated by corporate governance codes.

By providing a platform for the centralise trading of stocks of companies and a mechanism where the price for these stocks respond to events within the companies (price discovery), the stock market appraises managerial performance and ensures that only those companies with a sound management structure attract public capital. It is thus the penultimate mechanism for ensuring the free flow and availability of information about companies.

Price movements in the stock market are sensitive to news at the level of corporations. The market dislikes secrecy and uncertainty. It places the onus on listed companies to voluntarily divulge information to the investing public. This is an ongoing and dynamic process that ensures responsiveness to the ever changing information needs of investors, regulators and the general public.

The contribution of stock exchanges to improving standards of corporate governance has been manifest. Through participation in developing national codes of corporate governance, by setting listing and maintenance requirements consistent with high standards of governance and through ongoing monitoring and disclosure of listed companies’ corporate governance compliance, exchanges have been at the forefront of raising standards and sanitising business practices.

Even though the exchange focuses on publicly listed companies that raise capital from the general public, corporate governance codes can still be voluntarily adopted by closely held companies seeking to enhance risk management and best practices. Stock exchanges provide a second-tier, frontline regulatory framework for listed companies through a delegated authority from the securities commission.

As a self-regulatory organisation, they ensure that their members (brokerage firms) and issuers (listed companies) are compliant with the provisions of the law, the stock market rules and regulations and the applicable governance code. A series of enforcement and disciplinary measures are meted on defaulting companies ranging from fines to delisting of their shares.

One-size-fits-all? What Code To Adopt?

Companies listed on the Johannesburg Stock Exchange, the London Stock Exchange, NYSE and other major exchanges fully subscribe to the Combined Code, The King’s Report on corporate governance or The OECD’s principle of corporate governance.

Financial markets are different in structure. Prevailing laws and regulations vary, trade patterns vary, investment and capital flow, regional and bilateral trade protocols, monetary and fiscal policy exigencies, are some of the factors that differentiate one market from another. Corporate governance practices vary from one country to another, and experience in both developed and emerging economies has shown that there is no single framework that is appropriate for all markets.

So, governance principles are not prescriptive or binding, but rather take the form of recommendations that each country can respond to as best befits its own traditions and market conditions. While admitting that the above mentioned codes set very onerous standards which smaller companies in frontier markets cannot comply with, the challenge is to develop codes adapted to the particular needs of their economy. Zambia, Zimbabwe, Kenya, Botswana are some of the countries to have adopted governance codes for market participants.

Locally, the recent failure of major micro finance institutions, the financial difficulties at the Commercial Bank of Cameroon, CBC, and the ensuing litigation against its former CEO in court, has brought corporate governance issues to the fore. As the Cameroonian market gains depth and breadth, with a more animated trading environment, the need will arise for a governance framework to regulate market participants.

The Douala Stock Exchange (DSX) remains the single largest platform for ensuring that corporate governance practices are entrenched in the Cameroonian business psyche. Its “listing requirements” is a step in the right direction, but there is need for the adoption of a governance code that places continuous and ongoing reporting and communication requirements on listed companies in order to enhance visibility, transparency and the way listed companies engage the investing public.

An emerging economy depends on being able to build world-class companies which are leaders in the increasingly competitive regional and global marketplace. Good governance is about enabling entrepreneurship and innovation within a framework of accountability.  It demands sound judgment, high standards of transparency, integrity and probity in the relentless pursuit of the goals of the business.

There is a strongly, positively correlated relationship between the rate of adherence to good corporate governance practices and the long-term rate of growth and investment in an economy. In fact, most portfolio managers and institutional investors overseas judge emerging market economies on the basis of their adoption of governance codes such as the Combined Code and the King’s Report on corporate governance

The adoption of a corporate governance code is an essential condition for the development of the stock market ensuring financial stability, managerial soundness, better valuations, attraction and retention of foreign capital and reduction in organisationally systemic risk, while positioning the stock market to contribute to economic growth and development. Such a code should be adopted in a comprehensive and concerted manner necessitating input from industry bodies, professional associations, labour and regulatory authorities.

First published in The Post print edition no. 01350

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