BOX AC 939, ASCOT

BULAWAYO, ZIMBABWE

FACULTY OF SCIENCE AND TECHNOLOGY EDUCATION

DEPARTMENT OF SCIENCE, MATHEMATICS AND TECHNOLOGY

EDUCATION

MASTER OF SCIENCE EDUCATION IN ACCOUNTING AND BUSINESS

STUDIES

COURSE: PST6361 CORPORATE GOVERNANCE

STUDENT NAME: NDLOVU WITNESS N0189978N

LECTURER: MR. M. MOYO

Assignment Question: Citing relevant examples from the Zimbabwean

situation, discuss the causes of corporate failure in most recent times.

DUE DATE: 30 SEPTEMBER 2019

INTRODUCTION

Corporate failure has in recent times attracted vast attention from various
stakeholders such as economists, researchers, government and the general public.
This was rightly said by Crowther and Seifi as cited in [ CITATION COR15 \l 1033 ], that
corporate governance has attracted a great deal of attention since the mid-1980s
when concerns about the way companies were controlled and held accountable
were overshadowed by their commercial success unlike the 1970s, which had seen
some trying economic struggles around the world The reason is that any corporate
failure can destabilise the economic system in various ways such as increasing
unemployment by throwing workers into the labour market, increasing the level of
poverty, depriving people, especially creditors of their legitimate earnings as well as
intensifying the crime rate and reduction in the volume of tax earnings [ CITATION
Mba13 \l 1033 ]. It is the thrust of this essay to discuss the causes of corporate failure
citing examples of the Zimbabwean situation. Corporate governance and failure will
be defined.

DEFINITION OF TERMS

According to [ CITATION COR15 \l 1033 ], corporate governance is the system by which

an organization makes and implements decisions in pursuit of its objectives.
[ CITATION Cro11 \l 1033 ], define corporate governance as an environment of trust,
ethics, moral values, confidence and as a synergic effort of all the constituent parts,
that is, the stakeholders, including government, the general public, professionals,
service providers, and the corporate sector. The corporate governance system setup
in a country consists of a portion of a broader institutional network that controls or
direct the relationship among executives and stakeholders who have a large interest
in the organization’s activities Carney and Gedajlovic as cited in [ CITATION Ncu14 \l
1033 ]. Corporate governance is therefore the means through which organisations are
directed and controlled.

Three types of corporate failure are a corporate body with low or negative returns, a
corporate body that is technically insolvent and a corporate body that is bankrupt. A
corporate entity that continuously exhibits low or negative returns is bound to fail
sooner or later because there is no opportunity for expansion. A firm is technically
insolvent when it is unable to meet its liabilities as at when due. The assets of the
firm may be higher than its liabilities but because of its critical liquidity situation, it is
unable to meet its liabilities [ CITATION Mba13 \l 1033 ].

CAUSES OF CORPORATE FAILURE

The major causes of corporate scandals are centred on poor oversight and lack of
proper monitoring of the Chief Executive Officer and executive directors by the board
leading to corporate governance breaches [ CITATION Sif14 \l 1033 ]. For example
Premier Service Medical Aid Society (PSMAS) board failed dismally to monitor the
dealings of its CEO who awarded himself and senior managers hefty salaries and
benefits at the detriment of the provision of quality health care to the clients.

Corporate failures and fraud in Zimbabwe has been blamed on ineffective internal
controls that are used in measuring the compliance levels of managers in the day to
day running of the financial institutions by the board [ CITATION Nja11 \l 1033 ] . Sifile et
al, (2014), further assert that laxity of implementing effective internal controls, greed
and in some instances poor or lack of board supervision emerges as contributors to
poor corporate governance in many institutions. NSSA has been in the spotlight with
Prisca Mupfumira being alleged to have defrauded the enterprise of US$ 95 million.
Such amounts could not have been swindled at once hence the audit committee
were not doing a diligent job of verifying all transactions

Corporate failure is also due to nepotism in the selection of board members as well
as unskilled directors. Social capital perspective of director selection involves the
assessment of their specific knowledge, skills and experience, that is, directors are
expected to be fountains of knowledge, skills, and relevant experiences. For
example Air Zimbabwe where the son-in-law of the then president was appointed
under unclear circumstances with no regard to experience and qualifications

According to Singh as cited in Sifile et al, (2014), gender plays a pivotal role in
corporate failure. He asserts that a board diversity proxy that has received a lot of
research attention has been the issue of women presence on boards. Major
corporate collapses of the magnitude of Enron, Parmalat and WorldCom have been
dominated by male boards. The entering of women directors on the boards is seen
as a panacea to the never ending failures orchestrated by very ambitious and
seemingly uncontrollable males. A point true to the Zimbabwean situation as most
enterprises that have failed or performing badly are or were headed by males for
example, Zimbabwe Broadcasting Corporation (ZBC), PSMAS and Harare City
Council just to mention a few. The Minister of Finance and Economic Development
Prof Mthuli Ncube recently advocated for the increased inclusion of females in
directorships specifically holding the portfolio of chairing financial committee.

The influence of the Chief Executive Officer (CEO) on the board contributes to
corporate failure. Agrawal and Chadha as cited in Sifile et al, (2014) argue that a
CEO’s influence on the board can reduce the board’s effectiveness in monitoring
managers and the greater a CEO’s influence on the board, the less likely the board
is to suspect irregularities that a more independent board may have caught. CEOs
affect the quality of the information available to the board of directors and investors,
corporate investment decisions, remuneration and packages issues as well as
recruitment of senior management.

High production costs are another cause for corporate failure. This is a situation
where the production cost of a firm makes its product not to compete favourably with
other differentiated products in the market. This could be due to over employment of
human and material resources or technical inefficiency in the production process
[ CITATION Bow09 \l 1033 ]. The volatile exchange rates mean that importing raw
materials is expensive leading to high production costs and prices which are not
competitive compared to other imports of finished products.

Boards must be independent of political interference and be seen to be so. In

Zimbabwe, however, there is an undeniable interplay between politics and the
governance of the State Owned Enterprises (SOE). This is largely a result of the
state's involvement in the appointment of parastatal boards of directors, Zvavahera
and Ndoda, 2014 as cited in [ CITATION Chi17 \l 1033 ]. This has led to failure of most
enterprises as these appointees would not be qualified and inexperienced. Examples
of such enterprises include Grain Marketing Board (GMB) where a retired top police
officer was appointed at its helm in 2015. This has been trend with a number of
SOEs having retired army officers and politically affiliated individuals being directors
with no regard or consideration of necessary qualifications. More often than not,
these board appointments have been riddled with cronyism; where the appointment
of members to the boards has largely been based on political expediency and rarely
on pure merit. The situation is exacerbated in instances where the appointed board
members have political connections [ CITATION Chi17 \l 1033 ].

The board size is another cause for corporate failure as noted by [ CITATION Jen16 \l
1033 ] who articulated that, with the conception of boards, one may readily presume
that a board which is bigger maybe favoured by way of allowing the addition of
varied board members which are proficient in distinct fields; however, a bigger board
size leads to a rise in issues dealing with management and exchanges of information
thereby hindering the effectiveness and efficiency of the board. He further asserts
that a bigger board is distinguished by a dwindling capability of directors to assess
management and to examine and determine how firm performance can be improved.
A case displayed by the PSMAS board which failed to effectively play its stewardship
role especially the remuneration committee by awarding substantial financial rewards
to the CEO and the senior management at the opportunity cost of providing quality
health as per the mission and vision statement.

Lack of independence or “freedom after speech” contribute to corporate failure since

employees or the general public are not at liberty to disclose any acts of corruption
or scandals they encounter. This is noted by [ CITATION Chi17 \l 1033 ] who points out
that whistle-blowers have no protection; legal or otherwise. This quandary is
compounded by the various gagging mechanisms such as the Official Secrets Act
[Chapter 11:09] which prevent employees in SOEs from disclosing information about
activities happening inside the enterprises. This makes the public disclosure of
concealed malfeasance and corporate malpractice in state-owned enterprises
dangerous, and puts potential whistle-blowers in a dicey situation. Whistle-blowing
encourages employees to disclose any irregularities without the fear of retaliation,
and facilitates the early detection of any issues thereby helping to prevent corporate
malpractice [ CITATION Ncu14 \l 1033 ].

Lack of risk assessment strategy causes corporate failure. The risk associated with
an investment decision should be properly evaluated. The reason is that investments
in assets constitute the most important source of corporate earnings. Thus, if risk
assessment is not properly done, corporate income would be impaired as noted by
Mbat as cited in [ CITATION Mba13 \l 1033 ] . National Railways of Zimbabwe (NRZ) were
in the spotlight recently when they embarked on a deal to lease trains from South
Africa which on arrival proved to be incompatible to our railway lines.

Caballero and Krishnamurthy as cited in [ CITATION Mba13 \l 1033 ] assert that capital
inadequacy contributes to corporate failure. A firm that is undercapitalised is bound
to fail sooner or later. The reason is that the firm will not have enough capital to buy
the relevant fixed assets, invest in enough income generating assets or enough
working capital. Very often than not, such firms experience underutilisation of
capacity. Examples of such enterprises include Air Zimbabwe and National Railways
of Zimbabwe who are failing to acquire planes and coaches respectively that are
technologically up to date.

Income instability is another major cause since it affects the bottom line of entities
due to reduced turnover. This was noted by Caballero and Hammour as cited in
[ CITATION Mba13 \l 1033 ] that environmental economic instability can lead to corporate
failure. The reason being that any downturn in the economy can create some form of
financial distress due to a firm’s inability to sell its products. This has been the case
in Zimbabwe where the country is facing economic challenges that include volatile
price increases, rampant inflation and erosion of disposable income.

CONCLUSION

Developing a suitable system of corporate governance for the enterprises is an

important priority for Zimbabwe’s economic development. Rampant corruption,
political interference, bad corporate governance practices, high production costs,
nepotism in board selection, board size, lack of risk management system, poor
oversight and lack of proper monitoring of CEOs especially in state-owned
enterprises have become major risks to the growth and sustainability of the country’s
economy. The recent explosion of corporate scandals in Zimbabwe’s state-owned
enterprises and parastatals has demonstrated that the country’s public sector is
incapable of self-regulation [ CITATION Mba13 \l 1033 ] . This makes a strong case for a
rules-based corporate governance system that will impose stringent regulatory
oversight in the country’s state-owned enterprises. This though will not be enough as
witnessed over the years that codes of conduct do not deter corrupt activities as they
are still on the rise, there is therefore the need to encourage character change as
individuals and embrace the principles of corporate governance.
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