Ethics and Corporate Governance

CHARTERED INSTITUTE OF RISK AND SECURITY MANAGEMENT
PROFESSIONAL DIPLOMA IN RISK & SECURITY MANAGEMENT
ETHICS AND CORPORATE GOVERNANCE
Module REC 306
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CHARTERED INSTITUTE OF RISK AND SECURITY MANAGEMENT
"The Six Hour Tutorial Sessions"
As you embark on your studies with the Chartered Institute of Risk and Security Management
(CIRSM) by open and distance learning, we need to advise our students so that they can make
the best use of our modules and other learning materials, your time and the lecturers who attend
to you virtually. The most important point that students need to note is that in e-learning, there
are no lectures like those found in conventional face-to-face learning. Instead, there are learning
packages that may comprise written modules, audio recordings, video recordings and other
referral materials for extra reading. All these including WhatsApp, Telegram, Twits, Blogs,
Skype, telephone and email can be used to deliver learning to students. As such, at CIRSM, we
expect the lecturers to lecture to students virtually on the stipulated six-hour tutorials designed
to give students robust introductory knowledge to their programmes. We believe that the
teaching and learning task is accomplished by the learning package that students receive at
registration.
What then is the purpose of the six-hour tutorial for each course on offer?
At CIRSM, like any other e-learning programmes, the students are at the core of learning. After
they receive the learning packages and other learning materials, it is obvious that they will come
across concepts/ideas that may not be that easy to understand or that are not so clearly explained.
They may also come across issues that they do not agree with, that actually conflict with the
practice that they are familiar with. Through interaction and discussion groups, friends can bring
ideas that are totally different and new and arguments may begin. Students may also find that
an idea is not clearly explained and they may remain with more questions than answers. They
need someone to help them in such matters. This is where the six-hour tutorial comes in.
For it to work, you need to know that:
 This is one requirement in e-learning
 The lecturer has to introduce the course adequately for students to progress on
their own.
 The student should prepare questions, queries, clarifications, for the topics to the
discussed. For the lecturer to help you effectively, give him/her the concerns
beforehand so that in cases where information has to be gathered, there is
sufficient time to do so. If the questions can get to the lecturer at least two weeks
before the tutorial, that will create enough time for thorough preparation.
In the tutorial, the students are expected and required to take part all the time through
contributing in every way possible. They can give their views, even if they are wrong, (many
students may hold the same wrong views and the discussion will help correct the errors), they
still help them learn the correct thing as much as the correct ideas.
There is also need for both students and the lecturer to be open-minded, frank, inquisitive and
should leave no stone unturned as they analyze ideas and seek clarification on any issues. It has
been found that if tutorials are done correctly, students do better in assignments and
examinations because their ideas are streamlined. By introducing the six-hour tutorial, CIRSM
hopes to help students come in touch with the lecturers who mark their assignments, assess
them, and guide them in preparing for writing examinations and assignments and who run
students’ general academic affairs. This helps students to settle down in their course having
been advised on how to go about their learning.
Professional networking with students is, therefore, upheld by CIRSM.
The six-hour tutorials should be so structured that the tasks for each session are very
clear. Work for each session, as much as possible, follows the structure given below.
Session I (Two Hours)

Session I should be held at the beginning of the semester. The main aim of this session is to
guide you, the student, on how you are going to approach the course. During the session, you
will be given the overview of the course, how to tackle the assignments, how to organize the
logistics of the course and formation of study groups that you will belong to. It is also during
this session that you will be advised on how to use your learning materials effectively.
Session II (Two Hours)

This session comes in the middle of the semester to respond to the challenges, queries,
experiences, uncertainties, and ideas that students are facing as they go through the course. In this
session, difficult areas in the module are explained through thecombined effort of the students and the
lecturer. It should also givedirection and feedback where students have not done well in thefirst
assignments as well as reinforce those areas where performance in the first assignments is good.
Session III (Two Hours)

The final session, Session III, comes towards the end of the semester. In this session, students
polish up any areas that they still need clarification on. The lecturer gives students feedback on
the assignments so that they can use the experiences for preparation for the end of semester
examination.
Note that in all the three sessions, students identify the areas that their lecturer should give help.
They also take a very important part in finding answers to the problems posed. As students, you
are the most important part of the solutions to your learning challenges.
Conclusion
In conclusion, we should be very clear that six hours is too little for lectures and this does not
limit, in view of the provision of fully self-contained learning materials in the package, to look
for supplementary sources to augment this module. We, therefore, urge students not only to
attend the six-hour tutorials for this course, but also to prepare oneself to contribute in the best
way possible so as to maximize beneficiation.
BEST WISHES IN YOUR STUDIES.
CIRSM
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INTRODUCTION TO ETHICS AND CORPORATE GOVERNANCE
Objectives of the Unit

By the end of this Unit, students will be able to:
 Define corporate governance and business ethics
 Outline the historical development of business ethics and corporate governance
 Explain the various sources of ethics and corporate governance principles
 Understand the interaction between corporate governance and ethics.
1.0 Introduction
The Ethics and Corporate Governance Module presents an overview of various topical issues in this
developing field and its importance to the world of business. Given the numerous incidents of high
profile collapse and failure of many businesses locally and globally, the importance of the field of
business ethics and corporate governance cannot be gainsaid. This first unit introduces the interrelated
concepts of business ethics and corporate governance in terms of their definitions and scope as well
as their historical development. The unit will close by highlighting the various sources of principles
of ethics and corporate governance.
1.2 Definition and Scope of Business Ethics
Before delving into the nitty-gritties of business ethics as a discipline, it is important to first appreciate
the meaning of ‘ethics’ in its general sense. Although it may be easy to explain what is ethical and
what constitute unethical conduct in general, defining ethics may not be a simple task. Be that as it
may, the etymology of the word “ethics” can be traced back to the Greek word
‘ethikos’ which is translated to mean ‘character’.
Defining ethics
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There are various definitions that have been advanced by different authors. Reynolds (2015:3) simply
defines ethics as “a set of beliefs about right and wrong behaviour within a society.
Laudon & Laudon (2006: 148) also define ethics as ‘the principles of right and wrong that individuals,
acting as free moral agents, use to make choices to guide their behaviours.’ Ethics therefore refers to
moral ‘laws’ that govern a person or a group of persons’ behaviour.
According to Naidoo (2016:397) “ethics are uniform guiding principles which determine what is
‘right’ and acceptable in a society and allows a social order to be established. Examples of ethical
values include truth, fairness, respect and integrity. De George (1999) states that ethics is concerned
with the study of morality: practices and activities that are considered to be importantly right or wrong,
together with the rules that govern those activities and the values to which those activities relate. The
University of South Africa module on Professional Ethics (2009: 1) succinctly explains the meaning
and scope of ethics as follows:
“while ethics is about what we ought and ought not to do, it is also about setting priorities in human
behaviour. Ethics is not always about what is absolutely right or wrong, acceptable or unacceptable,
ideal or less than ideal. It is also about what is the best decision in particular circumstances, what is
the lesser of two evils, what is the balance between doing good and causing harm. Ethics is therefore
about working out the principles on which we make these sorts of decisions.”
In the practical sense, ethics are guiding principles used in deciding whether a course of action or
decision is right or wrong and eventually making the right choices. However, it is important to note
that what may be deemed to be ‘right’ or ‘wrong’ in one society or group may differ significantly in
another society. Reynolds (2015) argues that although ethical behaviour conforms to generally
accepted norms, many of which are almost universal, opinions about what constitutes ethical
behaviour can vary dramatically.
Ethics, morals and values

A common thread that runs through the concept of ethics includes a discussion on ‘morals’ and
‘values’. The term ‘morals’ derives its origins from the Greek word ‘mos’ which means
‘custom’. Naidoo (2016: 397) distinguishes between ethics and morals in the following terms:
“Whereas ethics are generally universally accepted, morals on the other hand vary amongst
individuals and from society to society. Morals are individual or group standards of behaviour which
determine right from wrong. Morals are therefore indicative of an individual standard as opposed to
ethics which are based on universally accepted principles.”
Ethics is therefore a broader concept than morality in the sense that it comprises principles and
standards, which are more universally accepted than morals. On the other hand, values are ideologies
that individuals or communities subjectively hold dear. Values are described in the
King VI Report on Corporate Governance for South Africa (2016) as “convictions and beliefs about
how the organization and those who represent it should conduct themselves.” From a corporate
governance standpoint, core values of an organization may include honesty, fairness, responsibility,
respect and dignity.
Defining Business ethics

While ethics is generally concerned with what is ‘right’ or ‘wrong’, business ethics deals with the
same principles but within the context of a business environment. As Naidoo (2016:398) aptly
describes it: “ethics is about the right behaviour; business ethics is about the right behaviour in
business and the behaviour of business.” Thus, business ethics can be defined as the study of business
situations, activities, and decisions where issues of right and wrong are addressed (Stanwick &
Stanwick, 2009). It involves distinguishing between “right” and “wrong” and then making the ‘right’
choices in business activities.
Mullins (2013) highlights that business ethics ‘seeks to explore the implications of general ethics for
the conduct of business.’ The same author however argues that it is not easy to apply ethics to business
because there is no single clear view of how to judge good and bad. A company’s ethics are the moral
principles and standards that guide it in its day-to-day business activities and its relations with internal
and external stakeholders (Naidoo 2016). The King IV Code of Corporate Governance of South Africa
(2016:12) echoes the same sentiments by postulating that “in the context of organizations, ethics refers
to ethical values applied to decision-making, conduct and the relationship between the organization,
its stakeholders and the broader society.”
Since companies and other business organizations are legal entities and cannot have their own
conscience on what is right or wrong, the ethics of an organization is determined by the conduct of its
leadership, management and employees. According to Barker (2006:19), “companies are legal persons
with separate identities. However, companies themselves cannot be ethical. It is the leaders of the
company who give a company an ethical culture.” From this standpoint, business ethics constitute a
set of principles and value guiding the behavior of an organization’s board members, management,
and employees at all staff levels.
1.3 Historical Development of Business Ethics

Business ethics has its own historical origins and development. It has evolved over many centuries
into a major discipline in the field of business. In general, business ethics can be traced back to the
earliest forms of civilization when humans started to trade. Sullivan (2009:11) observes that “from the
time of the earliest civilizations, public authorities, philosophers, and business leaders have been
concerned with ethics.” However, business ethics as an academic discipline has a much shorter history.
Academics argue that the history of business ethics largely depends on the particular meaning assigned
to the term (De George 2015). For instance, business ethics can be seen as an ancient practice if the
term is defined in the broad sense that ethics in business is simply the application of everyday moral
or ethical norms to business. An example is given of the Bible, which incorporates a moral code in the
form of the Ten Commandments providing for principles of truthfulness, honesty and a prohibition
against theft and covetousness. Other traditions and religions have comparable sacred or ancient texts
that have guided people's actions including business for many years (De George 2015). Today, many
business people are strongly influenced by their religious beliefs and the associated ethical norms and
apply these norms in their business activities.
According to Sullivan (2009) the first recorded comprehensive ethical guide was the Code of Hammurabi
developed in 1754 BC. The code established a set of rules making commerce and civilization possible and is
often referred to throughout the Middle East. From a philosophical point of view, philosophers such as
Aristotle and Plato are believed to have contributed to the development of business ethics. For instance,
Aristotle’s famous book Politics extensively covered economic relations, commerce and trade and made moral
judgments about greed, or the unnatural use of one's capacities in pursuit of wealth for its own sake, and
similarly condemned usury because it involves a profit from currency itself rather than from the process of
exchange in which money is simply a means (De George, 2015).
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Other notable philosophers who influenced the development business in one way or another
include John Locke who developed the classic defence of property as a natural right; and Adam
Smith who is often thought of as the father of modern economics and Karl Marx. The works of
some of these famous philosophers are constantly cited in American business schools today to
provide guidance on moral dilemmas that philosophers have considered on over the centuries.
Business ethics as an academic field has a more recent history dating back from the 1960s in
America where big businesses started replacing small and medium-sized businesses. This
resulted in environmental damage, which led to movements such as consumerism and protests
against multinational companies. In response to these movements, corporations started
developing the concept of social responsibility and spent more money on advertising their
programs and how they were promoting the social good. Business ethics as an academic field
started emerging in the 1970s as Business schools also contributed to the field of business ethics
by developing courses in social responsibility and ethical foundations of business, of private
property, and of various economic systems (de George, 2015). By 1990, business ethics was
well established as an academic field.
1.4 Definitions and Scope of Corporate Governance
Like business ethics, definitions of ‘corporate governance’ are wide and varied. Corporate
governance as a concept does not lend itself to precise definition despite the phenomenal
growing interest in this field. Different authors define corporate governance in different ways
and, consequently, there are a plethora of definitions of corporate governance.
Defining corporate governance
Although definitions of corporate governance widely vary, they tend to fall into two distinct
taxonomies. Claessens (2003) observes that the first set of definitions focus on the actual
behaviour of corporations, in terms of such measures as performance, efficiency, growth,
financial structure and treatment of shareholders and other stakeholders. The second set of
definitions deals with ‘the normative framework: that is the rules under which firms are
operating – with the rules coming from such sources as the legal system, the judicial system,
financial markets and factor (labour) markets.
A simple definition is that corporate governance is the system by which companies are directed
and controlled (Cadbury Report (1992). However, Naidoo (2016) observes that the tendency
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over the years has been to move away from this narrow definition of corporate governance to
increasingly broader definitions, which encompass elements of managing long-term risk,
overseeing ethical performance and sustainable business practices and taking accountability for
the company’s relationships with multiple stakeholders. The same author then defines corporate
governance as “structures, processes and practices that the board uses to direct and manage the
operations of a company and determine how authority is exercised, how decisions are taken,
how stakeholders have their say and how decision-makers are held to account.” (Naidoo:
2016:4).
Iskander and Chamlou (2000) seek to define corporate governance from two perspectives,
namely: from private and public standpoints. From a corporation’s perspective, the emerging
consensus is that corporate governance is about maximizing value subject to meeting the
corporation’s financial and other legal and contractual obligations. This inclusive definition
stresses the need for boards of directors to balance the interests of shareholders with those of
stakeholders - employees, customers, suppliers, investors, communities - in order to achieve
long term sustained value for the corporation. From a public policy perspective, corporate
governance is about nurturing enterprises while ensuring accountability in the exercise of power
and patronage by firms. The role of public policy is to provide firms with the incentives and
discipline to minimize the divergence between private and social returns and to protect the
interests of stakeholders.
The OECD (1999: 1) defines corporate governance as “a set of relationships between a

company’s board, its shareholders and other stakeholders.” According to Parkinson (1994)
corporate governance is the process of supervision and control intended to ensure that the
company’s management acts in accordance with the interests of shareholders. Coyle (2003)
observes that corporate governance is concerned with how powers are shared and exercised by
different groups to ensure that the objectives of the company are achieved. In this regard,
corporate governance entails the rights of shareholders and other interest groups such as the
employees, how directors exercise their powers, and how the holders of power in a company
should be held accountable for what they do.
Cannon (1994) provides a more elaborate and all-encompassing definition by observing that the
governance of an enterprise is the sum of those activities that make up the internal regulation
of the business in compliance with the obligations placed on the firm by legislation, ownership
and control. Sternberg (2000: 199) argues that ‘properly understood, corporate governance
refers simply to the need for, and ways of, ensuring that the corporation is pursuing its proper
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ends, typically by keeping directors and managers accountable to the shareholders’. Finally, the
Corporate Governance Framework for State Enterprises and Parastatals of Zimbabwe (2010:
xviii) defines corporate governance as follows:
“Corporate governance is a set of processes, customs, value codes, policies, laws and structures
governing the way a corporation is directed, controlled and held accountable.
Corporate governance ensures that the organization is run properly, that goals are being
achieved and funds are being managed with high standards of propriety and probity.” In
summary, corporate governance is therefore concerned with:
 The creation and monitoring of systems of checks and balances to ensure that corporate
power is exercised properly;
 Adequate and effective systems for ensuring that the company adheres to and complies
with legal, regulatory and ethical requirements;
 Processes and procedures which guarantee that risks are identified and managed within
acceptable parameters;
 Systems and practices for making and keeping the company accountable to its shareholders
and other key stakeholders.
Corporate governance and other forms of governance

Corporate governance must be distinguished from other forms of governance systems.
Corporate governance differs from other forms of governance such as national or political
governance in the sense that it applies to organizations that are incorporated to form legal
entities separate and distinct from their owners or founders. In other words, corporate
governance relates to companies, voluntary associations and other organizations. The
governance structures and frameworks for corporate organizations and political organizations
are therefore fundamentally different.
It is equally important to appreciate the distinction between corporate governance and

management of companies. Tricker (1984) clearly distinguishes between corporate governance
and management of companies by observing that “if management is about running business,
corporate governance is about seeing that it is run properly”. In other words, management
focuses on day-to-day business operations while corporate governance is concerned with
oversight on how the business is operated.
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1.5 Historical Development of Corporate Governance
Development of corporate governance in UK and US
The historical development of corporate governance as a discipline was largely influenced by a

number of widespread corporate failures in different countries during the 1980s and 1990s.
For instance, a number of large companies and financial institutions including the Bank of
Credit and Commerce International dramatically collapsed in the UK. In the United States, the
spectacular collapse of large institutions like Enron also spurred the need to develop effective
corporate governance systems and practices. In most cases, the reasons for the collapse of the
institutions revolved around issues of accounting or financial reporting irregularities and
inadequate internal control systems.
In the UK the first notable code of best practices was the Financial Aspects of Corporate
Governance (commonly known as the ‘Cadbury Report’) published in 1992. This was followed
by the Myners Report, which focused on the relationships between institutional investors and
company management. In 1995, the Greenbury Report was developed whose main thrust was
on directors’ remuneration followed by the Hampel Report in 1998. These various codes of best
practices were eventually consolidated into what is known as the Combined Code on Corporate
Governance. The Combined Code on corporate governance applies to UK listed companies on
a voluntary basis rather than a regulatory requirement. However, listed companies are required
to disclose in the annual reports the extent of their compliance or non-compliance with the
Combined Code. In 2016, the UK Code on Corporate Governance was published as the latest
code applicable to companies.
Development of corporate governance in South Africa
In South Africa, a number of codes of corporate governance have been developed under the
style “King Codes on Corporate Governance”, named after Mervin King, the chairman of the
various committees on corporate governance. The first code was the King I Report on Corporate
Governance published in 1994. This was later revised as King II (2002) and King III (2009)
Reports on Corporate Governance of South Africa. The latest edition is the King IV Code on
Corporate Governance of South Africa published in 2016. The King Code is a major reference
point for many listed companies including in Zimbabwe.
Development of corporate governance in Zimbabwe
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In Zimbabwe, corporate failures were mainly in the financial services sector where notable bank
failures and closures were experienced. The banking crises of 2003/2004 and the collapse of
many banking institutions were partly as a result of pure mismanagement of corporate assets,
unbridled corruption or downright deception by those at the helm of corporate structures,
coupled with weaknesses in the legal and regulatory framework and inadequate monitoring and
supervision of financial institutions.
Sifeli et al (2014:78) enumerate a long list of Zimbabwean companies and financial institutions
that failed or encountered serious corporate governance issues as follows:
“Several companies have faced difficulties associated with board failure. Of note are
companies like Air Zimbabwe, PSMAS, ZBC, African Renaissance Bank (AFRE), BCCI, UMB
Bank, ENG Capital and Barbican Bank. The major causes of corporate scandals were centred
on poor oversight and lack of proper monitoring of the CEO and executive directors by the
board leading to corporate governance breaches.”
Other notable examples of banks which collapsed for causes attributed to poor corporate
governance included Trust Bank Limited, building societies such as First National Building
Society (FNBS) and Time Bank, Royal Bank, Kingdom Bank and others placed under
curatorship at the behest of the Reserve Bank of Zimbabwe. This led to the development of
corporate governance systems as the central bank responded by introducing stringent measures
to tighten its grip on monitoring and supervisory activities over the banks. The Reserve Bank
also put in place a framework to ensure that banks act in accordance with strict corporate
governance requirements. This was done through the promulgation of Guideline
No//012004/BSD as a corporate governance framework to be followed and adopted by banking
institutions. This became an important milestone in the history of corporate governance in the
Zimbabwean financial services sector.
The major highlights of the Corporate Governance Guidelines issued by the Central Bank in
2004 included, inter alia, the separation of managers and owners in the running of financial
institutions. As a requirement of the Guidelines, shareholders with at least ten per centum
shareholding in a bank could no longer form part of management of the bank or assume the
positions of chairperson or deputy chairperson of the board of directors. Further, every banking
institution was required to have at least five directors, the majority of whom being nonexecutive
directors.
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In 2010, the Government of Zimbabwe developed and published the Corporate Governance
Framework of State Enterprises and
Parastatals to improve corporate governances of state enterprises. In 2014, the nation of
Zimbabwe recorded a major milestone when the National Code on Corporate Governance
Zimbabwe (also known as “ZimCode”) was published. The Code is applicable to all business
entities regardless of the manner and form of their incorporation or establishment and whether
the business entity
1.6 Sources of Ethical and Corporate Governance Principles

In order to fully understand ethics and corporate governance principles, it is important to also
have an appreciation of where such principles are usually found. In other words, there are
various sources from which ethical and corporate governance principles are derived.
These will be discussed below.
Corporate Governance Codes

Due to the significant developments in this area, a number of corporate governance codes have
been developed to guide organisations. For example, the UK Code on Corporate Governance
incorporates various principles which guide the governance of listed entities and other business
organisations. In South Africa, the King Codes of Corporate Governance also contain various
corporate governance and ethical principles. Similarly, Zimbabwe as a country has developed
its own home-grown codes, namely: the National Code on Corporate Governance (2014) as
well as the Corporate Governance Framework for Parastatals and State Enterprises (2010).
Constitution and Legislation
Laws and regulations constitute important sources of corporate governance and ethical
standards. According to Sullivan (2009:16) “the legal and regulatory framework within a
national context sets the minimum standards of acceptable conduct in doing business, and
reflects what society holds as fair and appropriate behaviour by all types and sizes of firms.
Thus, compliance with national laws is the starting point for doing the right thing by private
sector organizations.”
In Zimbabwe, the Constitution as the supreme law of the land provides for basic values and
principles governing public administration (section 194) and requires state-controlled
commercial entities to abide by standards of good corporate governance. Other notable pieces
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of legislation that provide minimum corporate governance principles include the Companies
[Chapter: 24:03], Public Finance Management Act [Chapter 22:19] and the Banking Act
[Chapter 24:20].
The Public Finance Management Act (section 50 thereof) requires every public entity to adhere
to and implement principles of sound corporate governance policies, procedures and practices.
The Companies Act deals with, inter alia, management and administration of companies
including appointment of directors, auditors and other officers of the company and the
requirement to table financial statements, directors’ reports and auditors’ reports at annual
general meetings.
The Banking Amendment Act No. 12 of 2015 of Zimbabwe contains key provisions relating to
corporate governance for banks and financial institutions. For instance, financial institutions are
required to maintain adequate and effective corporate governance practices in line with
prudential standards. Boards of financial institutions are required to establish risk management
committees and independent compliance units responsible for ensuring legal and regulatory
compliance and risk management practices. In addition, the Banking Act provides that no
director shall be appointed if he/she is a director of more than 4 other companies (more than 3
companies for executive directors). A director who has served for 10 years cannot be
reappointed unless at least 5 years have lapsed since the last appointment.
Judicial precedents
Courts are frequently called upon to adjudicate on matters relating to governance of corporate
entities. In the process of making judicial decisions, courts refer to and interpret corporate
governance principles. The impact of corporate governance principles cited by the courts is that
they become part of legal precedent and binding as law and therefore losing their status as
voluntary principles (Naidoo 2016). For instance, in the case of SABC Ltd v Mpofu [2009] JOL
23729 (GSL) the court emphasized the need for directors of companies to incorporate values of
Ubuntu into their decisionmaking. In Myburgh v Barinor Holdings (Pty) Ltd and Another (C
820/13) [2015] ZALCCT 1 the court accepted the need to separate executive positions of chief
executive officer and finance director based on the principles of King III Report on Corporate
Governance. Thus judicial precedents are becoming an important source of corporate
governance principles.
International conventions
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International conventions also constitute an important source of ethics and corporate

governance principles. Some of the conventions include OECD Anti-Bribery Convention;
OECD Guidelines on Corporate Governance; International Chamber of Commerce (ICC) Rules
of Conduct and Recommendations to Combat Extortion and Bribery and UN Convention
against Corruption.
Trade customs and practices

Customs are rules that become binding in the course of time through observance by the
community or a particular industry. They are not necessarily written down. In other words, the
community or industry becomes accustomed to regulating its relationship in a particular way,
with many of its members regarding that particular way of doing things as legally binding. For
instance, it may be a trade custom in an industry that companies do not spy on each other’s trade
secrets.
1.7 Interaction of Corporate Governance, Ethics and Law

Ethics, corporate governance and the law tend to interact in significant ways and even dovetail
in some instances. Ethics and corporate governance are interrelated concepts although the latter
is broader in scope. The King IV Code of Corporate Governance of South Africa’s definition
of corporate governance incorporates the concept of ethics. The King IV Code (2016:12)
defines corporate governance as “the exercise of ethical and effective leadership by the
governing body towards the achievement of the following governance outcomes: ethical
culture, good performance, effective control, legitimacy.”
Ethical issues take center stage in the field of corporate governance. Indeed, a number of
corporate governance codes contain principles relating to ethical conduct when running the
affairs of an organization. For instance, principle 54(a) of the National Code on Corporate
Governance of Zimbabwe stipulates: “the leadership of the Board must be based on ethics,
professionalism and good morality.” Similarly, principle 2 of Part 5.1 of the King IV Code on
Corporate Governance of South Africa provides that “the governing body should govern the
ethics of the organization in a way that supports the establishment of an ethical culture.” The
King IV Code requires organizations to have approved codes of conduct and ethics policies that
articulate and give effect to the direction of organizational ethics.
According to Naidoo (2016: 398) good corporate governance, has its foundation in effective
and ethical leadership. Ethics is therefore the heart of leadership as the board must lead ethically
and effectively. Coyle (2003:15) argues that ethical considerations are at the root of many

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perceived problems with corporate governance in practice. Individuals are expected to behave
in an ethical way. Companies must be aware of the need to maintain a culture of corporate
ethics, providing a code of conduct that all directors and employees are expected to follow. In
addition, the perception of ethical issues by external pressure groups may affect the reputation
of a company, or the way it is run.
The interaction between corporate governance principles and the law is usually apparent where
some issues of corporate governance are legislated and carry the force of law. In other words,
once compliance with a principle of corporate governance is a legal requirement, it becomes
mandatory for companies to adhere to such principle or face legal sanctions. The corollary is
that there is sometimes a thin line between certain corporate governance principles and legal
principles.
Business ethics also interacts with the law. Thus, Stanwick & Stanwick (2009:7) highlight that
“business ethics begins where the law ends. Business ethics is primarily concerned with those
issues not covered by the law, or where there is no definite consensus on whether something is
right or wrong.” However, according to Wyburd (1999:95) the law has various limitations in
providing guidance on ethical decisions in that:-
 the law is essentially reactive and seldom up-to-date especially in matters where developing
technology is involved;
 If there is too much law, management has to spend so much time in ensuring compliance
to the extent that they will have correspondingly less time to do other things;
 the law is usually too rigid and too blunt an instrument to cover all situations in all sorts of
businesses without being over prescriptive and bureaucratic;
 the law, and the fear of it, induces too much caution and secrecy in companies.
1.8 Unit Summary and Conclusion
This unit has introduced the concepts of business ethics and corporate governance. Various
definitions of these concepts have been explored in a bid to provide better understanding of
these fundamental disciplines in the field of business. The unit also sought to explore the
historical developments of business ethics and corporate governance as academic disciplines.
The unit concluded by delineating the relationships among business ethics, corporate
governance and the law.

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1.9 Review Questions

Defining corporate governance and business ethics and explain why these concepts are
important in the world of business.
What are the various sources from which principles of business ethics and corporate
governance may be derived?
Is there any relationship between ethics and corporate governance on the one hand and
corporate governance and the law on the other? Explain your answer.
“The historical development of corporate governance was largely influenced by corporate

failures and company closures in many countries.” Discuss this statement citing relevant
examples.

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BUSINESS ETHICS FUNDAMENTALS

 Identify common ethical issues in business;
 Understand global ethical issues in international business;
 Decide how to handle and make ethical business decisions;
 Understand measures to build effective ethics programs;
 Appreciate corporate social responsibility programs.
2.0 Introduction
Ethics has become an integral component for successful businesses globally. As highlighted by
Sullivan (2009:10), “ethics and moral norms now set a new benchmark for choosing to ‘do the
right thing’ in business practices”. Sound ethical practices and behaviors can result in
tremendous benefits for businesses in the long run. On the other hand, unethical business
conduct can tarnish or destroy the reputation and goodwill of a business or even bring a business
to its knees. From a risk management point of view, it becomes imperative for the board and
management to ensure that a sound ethical culture is developed and adhered to in an
organization to guarantee its viability and sustainable development.
This Unit will focus on a broad range of issues in business ethics including common ethical
issues confronted by businesses; global ethical issues in international businesses as well as
ethical decision-making processes. The Unit will also cover issues pertaining to how to
effectively manage ethics in organizations through the development and implementation of
codes of ethics. Corporate social responsibility issues will also be discussed.

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2.2 Morals, Ethics and Law

Ethical standards and legal principles play a critical role in guiding people on what is proper or
improper, right or wrong in a given society or specific organization. The manner in which we
conduct ourselves, communicate and interact certainly affects other people in different ways,
good or bad. As such, there must be certain societal rules and moral standards that govern how
people interrelate. Haag et al (2004) observe that ethics is the set of principles and standards we
use in deciding what to do in situations that affect other people. Sometimes these principles are
so strongly and widely held that they have become laws.
Although ethics and morals tend to be interrelated, there is a difference between the two
concepts. Reynolds (2015) opines that ethical behaviour conforms to generally accepted
norms—many of which are almost universal. Morals are central to issues relating to ethics
although there is a difference between the two. Morals are one’s personal beliefs about right
and wrong, while the term ethics describes standards or codes of behaviour expected of an
individual by a group (nation, organization, profession) to which an individual belongs
(Reynolds 2015). In other words, morals tend to be opinions or beliefs of individuals while
ethics are moral principles that are universally accepted by society.
Although ethics and law tend to dovetail and both guide and regulate human behavior, it is
important to appreciate the difference between ethical (moral) norms and legal principles.
According to Madhuku (2010:1) ‘law refers to rules and regulations that govern human conduct
or other societal relations and are enforceable by the state. It is the quality of enforceability by
the state that distinguishes law from other rules.’ The state machinery comprising law
enforcement agencies (police), the judiciary, and other quasi-judicial institutions has the
responsibility of enforcing the law. Thus the main difference between legal rules and ethical
principles is that the former are enforceable by the state and carry certain sanctions or penalties
if they are not observed. On the other hand, ethical principles may be described as "moral laws"
as these are no enforceable by the state.
2.1 Benefits of sound business ethics

Ethics has risen to the top of the business agenda as the risks associated with unethical conduct
have increased tremendously, both in their likelihood and in their potential negative impact. In
the past decade, numerous cases of company closures and the collapse of financial institutions
have been reported. As such, adherence to sound business ethics inevitably comes with various
benefits for organizations. There is a general perception across different countries, cultures, and
industries that ethical companies are more successful than those that are not, particularly over
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the long run (Sullivan 2009). Companies that follow good ethical practices can achieve a wide
spectrum of benefits including the following:
Customer Loyalty
Businesses with a good reputation are likely to attract and retain customers. Customers are more
likely to continue to buy products and services from reputable companies and tend to shun those
companies whose business practices are ethically questionable. Sound ethical practices are
therefore likely to result in repeat business from loyal customers.
Employee Retention
It is generally believed that companies that adhere to good corporate governance and ethical
practices tend to attract more employees and retain the best employees in the long run. This is
because employees generally prefer to be associated with companies that are well managed and
respect employment rights. Thus sound business ethical conduct results in low turnover and
enhanced productivity.
Legal Issues
Unethical behaviors more often than not result in legal problems for businesses. For instance,
disregarding environmental issues may attract severe penalties imposed by the law. Similarly,
corrupt practices may end up exposing company officials to potential prosecution in courts of
law. The opposite is that sound ethical practices result in fewer legal challenges for the
organization and ultimately a reduction in time and expenses associated with lawsuits.
(iv) Increased investment opportunities
Investors are generally inclined to invest their money in organizations that observe high ethical
and good corporate governance practices. The corollary is that companies committed to sound
ethical standards can attract potential investors and secure capital from financial institutions
with relative ease.
Competitive advantage
The business environment has become highly competitive and the management of corporate
ethics has assumed a key strategic dimension in many organizations. As such, sound business
ethics is an important source of competitive advantage. According to Sullivan (2009),
experience shows that companies that adhere to ethical standards perform better financially in

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the long run than those without such a commitment. Conversely, disregarding good corporate
governance and ethical principles has ultimately resulted in closure of many businesses the
world over.
Reduction of risk
Sound ethics and good corporate governance help corporations reduce risk, stimulate
performance, improve access to capital markets, enhance marketability of goods and services,
improve leadership, and demonstrate transparency and accountability (Sangware, 2014).
Corporate governance principles require boards of directors and management to come up with
sound risk management strategies and establishing an ethical culture within the organization.
Without managing the ethical culture an organization faces many risks including the risk of
business closure.
2.2 Common Ethical issues in business
Businesses are confronted with various ethical issues during their day-to-day operations. Such
issues differ from one business to another. For instance, small businesses may face a unique set
of ethical issues that may be different from those encountered by large corporations. For small
businesses, typical examples include ethical issues regarding hiring and firing employees;
conflicts of interest in family run small businesses, among others. However, there are certain
common ethical issues cutting across all forms of business regardless of size, sector or type of
business. Some of the major issues include the following:
(i) Integrity and trust
Issues of integrity and trust are at the heart of business ethics. Indeed, most successful business
relationships are built on the foundation of trust and integrity. Rainey (2006: 230) states that
“ethical practices are directly related to trust. It is expected that corporations and their
associations will police themselves to ensure that best practices are employed and that
individuals, groups, departments, business units, and the entire organisation act and behave in
a responsible, prudent, and safe manner.”
Thus the affairs of a business must be conducted with honesty and integrity if an organization
is to be perceived as having a commitment to ethical business practices. For instance, a business
ought to treat its customers fairly and professionally in order for customers to remain loyal to
the company and continue to trust its products and services. Fairness in business dealings means

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being objective and having an interest in creating a win-win situation for parties involved in
business transactions.
(ii) Diversity issues

An organization is usually made up of people with diverse backgrounds and cultures.
Organizations also interact with people from different cultures and societies such as customers,
investors and other key stakeholders. What is morally right or wrong in one culture may not
necessarily be right or wrong in another culture. Therefore, issues of managing diversity
confront every business or organization that employs or interacts with people from different
backgrounds. In order to manage issues of diversity, an organization must treat all people with
respect and dignity. An ethical approach to diversity also applies to recruiting a diverse
workforce, enforcing equal opportunities for everyone regardless of race, ethnicity, gender, or
creed.
(iii) Compliance and Governance Issues
Compliance with the law and good governance principles is a fundamental ethical issue
confronting every business. In other words, it is a moral obligation for every business to comply
with legal and regulatory requirements and refrain from any conduct that may be contrary to the
law. Rainey (2006:230) highlights that “ethical practices involve complying with laws and
regulations, mitigating impacts, and informing constituencies about the full implications of
products and operations.”
For instance, businesses are expected to fully comply with environmental laws, tax legislation,
health and safety regulations, among many others. Business practices must therefore be
underpinned by a commitment to full compliance with the law. Before making any decision or
adopting a course of action, businesses must first ascertain whether the decision or action
complies with relevant laws. Employees should not be encouraged to break the law or disregard
ethical principles as part of business practices.
(iv) Supplier/Customer Relations
Common ethical issues emanate from situations where businesses have to make decisions on
which suppliers or customers to deal with. For example, is it ethical to engage in business with
a supplier who disregards environmental issues, smuggle goods without paying duties or use
child labour to produce its products? Is it ethical to receive donations from an organization
involved in drug trafficking? Business managers face such challenges and have to make
appropriate decisions in an ethical and professional manner.

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2.3 Global Ethical issues in international business

Globalization has increased the magnitude of ethical challenges faced by businesses in general.
Multinational companies carry out business operations in various nations. Even small
businesses are now able to transact online business across the globe riding on technological
advancements. This development raises various ethical challenges, as there are no universal
ethical standards applicable across the world. According to Salehi, Saeidinia and Aghaei,
(2012:1):
“As multinational companies expand globally and enter foreign markets, ethical conduct of the
officers and employees assume added importance since the very cultural diversity associated
with such expansion may undermine the much shared cultural and ethical values observable in
the more homogenous organizations.”
Thus one of the major challenges for the business community, particularly those operating in a
multicultural or multinational environment, has been to find a source or standard that can anchor
an ethics code, independent of national culture or local issues (Sullivan 2009). Business
managers are under enormous pressure on how to deal with different cultures and satisfying all
stakeholders. Some of the global ethical challenges emerging from operating in the international
marketplace include the following:
(i) Corruption
Corruption is the misuse of public or corporate position or power for private gain (Wyburd,
1998). In certain countries it may be almost impossible to operate business as a foreign company
without paying government officials some form of bribe to get the bureaucratic wheels moving.
The reason for paying bribes vary significantly but may include winning government contracts,
facilitating issuance of licences or influencing legal outcomes. Wyburd (1998:51) describes this
form of corruption as follows:
“Another aspect of bribery can be described loosely as administrative – to get things done that
ought to be done anyway, often by people who are already paid to do so. This form of corruption
(or ‘grease’, as it is often called) seems harmless enough to otherwise honest individuals,
especially at the moment of need…Moreover, such practices are regarded in many countries as
essential to keep the wheels turning in the local economy and necessary addition to the income
of the underpaid officials, who are responsible for the extortion in the first place.”
In some countries, governments merely pay lip service to combating corruption while other
nations accept institutionalized corruption as the reality of day-to-day transactions (Sullivan

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2009). Countries such as Denmark, Canada, and New Zealand are renowned for being highly
ethical while corruption is very high in countries in Asia, South America, Russia, including
some African countries. In Zimbabwe, unbridled corruption has become a serious cancer eating
away the economy to the detriment of the general welfare of citizens.
The fundamental question for business ethics practitioners is whether it is ethical to pay
governmental officials bribes in order for business transactions to succeed? It is also a major
ethical challenge multinational corporations have to answer when operating in the global
marketplace. It is important for these multinational corporations to know the local traditions
and customs before venturing into a particular foreign market. Although such situations are
difficult to navigate, transnational corporations operating in foreign markets may consider the
following in dealing with ethical challenges relating to payment of government officials:
 offering donations for the development of public services in the local market such as building
hospitals or roads. This will ensure that money will not end up directly in the pockets of private
government officials but benefit the community in which the company operates;
 making donations in the form of goods or services such as medical equipment, computers for
schools, handouts for underprivileged communities;
 creating employment opportunities for the local people so that they benefit from the business
activities of the multinational corporation.
(ii) Employment standards
Another ethical issue faced by transnational corporations relates to employment and labour
standards including poor wages and working conditions. In other countries, sweatshops are
common where manual workers are employed at very low wages for long hours under poor
conditions and exposure to many health risks. Is it ethical for foreign companies to pay local
workers lower wages than what is paid to their foreign counterparts working for the same
companies? Is it ethical for a foreign company to employ child labour where such practices are
permitted such as in some Asian countries? Despite such challenges, multinational companies
ought to establish their own employment standards that will protect workers by providing
reasonable wages and safe working conditions.
(iii) Industrial espionage
The intensification of competition among businesses in the global marketplace has resulted in
some organizations embroiling themselves in unethical practices involving industrial espionage.
In general, industrial espionage involves the act of spying directed towards discovering the
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secrets of a rival manufacturer or other industrial company. Industrial espionage comes in

different forms and may involve stealing trade secrets such as patents, designs and other
technical information, theft of customer lists, among others.
Crane (2003:13) observes that “industrial espionage has become a significant, and in many ways
troubling, aspect of contemporary business practice.” Industrial espionage, or spying, is both
unethical and illegal although there is sometimes a fine line between the legitimate tactics of
competitive intelligence gathering and the illegitimate practice of industrial espionage (Shing
and Spence 2002).
A classic example of industrial espionage in recent years involved Proctor & Gamble and
Unilever in 2001. Private investigators hired by Proctor & Gamble in the US to find out more
about its competitor’s hair care business sifted through rubbish bins outside Unilever’s offices.
The investigators gathered piles of unshredded documents relating to Unilever’s plans for the
shampoo market. Proctor & Gamble ended up paying Unilever large amounts of money as
compensation.
(iv) Environmental issues
As businesses operate in international markets, cases of environmental degradation have been

on the increase. Global warming, climate changes, deforestation and high levels of pollution are
some of the topical environmental issues. A new discipline called environmental ethics has
emerged in response to such issues. Environmental ethics is a branch of ethics that studies the
relation of human beings and the environment and how ethics play a role in this. As such,
environmental issues have assumed a global ethical dimension faced by international
businesses.
2.4 Common workplace ethical dilemmas

According to Singh (2015) unethical behavior includes the transgression of moral norms by
employees such as greed, corruption, antisocial behavior and the abuse of company assets for
personal enrichment. Workplace ethics involves the application of moral principles, standards
of behavior or set of values regarding proper conduct in the workplace as individuals and in a
group setting. Managers and employees also face a variety of ethical issues at the workplace.
Some of the ethical issues are easy to resolve while others are more complex resulting in ethical
dilemmas for employees. However, the following are some of the common ethical issues faced
by officers and employees in an employment establishment.

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(i) Monitoring employees

Employers are faced with a serious ethical dilemma when they decide to monitor employee
activities at the workplace. Monitoring of employees is usually done to ensure that company
time is being used productively, company assets are not abused and employees are not involved
in any other forms of shenanigans. According to Yerby (2013) employers can create complex
problems when they monitor employees in terms of what they should be restricted to
monitoring. Do the employees have the right to know that they are being monitored?
With technological developments, it has become relatively easy for employers to monitor
employees’ communications (email, phone calls, social media etc.). It has also become common
for employers to install security cameras (CCTV) for purposes of surveillance. This raises
ethical and legal issues relating to possible violations of employees’ privacy rights.
(ii) Conducting personal business on company time
Employees spend the greater part of their time at the workplace than any other place. As such,
the temptation to conduct personal business on company time and using company assets may
be too much to resist. This raises questions on whether it is ethical for employees to conduct
personal business on company time or to use company resources for personal gain. Typical
examples include using company phones to make personal calls or the Internet for personal
activities. Some employees even conduct freelance side businesses during working hours.
Abuse of company assets is usually a disciplinary offence incorporated in most employment
codes of conduct. However, there may be situations where no clear-cut policies exist on how
employees and managers should deal with such ethical challenges.
(iii) Employment rights
Labour and employment laws prescribe certain minimum rights and standards for employees.
However, employers may violate these rights in circumstances where it may be difficult for
employees to enforce their rights. A typical example is sexual harassment practices perpetrated
against employees at the workplace. Employees may face an ethical dilemma on what to do if
a co-worker is sexually harassed. If they report the unethical practices their jobs may be at risk.
It is therefore important for organizations to come up with clear policies to address some of
these ethical challenges.
(iv) Corruption and bribery

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Cases of employees involved in corruption and bribery are rampant in workplace situations
particularly in government-owned enterprises where employees are generally not paid well.
Employees are often in an ethical dilemma when approached by third parties with offers of
monetary rewards or other incentives in exchange for doing or not doing certain things. The
problem is compounded by the fact that corruption is highly complex and secretive such that it
is difficult to combat. Therefore, organizations must put in place policies and procedures for
reporting and dealing with corruption. A typical solution is to establish ‘whistle blower’ systems
in the workplace that enable employees and members of the public to freely and anonymously
report cases of corruption and other unethical behaviors at the workplace.
(v) Business gifts and entertainment
It is customary for companies to give customers, suppliers, or other business partner’s gifts or
presents as tokens of appreciation. Similarly, employees may also receive unsolicited gifts or
invitations for entertainment from various parties. In some cases giving or accepting gifts may
be appropriate to maintain business relationships. However, in other cases it may constitute a
breach of business and professional ethics or against the law where there is a possibility that
this may be perceived as a bribe or intended to influence a decision or outcome.
As such, it is unethical and sometimes illegal to accept gifts or business invitations where the
intention is to buy favors. The National Corporate Governance Code of Zimbabwe provides in
Recommendation 350 that “a business courtesy, such as a gift, contribution or entertainment
should never be offered in circumstances that might create the appearance of an impropriety.”
Given the potential ethical challenges associated with business gifts and entertainment,
organizations need to develop codes of conduct with clear policies to guide employees on
handling such issues. The codes of conduct must be guided by principles of moderation,
transparency, reciprocity and legality.
(a) Moderation
Business gifts and entertainment of any sort must not be excessive. In order to ensure
moderation, the type of entertainment or gift should be consistent with customary business
practice and modest in value. The gift or entertainment should also not result in unusual personal
enrichment for the recipient. For example, receiving a branded t-shirt or diary may be
considered as moderate gifts. However, being offered a holiday package in a foreign country

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fully paid by a supplier may be deemed excessive and therefore unethical for an employee to
accept such gift.
(b) Transparency
The giving or receiving of business gifts or entertainment should be done in a transparent

manner to avoid situations where such gifts may be perceived to be unethical. This means that
employees should generally disclose to their superiors any such gifts or rewards received. In
some organizations, all gifts received must be declared and recorded in a register in order to
ensure transparency.
(c) Reciprocity
For business gifts to be more in line with ethical parameters, there is need for reciprocity. In
other words, business partners may have a customary practice where business entertainment is
exchanged on reciprocal basis. This guarantees that no one organization is unduly influencing
the other to secure business favors.
(d) Legality
Business gifts and entertainment must not be received or given in contravention of any
applicable law. For instance, the Prevention of Corruption Act [Chapter 9:16] makes it an
offence for an employee to corruptly solicit, accept or obtain a gift or consideration for himself
or any other person as an inducement or reward (i) for doing or not doing, or for having done
or not done, any act in relation to his principal’s affairs or business; or (ii) for showing or not
showing, or for having shown or not shown, favor or disfavor to any person or thing in relation
to his principal’s affairs or business.
The National Code on Corporate Governance of Zimbabwe (2014:85) provides that “obtaining,
attempting to obtain, or accepting any bribe, secret commission or illegal inducement of any
sort may give rise to corporate conflicts and the company must actively discourage such conduct
with appropriate sanctions.” (Recommendation 337). Thus it is important to ascertain whether
giving or receiving a business gift does not amount to a bribe, secret commission or illegal
inducement in contravention of the law and corporate governance principles.

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2.6 Consequences of Unethical Behavior

Unethical conduct can have serious adverse consequences for individuals, organizations and the
nation at large. Generally, unethical practices increase the cost of doing business, as one has to
pay a bribe to get things done. This in turn discourages legitimate trade and investment in a
country, as potential investors tend to shun corrupt economies. According to Singh (2015)
unethical behavior of employees in the workplace not only threatens the reputation of the
affected organizations, but also has a devastating effect on these organizations’ ability to render
quality services to its customers and other stakeholders.
2.7 Nature of Ethical Dilemmas

People more than often encounter ethical dilemmas in terms of which there are two or more
alternatives that are not palatable. According to Wikipedia, an ethical dilemma or ethical
paradox “is a decision-making problem between two possible moral imperatives, neither of
which is unambiguously acceptable or preferable. The complexity arises out of the situational
conflict in which obeying one would result in transgressing another.”
An example of a typical ethical dilemma is where an employee is entrusted with company funds
and his child falls extremely sick. If the employee uses the company funds to get urgent medical
assistance it amounts to misappropriation of funds and therefore unethical and illegal. If the
employee’s child does not get medical attention, the child may die. What should the employee
do? The dilemma stems from having to make a choice from the two or more unpleasant options.
Thus the following conditions must exist for a situation to constitute an ethical dilemma:
 The individual or group must make a decision about which course of action is best among the
available options. Where there is no need to choose an option there is no dilemma. Thus
situations that are uncomfortable but that do not require a choice, are not ethical dilemmas.
 there must be different courses of action or alternatives to choose from. Naidoo (2016: 398)
states that “often, the dilemma is not just a simple matter of choosing between right and wrong,
but weighing various options to find the best solution for the company and stakeholders who
are impacted by the decision.”
 Regardless of the course of action taken, some ethical principle is compromised. In other words,
any of the courses of action adopted will still result in an ethical infraction.
A distinction should be made between personal and professional ethics and values. Conflicts
between personal and professional values should not be considered ethical dilemmas because
when an individual elects to become a member of a profession, he or she is agreeing to be bound
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by the standards of the profession, including its Code of Ethics and values. For instance, a
registered medical doctor may not refuse to carry out a legal abortion on the basis of his personal
values that abortion is immoral in general.
In practice, ethical dilemmas may be complex but one might have to choose a course of action
to adopt regardless of the circumstances. Trying to resolve ethical dilemmas may entail
distinguishing between personal and professional dimensions and identifying the ethical, moral,
legal, and values considerations in the situation. Ethical decision-making models can be applied
to resolve ethical dilemmas.
2.8 Conflict of Interest situations

Defining conflict of interest
Members of an organization must ensure that their conduct is perceived to meet the highest
ethical standards and that it is aligned with the organization’s values of respect and integrity.
The National Code on Corporate Governance of Zimbabwe (2014) provides that “board
members, company executives and employees should always recognize that their primary
responsibility is to act in the best interests of the company at all times.” Identifying, declaring
and managing conflicts of interest situations is an indispensable part of demonstrating
impartiality and integrity when discharging an organization’s responsibilities and official
duties. Directors, management and employees may be required to disclose personal interests in
terms of the law or corporate governance principles.
Conflict of Interest refers to situations in which personal interests (which in most cases include
financial interests) may compromise, or have the appearance of, or potential for, compromising
professional judgement and integrity and, in doing so, the best interests of the company or
organization. McDonald et al (2002:68) define a conflict of interest “as a situation in which a
person has a private or personal interest sufficient to appear to influence the objective exercise
of his or her official duties as, say, a public official, an employee, or a professional." Naidoo
(2016:215) explains the meaning of conflict of interest in the corporate governance context as
follows:
“in a governance sense, a conflict of interests means any financial or other interest which
actually or potentially impairs a director’s objectivity and his ability to act independently or
which creates an unfair advantage for, or in favor of, any third party by virtue of an existing
relationship with the conflicted director.”

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Thus, personal or private interests should not improperly influence the performance of
individuals’ official duties or responsibilities in an organization. The OECD Toolkit on
Managing Conflict of Interests in Public Sector (2005) defines conflict of interest from a public
administration standpoint as “a conflict between the public duty and the private interest of a
public official, in which the official’s private capacity interest could improperly influence the
performance of their official duties and responsibilities.”
There are many conflict of interest situations that may arise in business. The following are some
of the typical scenarios where conflict of interest may exit:
 operating any business which is of the same nature as, or competes with, the business of the
company in which one is a director, officer or employee;
 where an employee or director has a financial interest (e.g. holding shares or options) in a
supplier, business partner, vendor or any other company which does business or intends to do
business with the organization;
 Awarding of a contract to a person or company in which a director, officer or employee has an
interest;
 having a financial or any other personal interest in the outcome of any tender proceedings or
the success of any existing supplier relationship;
 being employed by (as staff member or in directorship) or providing services to any potential
tenderer or existing supplier, vendor or business partner;
 employing close relatives and friends in positions or areas which have a bearing in critical
decisions of the company (e.g. employing a relative as an auditor of the company);
 receiving any kind of monetary payment or non-monetary gift or incentive (including
hospitality) from any bidder or existing supplier or its representatives;
 canvassing, or negotiating with, any person with a view to entering into any of the
arrangements outlined above; and/or
 having a close family member (which term includes unmarried partners) or personal friends or
relatives who fall into any of the categories outlined above.
Types of conflict of interest

Conflicts of interest may be categorized as financial interest or nonfinancial interest. Financial
interest is where a person has a financial interest while a non-financial interest may take many
forms and is generally where there is, or appears to be, an opportunity for personal benefit, or
advantage for the individual. Similarly, conflict of interests may also be classified as direct
interest or indirect interest. A direct conflict of interest is where the individual has an
opportunity to benefit personally while an indirect interest may provide a benefit or advantage
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to a close family member or a person with whom the individual has a close personal relationship.
A family member may include an individual’s spouse, children, parents, grandparents and any
individual related by blood or affinity whose close association with the individual is equivalent
of a family relationship.
Yet still, conflicts of interest may be classified as actual, perceived or potential conflict of
interest. Actual conflict of interest situations entail a direct conflict between an individual’s
official duties and the organization’s responsibilities and a competing interest or obligation,
whether personal or involving a third party. A perceived conflict of interest arises where it
could reasonably be perceived, or give the appearance, that a competing interest could
improperly influence the performance of an individual’s official duties and the organization’s
responsibilities. Lastly, a potential conflict of interest emanates from situations where an
individual has an interest or obligation, whether personal or involving a third party, that could
conflict with the individual’s official duties and the organization’s responsibilities in the future.
Legal and Corporate Governance Principles on Conflicts of Interest
The law may prescribe the requirement for directors, officers and employees to disclose
personal interests in order to avoid or manage conflict of interest situations. For instance, the
Companies Act [Chapter 24:03] provides in section 186 that “it shall be the duty of a director
of a company who is in any way, whether directly or indirectly, interested in a contract or
proposed contract with the company to declare the nature and full extent of his interest at a
meeting of the directors of the company.” In addition, directors have common law ‘fiduciary’
duties, which include (i) the duty not to have personal interest conflict with the interests of the
company; (ii) the duty not to make ‘secret profits’; and (iii) the duty to exercise powers ‘bona
fide’ in the company’s interest. These duties are intended to prevent personal interests of
director from conflicting with or prevailing over the interests of the business.
Corporate governance principles also regulate conflict of interest situations. In Zimbabwe, the
corporate governance principles relating to conflicts of interest are dealt with in Chapter 6 of
the National Code on Corporate Governance of Zimbabwe (2014). The Code provides that
“company directors, officers and employees should not use their powers for any improper
purpose, take personal advantage of the company’s opportunities or allow their personal
interests to come into conflict with those of the company.” (Recommendation 339). The Code
also discourages personal interests of directors, officers or employees or persons closely

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associated with the company from taking precedence over those of the company and its
stakeholders (Recommendation 340).
The Corporate Governance Framework for State Enterprises and Parastatals in Zimbabwe
(2010) is also relevant. The framework requires directors of state enterprises to disclose their
personal interests in writing to the board of directors, responsible Minister and the Minister of
State Enterprises and Parastatals. The personal interests include shares and contracts in which
a director has direct or indirect personal interest which may give rise to conflict of interest.
Managing conflicts of interest
Albeit, mere perception that a conflict of interest exists might undermine an organization’s
integrity in the eyes of the public, it does not necessarily follow that conflicts of interest are
automatically improper. As a matter of fact, conflicts of interest may inevitably arise even where
there is no improper or unethical behavior. What is important is how the situation is managed
once the conflict is identified. Thus any actual, perceived or potential conflict of interest
situation does not automatically evince any wrongdoing on the part of the individual concerned.
It is important for organizations to properly manage and resolve conflicts of interest. Failure to
manage conflicts of interest may result in deleterious consequences for the organization. For
instance, a conflict of interest can result in corrupt conduct, abuse of office, misconduct, breach
of trust, or unlawful action. More importantly, public confidence in the integrity of institutions
may also be seriously impaired as a result of failure to manage conflicts of interest.
Resolving conflict of interest situations depends on the nature of the interest and involves
establishing the relevant facts, applying the relevant law and policy, and distinguishing between
actual, perceived, and “potential” conflict situations. As such, the process may range from being
a simple task to a complex situation. However, effective management of conflicts of interest
entails the following:
(i) Conflict of interest policy
The starting point is for an organization to develop a conflict of interest policy. The purpose of
a conflict of interest policy is to ensure that the interests and general welfare of an organization
are promoted and protected and that any situation that could give rise to a conflict of interest is
properly managed. Such a policy also helps to enhance awareness within the organization about
situations that may potentially generate conflicts of interest as well as provide procedures for
reporting, managing and resolving conflicts of interest situations. (ii) Identification

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Identifying and resolving conflict-of-interest situations is crucial to good governance and

maintaining trust in public and private institutions. However, experience shows that this can be
difficult to achieve in daily practice (OECD 2005). Identifying conflict of interest situations
may be a complex exercise. However, one can use an objective test to ascertain whether an
individual could be influenced, or appear to be influenced, by a private or personal interest in
carrying out their duties to the organization. The ultimate question is whether a disinterested
person or bystander would view an official’s private relationships as conceivably conflicting or
appearing to conflict with the organization’s interests. If the answer is in the affirmative, there
is a possibility of a conflict of interest. Asking the questions in Figure 2 may also help in
establishing conflict of interest situations:
(iii) Disclosure of personal interests
One of the effective ways of managing conflict of interest situations is to have a clear policy in
place for disclosure of personal interests by directors, officers and employees. This policy will
ensure that personal interests of members of an organization are known in advance and also
disclosed where there is potential conflict. It is common practice for organizations to require

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employees to complete declaration of interest forms that will be kept by the company secretary
or human resources department and updated regularly. The National Code on Corporate
Governance of Zimbabwe recommends full and timely disclosure of any conflict or potential
conflict to be made to the Board (Recommendation 344 of the Code).
(iv) Recusal
Where a decision is to be made on behalf of an organization and an officer has a direct or indirect
personal interest in the decision, it is proper for the officer to recuse himself or herself from
participating in the decision making process. This will ensure that the officer’s personal interests
will not influence the decision. Recusal as a way of managing conflict of interests’ situations is
recognized by corporate governance principles. For instance, Recommendation 365 of the
National Corporate Governance Code of Zimbabwe provides that “an actual or potential conflict
of interest involving a director, officer or employee should be disclosed and the director, officer
or employee concerned should not sit in any meeting which discusses the
conflict.”
(2010) also provides that “every such Director shall withdraw from the proceedings of the Board
or Committee when a matter in which he/she has an interest is considered, unless the other
members decide that the member’s direct or indirect interest in the matter is trivial or irrelevant.”
This means persons whose interests conflict with decisions to made on behalf of the company
must not be part of the decision making process as their judgment may be clouded by their
personal interests.
2.9 Ethical Decision Making

In the prevailing business environment globally, fairness, justice and honesty in business
dealings have become fundamental issues causing complex dilemmas in businesses. Any wrong
or biased decision can have serious adverse consequences on the goodwill and reputation of a
business in the marketplace.
Ethical decision making can be defined as a cognitive process that considers various ethical
principles, rules and virtues or the maintenance of relationships to guide or judge individual or
group decisions or intended actions. It is the process of choosing the best alternative for
achieving the best results or outcomes in compliance with individual and social values, morals
and regulations. Ethical decision making models help organizations to explore ethical dilemmas

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and to identify ethical courses of action. Ethical decision making therefore entails the following
process illustrated in Figure 2 below:
(i) Identification of Ethical Dimensions
The first step involves determining whether an ethical analysis is needed in the first place. This
is because not all decisions involve ethical analysis. One way of identifying ethical dimensions
is to ask whether an action or decision may violate moral or legal principles.
(ii) Collection of Relevant Information

Once it has been determined that there is an ethical dimension to the decision-making, an
employee will need to gather all the relevant information to make an informed and ethical
decision. This may require the employee to look at relevant company policies, values, principles
and the company's code of ethics related to the issue. The employee should also check any
relevant laws and regulations.
(iii) Evaluation According to Ethical Standards
Once the relevant information has been collected, the information needs to be evaluated in terms
of the relevant ethical guidelines. The ethical guidelines are usually contained in the company's
code of ethics, policies, values and principles.
(iv) Consideration of alternatives
After evaluation, the next step in ethical decision-making is consideration of each alternative.
Sometimes, the alternatives are as simple as pursuing a course of action or not pursuing it.
However, the world is often more complex.
(v) Making the decision
The final stage in the model is to make the decision. The decision maker should select the choice
that does not violate the ethical criteria determined in the previous steps. In other words, the
choice that is in harmony with the organization’s ethical principles is a proper ethical decision.

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Ethical Decision Making Model
2.6 Managing Ethics in organizations

Managing ethics in organizations is an integral part of day-to-day operations of business. In the
complex global business environment, companies of different sizes are confronted with a
myriad of ethical issues. A deliberate effort is therefore required in organizations to have a
systematic way of managing ethics in order to minimize the various risks attendant to unethical
conduct.
Effective management of ethics in an organization requires establishing ethics management

programs encompassing codes of ethics as well as training and awareness programs for
employees. According to Brenner (1992) a corporate ethics program is made up of values,
policies and activities which impact the propriety of organizational behaviours. The major
components of an ethics management system include the following:
(a) Setting the ethical tone

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The starting point on effective management of ethics in organizations is for the leadership to set
the ethical tone at the top and cascade the same throughout the organization. A famous adage
states that a fish rots from the head. This implies that if the board of directors promote unethical
conduct, the whole company is likely to do the same. Accordingly, it is the responsibility of the
board to set the ethical values and objects of the organization.
The National Code on Corporate Governance of Zimbabwe provides that the leadership of the
board must be based on “ethics, professionalism and good morality” (Principle 54(a)). The
National Code also requires the chairperson of the board to set the ethical tone for the board
(Recommendation 119 (e) of the Code). It is therefore clear that ethical leadership is entrenched
as a fundamental corporate governance principle in our national code. Similarly, the King IV
Code of Corporate Governance of South Africa (2016) contains comprehensive provisions
relating to management of ethics in organizations. In particular, the King IV Code places an
obligation on governing bodies to ensure that employees and other stakeholders are familiar
with the organization’s ethical standards through:
 Publication of codes of conduct and policies on websites or other platforms;
 incorporating relevant ethical standards in supplier contracts and employment contracts;
 including ethical standards in employee induction and training programmes.
According to Sullivan (2009), building an ethical organization has to do more with individual
leadership and organizational commitment than about mere compliance with formal processes
or systems. Thus it is important for the leadership to build a corporate ethical culture applicable
to both internal and external stakeholders of the company.
(b) Incorporating ethical standards in contracts
Organizations must adopt a sound practice of incorporating expected ethical standards in

employment contracts as well as supplier contracts. This will ensure that employees and
suppliers are contractually bound to comply with the expected ethical standards. For employees,
a breach of ethical standards stipulated in the employment contract will constitute a disciplinary
offence. On the other hand, a violation of ethical standards by a supplier may result in
cancellation of contracts or some other sanctions stipulated in the contract. Thus incorporating
ethical standards as contractual provisions helps in entrenching a strong ethical culture in an
organization.
(c) Training and awareness

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Organizations should focus on hiring and promoting employees based on demonstrated integrity
and ethical performance. Employees need to be trained on corporate governance and ethical
principles for them to be able to manage such issues. The training should start with
incorporating issues of ethics in induction programs for new employees. However, continuous
training and awareness programs are necessary to maintain a sound corporate ethical culture
within the organization. Sullivan (2009: 17) highlights that
“The best way to protect the ethical culture of an organization is to actively promote it, practice
it, train in it, update it, and make it real and visible to external and internal stakeholders. In
other words, the development of an ethical culture results from the continual and ongoing
corporate commitment to integrate and align a company’s ethical standards with business
strategy and operations.”
Training on company values, ethical standards, and compliance procedures is an essential

element to ensure that employees adhere to and uphold the organization’s stated values and
policies. Businesses have the responsibility to develop codes of conduct and ethics that every
member of the organization must abide by and put into action. Thus business operations and
personal conduct of employees and other stakeholders must conform to the ethical standards
and values set by the organization.
2.8 Code of Ethics
Perhaps the most fundamental aspect of effective management of ethics is the development and
implementation of a written Code of Ethics in an organization. Establishing Codes of Ethics is
also in keeping with good corporate principles and best practices. For instance, the National
Code on Corporate Governance of Zimbabwe (2014) recommends boards of directors to
provide leadership by “framing and implementing a code of ethics, morality and
professionalism for the company, its employees, management and board members”
(Recommendation 55 (e) of the Code).
Defining Code of Ethics
In general terms, a code is a set of conventions or moral principles governing behaviour in a

particular field. Thus a code of ethics is a set of moral and ethical principles within an
organization, profession or applicable to a specific group of people. Sullivan (2009:30) defines
and explains the scope and purpose of a code of ethics as follows:
“A code of ethics outlines the values and beliefs of an organization and ties them to an
organization’s mission and objectives. Specifically, it codifies the standards of ethical behavior

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expected of all employees and the values to which all members of an organization commit
themselves to uphold when conducting business with internal and external stakeholders. As
such, the code of ethics becomes a yardstick by which to measure the ethical performance of a
company.”
A good code of ethics does not only describe an operational process of regulating the behavior
of managers and employees but also sets long-term goals and communicates the company’s
values to external stakeholders. What emerges from the above definition and explanation is that
a code of ethics:
 incorporates values and beliefs of an organization linking them to the organization’s mission
and objectives;
 codifies the ethical standards and value to be adhered to by all employees in the organization
when conducting business with internal and external stakeholder; and
 may be used as a benchmark for measuring the ethical performance of an organization.
According to Mullins (2013: 683) codes of conduct play a critical role in fostering ethical
conduct in organizations by sending clear guidance to the employees about what is expected of
them and to the outside world about the standards by which the organisation wishes to be
judged. In defining a code of ethics, it is important to choose core values that resonate personally
with the people that make up the company (Naidoo 2016).
Codes of ethics are therefore an indispensable tool in managing ethics in organizations. A code
of ethics demonstrates commitment to responsible business practices in that it outlines specific
procedures to handle ethical failures in an organization. Codes of ethics address a variety of
issues including work environment, gender relations, discrimination, communications and
reporting, courtesy gifts, product safety, employee-management relationships, involvement in
the political sphere, financial practices, corruption, conflicts of interest, and responsible
advertising.
Reporting unethical conduct

A good code of ethics must also provide for a mechanism for reporting unethical conduct in a
way that does not result in the victimization of persons reporting such conduct. In other words,
the code of conduct must incorporate a whistle-blowing policy. Naidoo (2016: 283) defines a
whistle-blower as “one who exposes any illegal, unethical or otherwise corrupt activity by or
within a company, in the public interest, sometimes on conditions of anonymity.” Coyle

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(2003:30) states that “a whistle blower is an employee who provides information about his or
her company which he or she reasonably believes provides evidence of:
 a violation of a law or regulation by the company;
 a miscarriage of justice;
 financial malpractice; or
 a danger to public health or safety.”
A typical whistle-blowing system if the Deloitte Tip Offs Anonymous that is widely used in
Zimbabwean organizations as a channel for reporting unethical practices. The system provides
for a whistleblowing hotline service for safe, confidential and secure way of reporting unethical
conduct in workplaces.
Types of Codes of Ethics

There are basically two types of codes of ethics, namely: rules-based code of ethics (also known
as ‘compliance-based’) and value-based (also known as ‘principle-based’) codes of ethics.
Rules-based codes of ethics tend to contain more detailed rules and emphasize compliance with
those rules. On the other hand, value-based codes usually include broad principles or values
with more emphasis on “doing the right thing” as opposed to focusing on compliance.
Thus a values-based approach entails laying out a set of principles as a guide to employees on
expected ethical standards. As a result, value-based codes tend to be brief guidelines on ethical
conduct. Conversely, rules-based principles provide detailed rules of ethical conduct as well as
penalties for non-compliance with the rules. Which type of code is more effective is a question
open for debate. Rules-based codes of ethics are more common in highly regulated industries
such as the banking sector in which violations of ethical principles may have serious legal
repercussions. Put differently, rules-based codes of ethics contain well-defined rules of ethical
conduct as well as explicit penalties for non-compliance.
A value-based code of ethics focuses on a company's core value system. Value-based ethical
codes may require a greater degree of self-regulation than compliance-based codes. Generally,
there is a common belief that a more value-based code will lead to more ethical conduct than
rules-based codes although there is no empirical evidence to support this proposition.
Advantages of rules-based codes include greater clarity on ethical standards expected of

members of an organization. Penalties prescribed in the code also act as a deterrent against
unethical behaviours. However, disadvantages include focusing on compliance with the rules
as opposed to focusing on doing the right thing. Rules based standards may be inflexible and
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inapplicable to all situations. Value-based codes have advantages in that they are not rigid and
can be applied and adapted to different circumstances. These types of codes also encourage
members of an organization to voluntarily “go an extra mile” in promoting ethical culture
compared to rules-based codes which require compliance. Thus members of an organization are
flexible to develop their own specific ethical principles using the value-based codes model. The
disadvantages are however that the value-based principles tend to be broad and offer very little
guidance on the best ethical decisions. This results in ambiguity and lack of uniformity on the
applicable ethical principles.
Implementation of Codes of Ethics
It is not sufficient to have a code of ethics on paper without effectively implementing the same
to ensure high ethical standards in an organisation. As observed by Sullivan (2009:3), “the
corporate sector is replete with examples of firms that profess strong ethical cultures on paper
but become unravelled by corrupt behaviour. Having a strong sense of ethics is not a guarantee
that a company will always do the right thing.”
Thus the board of directors and senior management must ensure that the code of ethics is
effectively implemented through leading by example. This will show commitment to the rest of
the members of the organization to adhere to sound ethical standards. In other words, a code of
ethics must not be perceived as an end in itself but a means to an end for building a strong
ethical culture within an organization.
2.9 Corporate Social Responsibility

Companies are legal entities separate and distinct from their owners or members. As such,
companies and other business corporations are ‘corporate citizens’ with legal rights and
obligations. As legal persons, companies are expected to be law-abiding citizens. As such,
companies can be either good or bad corporate citizens (Naidoo 2016). In addition, companies
do not exist in a vacuum but are an integral component of the societies within which they
operate. It is from this understanding that the concept of corporate social responsibility is
derived. Mullins (2013: 670) underscores the impact of corporate actions on the society as
follows:
“Organizations play a major and increasingly important role in the lives of us all, especially
with the growth of large-scale business and expanding globalization. The decisions and actions
of management in organizations have an increasing impact on individuals, other organizations
and the community. The power and influence that many business organizations now exercise

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should be tempered, therefore, by an attitude of responsibility by management. In striving to

satisfy its goals and achieve its objectives, the organization cannot operate in isolation from
the environment of which it is part.”
According to Friedman (1970) the social responsibility of business is to make as much money
as possible for the shareholders, within the law and rules of the game (fair completion, no
deception or fraud and so on). However, organizations must think beyond merely making profits
for the business to how their activities affect the societies in which they operate. Thus business
decision making must be informed by ethical values, compliance with legal requirements and
respect for people, communities and the environment.
There is a close relationship between corporate citizenship and corporate social responsibility.
The World Bank defines corporate social responsibility as “the commitment of business to
managing and improving the economic, environmental and social implications of its activities
at the firm, local, regional and global levels.” Corporate social responsibility therefore focuses
on the good that companies are expected to do in the course of being, or becoming, good
corporate citizens (Naidoo 2016). Coyle (2003:27) describes corporate social responsibility as
“the responsibility shown by a company (or other organizations) for matters of general concern
to the society in which it operates, such as protection of the environment, health and safety, and
social welfare.”
A business organization must come up with a comprehensive set of policies, practices and
programmes designed to provide guidelines on corporate social responsibility initiatives. Major
issues of a corporate social responsibility policy vary from one organization to another but may
include: minimizing damage to the environment and fostering sustainable business
development, having liberal employment policies, making investments in local communities,
donating to charitable organizations, among other initiatives.
Ethical behaviour and corporate social responsibility can bring significant benefits to a business
such as:
 attracting customers to the firm’s products thereby boosting sales and profits;
 Employee retention, reduced labour turnover and increased productivity;
 attracting more employees wanting to work for the business, reducing recruitment costs and
enabling the company to get most talented employees.
 attracting investors and keeping the company’s share price high, thereby protecting the
business from takeover.
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This Unit covered a broad range of issues in business ethics including common ethical issues
confronted by businesses; global ethical issues in international businesses as well as ethical
decision-making processes. The Unit also explored issues pertaining to how to effectively
manage ethics in organisations through the development and implementation of codes of ethics.
The concepts of corporate citizenship and corporate social responsibility have also been
discussed.
1. Explain the common ethical issues in business and how these can be addressed.
2. What are the major ethical issues confronting international business organizations operating
in the global markets?
3. Discuss how organizations can effectively deal with conflict of interest situations arising from
business operations.
4. What are the major components of a code of ethics of a business organization?
5. Why are corporate social responsibility programs important for the success of companies?

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CORPORATE GOVERNANCE THEORIES AND PRINCIPLES

By the end of this unit, students will be able to:
 Explain the importance of corporate governance to businesses and nations in general;
 Understand the agency theory, shareholder value theory and stakeholder/pluralist theory of
corporate governance;
 Explain the six pillars of corporate governance namely, transparency; accountability;
responsibility; independence; fairness; and reputation;
 Understand general universal principles underlying corporate governance systems.
1
.0 Introduction
The domain of corporate governance is wide and encompasses many principles targeted at
improving the governance of different entities. In the same vein, various theories have been
developed to shed light on the corporate governance principles. In this Unit, focus will therefore
be on theories and principles of corporate governance including the agency theory, shareholder
value theory and the stakeholder/pluralist theory. The six pillars of corporate governance, viz:
transparency; accountability; responsibility; independence; fairness; and reputation will also be
discussed in detail as they form the crux of many corporate governance standards. In the final
analysis, the Unit will explore various universal principles found in most corporate governance
codes and best practices.
Coyle (2003:5) “corporate governance is a matter of much greater importance for large public
companies, where the separation of ownership from management is much wider than for small
1
Importance of Corporate Governance
One needs to appreciate the importance of corporate governance principles in order to be able
to grasp the various theories and principles. There is no shadow of doubt that corporate
governance has assumed a much important role all over the world. According to
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private companies. Public companies raise capital on the stock markets, and institutional
investors hold vast portfolios of shares and other investments.” This does not however mean
corporate governance is unimportant to small companies.
Thus sound corporate governance brings with it a number of benefits not only to the business
organizations but also to the nation at large. In the first instance, good corporate governance
and best practices tend to assist in attracting foreign investment. If there is weak corporate
governance culture in a country generally, the country will struggle to attract foreign
investments (Coyle 2003). Similarly, good corporate governance tends to positively support
capital markets. Companies which adopt good corporate practices generally result in their share
prices in the stock market increasing. According to a paper prepared by the Office of the
President and Cabinet (2014) the major benefits of good corporate governance include:
 better access to external finance by entities, which in turn can lead to larger investments, higher
growth, and greater employment creation;
 lower costs of capital and higher firm valuation, which make investments more attractive and
lead to growth and greater employment;
 improved operational performance through better allocation of resources and more efficient
management, which can create wealth; and
 reduced risk of corporate crises and scandals, and better relationships with stakeholders.
3.2 Corporate Governance Theoretical Framework

Corporations operate within a governance framework which is set by the law, by regulations,
by a corporation’s constitution, by those who own and fund them and by the expectations of
those they serve (Cadbury, 2000). There are various schools of thought and approaches to
corporate governance, with each perspective placing emphasis on certain facets of corporate
governance. Some of the prominent theories of corporate governance include the Agency
Theory, the Shareholder Value and the Stakeholder approaches to corporate governance.
Agency theory
The emergence of limited liability companies and the opening up of corporate ownership to the
general public through share ownership had a dramatic impact on the manner in which
companies were controlled (Solomon and Solomon, 2004). The dichotomy between ownership
and control of the company led to the so-called “agency problem” necessitated by asymmetry
of information between owners and managers. The essence of the agency problem is predicated
on the assumption that there is an inherent conflict between managers and shareholders, as
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managers will seek to maximise their benefits and perquisites at the expense of shareholders’
wealth.
Iskander and Chamlou (2000:3) correctly observe that ‘in the absence of the protections that
good corporate governance supplies, asymmetries of information and difficulties of monitoring
mean that capital providers who lack control over the corporation will find it risky and costly
to protect themselves from the opportunistic behaviour of managers or controlling
shareholders’. Viewed from this standpoint, corporate governance becomes imperative to
ensure that there are mechanisms in place that enable shareholders to exercise some semblance
of control over management in running the activities of the company and ensure that protection
of their investment is guaranteed. An effective system of corporate governance must therefore
strive to channel the self-interests of managers and directors into alignment with the corporate
objectives and shareholder interests.
According to Gillan et al (2007:1) ‘corporate governance in publicly traded corporations arise

as a response to agency conflicts between owners and managers, conflicts that result from the
separation of ownership and control.’ These mechanisms can be either internal (for instance,
board of directors) or external (for instance, legal and regulatory rules, the market for corporate
control). The interaction of these mechanisms determines the effectiveness of a firm’s total
governance structure (John and Senbet, 1998).
Fama and Jensen (1983) as quoted by Kor, Watson and Mahoney (2004: 8) observe that the
‘heightened information asymmetry between shareholders and managers and the greater
potential for agency problems create an increased need for closer monitoring of managerial
decisions and actions. The agency theory advocates the monitoring of managerial actions by
independent boards and influential institutional shareholders when conditions within the firm
and its environments suggest that there is high risk of managerial opportunism.’
The agency theory is therefore a useful paradigm in the field of corporate governance as it seeks
to explain the relationship between owners and managers of corporations and the ways in which
potential conflicts of interest can be minimised. Naidoo (2016:8) highlights that the challenges
of an effective system of corporate governance are “to ensure that there are sufficient checks
and balances in place to keep directors and management accountable to shareholders.”
Shareholder value theory

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The shareholder value approach postulates that directors should direct and govern the company
in the best interests of shareholders. The thrust of this approach emanates from the fact that
shareholders provide capital and they expect managers to ensure that the company is managed
to maximize shareholders’ wealth. Viewed from a shareholder value standpoint, corporate
governance is considered as a set of behaviours which induce the firm to maximise shareholder
value. The shareholder value approach assists to legitimise the dominance of shareholders and
the authority of capital market view of the firm. Sternberg (2000) argues that as shareholders
are the owners of the corporation and they provide equity capital, the corporation and its agents
are accountable to the shareholders.
Consequently, it is the shareholders who are ultimately responsible for corporate governance.
An extension to the shareholder value approach is the ‘enlightened’ shareholder value approach
which also subscribes to the notion that directors should run the company in the best interests
of the shareholders but in an ‘enlightened’ way. In other words, directors should take into
consideration both the short term and the long term and ought to pay regard to the interests of
other stakeholders. Thus the ‘enlightened’ shareholder value theory recognises that corporate
governance is more than mere demands for shareholder value. Heath and Norman (2004) argue
that while the board is supposed to ensure that the firm respects its legal and contractual
obligations to other stakeholder groups, it is also fully within its rights to instruct managers to
consider the ultimate purpose of the firm to be the maximisation of profits and shareholder
value.
Stakeholder/pluralist theory
Solomon and Solomon (2004; 14) define corporate governance as “the system of checks and
balances, both internal and external to companies, which ensures that companies discharge their
accountability to all their stakeholders and act in a socially responsible way in all areas of their
business activity”. This definition is premised on the stakeholder or pluralist theory, which
postulates that institutions can maximise value creation over the long term by discharging their
accountability to all stakeholders and by optimising their system of corporate governance.
Freeman (1984) proposed a general theory of the firm incorporating corporate accountability to
a broad range of stakeholders. At the heart of the stakeholder theory is the assumption that
companies should not only seek to maximise shareholders’ wealth but should also be
accountable to a broad spectrum of stakeholders such as employees, suppliers, customers,
creditors, government and the society in general. Thus the stakeholder view of corporate
governance posits that directors should not only take into account the interests of shareholders
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but all other stakeholders including the society and or the public at large. The main purpose of
the stakeholder theory is to enlarge the definition of the firm from a limited owner-manager
relationship to a wider focus (Bitar, 2004).
According to Jensen (2001) stakeholder theory states that managers should make decisions so
as to take account of the interests of all the stakeholders in a firm and stakeholders include all
individuals or groups who can substantially affect the welfare of the firm. Bhatia (2004)
endorses the stakeholder approach by arguing that corporate governance ‘is a set of systems and
processes to ensure that the company is managed to suit the best interests of all stakeholders.’
However, Roe (2001:206) argues that “a stakeholder measure of managerial accountability
could leave managers so much discretion that managers could easily pursue their own agenda,
one that might maximise neither shareholder, employee, consumer, nor national wealth, but
only their own”.
Another trenchant criticism of the stakeholder theory is that it leaves managers and directors
unaccountable for their stewardship of the firm’s resources and plays into the hands of
selfinterested managers allowing them to pursue their own interests at the expense of society
and the firm’s financial claims (Jensen, 2001). However, the stakeholder theory remains an
important philosophy despite some of the shortcomings pointed out by critics.
The above theories of corporate governance, namely; the agency theory, shareholder value and
the stakeholder value approach all provide valuable insights into understanding corporate
governance from different standpoints. Each emphasises an important view of corporate
governance and what it seeks to achieve.
3.3 Corporate Governance Concepts

There are basically six key concepts underlying best practices in corporate governance. These
principles include (i) openness, honesty and transparency; (ii) independence; (iii)
accountability; (iv) responsibility; (v) fairness; (vi) reputation. These concepts are the mainstay
of sound corporate governance and are key internal controls directly attributable to effective
running of businesses. Bhatia (2004) emphasises that the philosophy of corporate governance
hinges on total transparency, integrity and accountability of the management, which includes
non-executive directors. Companies that are well governed embrace these qualities of good
governance in order to improve the relationship between the company and its shareholders and
other stakeholders and uphold the reputation of the company with customers and the public in
general (Coyle, 2003).
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(i) Accountability
In general, accountability refers to the requirement for a person in a position of responsibility
to justify, explain or account for the exercise of his/her authority and his/her performance or
actions (Coyle 2003). In the corporate governance context, directors and executive management
have a duty to account to the shareholders and other stakeholders of the company on decisions
made and actions taken on behalf of the company. Directors and management are also
accountable for the performance of the company over each financial year.
The National Code on Corporate Governance of Zimbabwe (2014) recommends boards of

directors to provide leadership by “being accountable to all shareholders and other stakeholders
of the company” (Recommendation 55 (f) of the Code). Similarly, the King IV Code on
Corporate Governance of South Africa stipulates that “members of the governing body should
be willing to answer for the execution of their responsibilities, even when these were
delegated.”
(iv) Responsibility
Responsibility works hand in glove with the concept of accountability. In other words, a person
with a responsibility to do something is also liable to be held accountable for the exercise of the
responsibility. However, Naidoo (2016) differentiates between accountability and
responsibility. The author observes that accountability arises when a task is delegated by one
party to another, for example, the task of directing the company is delegated by shareholders to
directors. On the other hand, responsibility is the duty to respond or to take action, whilst
accountability implies a level of oversight of that action so that ultimately the accountable body
is held answerable for such action (Naidoo 2016).
The King IV Code on Corporate Governance of South Africa (2016) provides that “members
of the governing board should assume collective responsibility for steering and setting direction
of the organization; approving policy and planning; overseeing and monitoring of
implementation and execution by management, and ensuring accountability for organizational
performance.” In terms of corporate governance, the board of directors and management have
individual and collective responsibilities to ensure the proper and efficient running of the
organization. As pointed out by Coyle (2003:24):
“A key issue in corporate governance is to decide who should have responsibility. Executive
managers are responsible for the operations of the business, and the ultimate responsibility
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rests with the chief executive officer. The board of directors also has responsibilities, and it is
a principle of good corporate governance that the board should establish a list of matters for
which it should take the decision itself, without delegation to management…”
The board of directors also has a responsibility of ensuring the organisation complies with the
relevant laws and regulations. Thus responsibility is a key concept in the sphere of corporate
governance.
(ii) Openness, Honesty and Transparency

Openness and transparency are twin concepts that focus on availability of information about the
organization to key stakeholders. According to Coyle (2003:22) openness may be defined as “a
willingness to provide information to individuals and groups about the company (without giving
away commercially sensitive information).” Similarly, transparency refers to “the ease with
which an outsider is able to make a meaningful analysis of a company and its actions” in terms
of both financial and non-financial information available to stakeholders (Coyle 2003:22).
Honesty refers to the qualities of a company in terms of ensuring that the information provided
to stakeholders is true and a correct reflection of state of the business.
The concepts of openness and transparency are key to ensure good corporate governance, as
shareholders, investors and other stakeholders need to have information about what is
happening in the organization. Corporate disclosure to stakeholders is the principal means by
which companies can become transparent (Solomon and Solomon, 2004). Transparency
demands that there should be comprehensive disclosure of financial and non-financial
information of the company. Transparency is therefore an essential element of a wellfunctioning
system of corporate governance.
Accordingly, corporate governance principles require the company to provide regular, accurate
and timely information about the performance of the business and any other major
developments in the company. For instance, the National Corporate Governance Code of
Zimbabwe (2014) requires the board of directors to “ensure that regular, accurate, complete,
timely, reliable, easy to understand and relevant material is made available to all shareholders
and directors without compromising the confidentiality and commercial sensitivity of such
material” (Principle 263 of the Code).
(iii) Independence

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Literary, independence refers to freedom from the influence or control of another individual or
group. From a corporate governance perspective, ‘independence’ is necessary to ensure that
procedures and structures are in place to minimise potential conflicts of interest that could arise.
Coyle (2003) posits that independence is of particular relevance to a company’s non-executive
directors and its professional advisors. Non-executive directors and auditors of the organization
must be independent in order to express their honest and/or professional opinion in the best
interests of the company.
Independence may be undermined in the following circumstances:
 having personal interests that are in conflict with the interests of the company;
 Working as a senior executive of a company before appointment as a non-executive director;
 Familiarity, namely: where a non-executive director or auditor has known the company’s
management for a long time;
 Where non-executive directors or auditors receive a large percentage of their annual income
from the company.
(v) Fairness
An organization should strive to treat all stakeholders with fairness, impartiality and absence of
bias as part of sound corporate governance practices. Thus a stakeholder-inclusive approach is
recommended when directors and management discharge their roles and responsibilities to
customers, employees, shareholders, the community and other stakeholders by ensuring each
of them is treated with utmost fairness. A common corporate governance principle relating to
the concept of fairness is that minority shareholders of the company should be treated equally
and in the same way as majority shareholders. In most countries, the law provides for the
protection of rights and interests of minority shareholders.
(vi) Reputation
Every company or business has its own reputation, good or bad, in the market or community
within which it operates. Good corporate governance demands that companies build a good
reputation, as it is a necessary ingredient for successful companies. For instances, public
companies listed on the stock exchange must strive to build a good reputation as this has a
bearing on the performance of the company’s shares. The development of codes of ethics,
corporate social responsibility programs, fair and equitable treatment of customers, suppliers,
employees etc. can all contribute to the reputation of a business organization.

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3.3 Standards of good Corporate Governance

There is general consensus that a “one-size-fits-all” system of corporate governance does not
exist. However, famous codes of corporate governance and best practices such as the UK Code
on Corporate Governance (2016); the King IV Corporate Governance Code of South Africa;
OECD Principles of Corporate Governance, and Principles for Corporate Governance in the
Commonwealth (CACG Guidelines) provide certain universally accepted principles of
corporate governance and best practices.
Standards of corporate governance are determined by the measures which companies take for
themselves, whether voluntarily or otherwise to improve the way they are directed and
controlled, and the legal, financial and ethical environment in which they work (Cadbury quoted
by Claessens, 2003). The following are some of the common principles of good corporate
governance that are explicit in most codes of best practices:
Board of Directors
The board of directors is the hub of corporate governance. Iskander and Chamlou (2000) argue
that the board of directors is at the center of corporate governance and its overriding
responsibility is to ensure the long term viability of the firm and to provide oversight of
management. The board of directors can be a powerful monitoring mechanism that encourages
economic value-maximizing decisions when its members are not under the chief executive
officer’s influence (Morck, Shleifer and Vishny, 1989).
Jenkins and Ambrosini (2007) argue that the board of directors is a monitoring and controlling
device of the shareholders and the shareholders appoint members to the board to oversee
managers and ensure the firm operates in ways that maximize shareholder wealth. To this end,
the primary responsibility of the board is to act in the principal’s best interests by formally
monitoring and controlling the firm’s top managers.
Hamilton and Micklethwait (2006: 1) identify six main causes of corporate failure namely:
‘poor strategic decisions; overexpansion and ill-judged acquisitions; dominant CEOs; greed,
hubris and the desire for power; failure of internal controls at all levels from the top downwards;
and ineffectual or ineffective boards.’ Of particular importance is the role of ineffective boards
in contributing towards corporate failures. Accordingly, the existence of an effective and
efficient board of directors is an essential ingredient of a good corporate governance system.
Solomon and Solomon (2004:65) underscore the importance of an effective board of directors
as follows:
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“For a company to be successful it must be well governed. A well-functioning and effective

board of directors is the Holy Grail sought by every ambitious company. A company’s board is
its heart and as a heart it needs to be healthy, fit and carefully nurtured for the company to run
effectively.”
Hamilton and Micklethwait (2006) further argue that many boards fail to question and assess
the competence of management; rubber stamp decisions of management; spend as little time as
possible in board meetings; allow executive compensation to spiral out of control; and accept
management figures and explanations without serious question. The collapse of large
corporations such as WorldCom, Enron, Parmalat and Tyco bear clear testimony to the role of
ineffective boards of directors. It is therefore of cardinal importance that boards of directors
discharge their functions effectively and efficiently for the survival and sustainable growth of
the institutions they run and direct.
Board Composition
Since the board of directors is the fulcrum of the institution and its corporate governance it is
important that its composition is thoroughly determined. In South Africa, the Protocol on
Corporate Governance in the Public Sector (2002) recommended that it is imperative when
appointing directors that shareholders ensure that the board is properly constituted. In this
regard, the board should at all times comprise of individuals with integrity and accountability,
competence, relevant and complementary skills, experience and expertise.
The National Code on Corporate Governance of Zimbabwe (2014) provides hat the board
should be composed of persons with good leadership qualities and core competencies such as
accounting or financial expertise, legal skills, business and management experience, industry
knowledge and strategic planning experience (Principle 79 of the Code). It is a good corporate
governance requirement for the board to consider whether its size, diversity and demographics
make it effective and efficient. In summary, board composition is influenced by a number of
factors such as the need for an appropriate balance of skills, diversity and experience; the
requirement to maintain a balance between executive and non-executive directors and to have
a sufficient number to meet the quorum as well as the requirement for independence (Naidoo
2016).
Balance of Power

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Exemplary boards are well balanced in terms of the number of executive and non-executive
directors that harness the diverse experiences, skills and intellects of the directors to pursue the
strategic objectives of the institution. The National Code on Corporate Governance of
Zimbabwe (2014:30) stipulates that ‘a board should be appropriately composed and structured
so as to ensure that power is evenly balanced and that it is exercised in the best interests of the
company” (Principle 86 of the Code). A fundamental principle of good corporate governance
is that the board should ideally have a majority of non-executive members, the majority of
whom should be independent (Principle 87 of the Code).
Separation of roles of Chairman and Chief Executive Officer

According to the Combined Code on Corporate Governance (2003), good corporate governance
and best practices dictate that there should be a clear dichotomy between the role of the chief
executive officer of the company and the chair of the board of directors to ensure independence
at board level. The National Code on Corporate Governance of Zimbabwe (2014) advocates for
the separation of the roles of the chairperson of the board and chief executive officer and, where
the two roles are merged, special reasons for combining the roles should be disclosed
(Recommendation 91 of the Code). Coyle (2003) points out the risks of residing the positions
of both chief executive and board chair in one individual by highlighting that:
“When the same person holds the position of both of chairman of the board and CEO, there is
a possibility that he or she could become a domineering influence in decisionmaking in the
company. There is also a risk that the individual will run the company for his or her own
personal benefit, rather than in the interests of the shareholders and other stakeholders.”
Hamilton and Micklethwait (2006: 6) also warn that ‘another clear danger is combining the
roles of chairman and chief executive officer. One key task of the chairman should be to assess
the chief executive officer’s performance in running the company.’ A company with good
corporate governance mechanisms, such as split roles or an optimal balance of executive and
non-executive directors, is likely to display more effective monitoring of management
(Solomon and Solomon (2004).
Some studies have shown that splitting the role has indeed led to significantly higher financial
performance (Peel and O’Donnell, 1995). However, Daily and Dalton (1997) argue that the
evidence is not persuasive enough to engender splitting the roles in practice. In the same vein,
Brickley et al (1997) provide contrasting evidence that the costs of separating chief executive

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officer and board chairperson positions may exceed the benefits. An alternative structure to the
separation of these positions is to designate a lead independent director. Haberberg and Rieple
(2001: 58) also contend that ‘research has found no evidence at all that separating the role of
chairman and chief executive makes any difference to firm’s performance.’
Although there are contrasting views regarding splitting the roles of CEO and board chairman
there is a compelling business case for maintaining a split between these roles if sound corporate
governance is to be attained and sustained in any organization. However, where the two roles
are combined special reasons should be disclosed and adequate safeguards put in place to
prevent abuse of corporate powers.
Independence of the Board

In order for the board to be effective and efficient and safeguard the varying interests of all
stakeholders, there should be a degree of independence among the members of the board. An
independent board of directors is the bridge between management and owners, other
stakeholders, and the outside world (Iskander and Chamlou, 2000). The independence of the
board, particularly from management is indispensable and its members should be well-versed
in the company’s line of business or in general facets of business. Good corporate governance
demands that there should be a separation of ownership and management in the company.
Another central issue in corporate governance is that there should be balance of power and
influence between individuals on the board. Coyle (2003; 63) stipulates that
“in a well-governed company, there should be checks and balances that prevent one individual
or group of individuals from dominating the board and its decisions. In a badly governed
company, there will be an opportunity for autocratic leadership, where the board is dominated
by one individual.”
Kose (1998) also highlights that a board of directors’ effectiveness is determined by its
independence, size and composition. In the same vein, Kor, Watson and Mahoney (2004) point
out that board independence can be greatly improved by including outside directors on the board
because these outside directors are more likely to question the decisions made by the CEO and
other executives. This brings into perspective the role of independent non-executive directors
and their contribution towards a system of good corporate governance.
Role of independent non-executive directors

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Good corporate governance recognizes the need for board of directors to consist of a portion of
independent non-executive directors. According to Coyle (2003: 80) ‘independent nonexecutive
directors are appointed to provide a counterbalance to powerful executive directors and to give
the benefit of their experience and know-how to decision-making by the board.’ Martin (2004)
argues that the concept of the widespread appointment of non-executive directors is relatively
recent. Most company Boards consist predominantly of full-time executives. Since it may be
difficult for such executives to retain an overall and objective view of the company that their
duties as directors require, it has become increasingly common to appoint nonexecutive
directors.
Solomon and Solomon (2004: 69) share the view that “from an agency theory perspective, the
presence of independent non-executive directors…on company boards, should help to reduce
the notorious conflicts of interest between shareholders and company management, as they
perform a monitoring function by introducing an independent voice to the boardroom.” Jenkins
and Ambrosini (2007: 122) bluntly put it that ‘boards with a preponderance of insider executives
are more likely to be guilty of ineffective control and monitoring of top managers’. However,
this does not detract from the role executive directors’ play in corporate governance as there is
need to balance between non-executive and executive directors.
As pointed out by Byrd and Hickman, (1992: 196), ‘inside directors provide valuable
information about the firm’s activities, while outside directors may contribute both expertise
and objectivity in evaluating the managers’ decisions. The corporate board, with its mix of
expertise, independence, and legal power, is a potentially powerful governance mechanism.’
Non-executive directors should be free from any business or other relationship, which could
materially interfere with their ability to act independently (King II Report). One of the
recommendations of the King II Report on the criteria to establish the independence of a
nonexecutive director is that he/she should be ‘free from any business or other relationship,
which could materially interfere with his/her ability to act independently’. A non-executive
director is considered independent when the board determines that the director is independent
in character and judgement and there are no relationships or circumstances which could affect,
or appear to affect, the director’s judgement (Higgs Report, 2003). The same view is espoused
by the Basel Committee on Banking Supervision (2005) that banks should have an adequate
number of appropriate composition of directors who are capable of exercising judgement
independent of the views of management, political interests or inappropriate outside interests.

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Lendon- Travers (1990: 7-8) observes that “non-executive (directors) should not allow
themselves to be subject to internal pressures or conflicts of personal interest or ambition; their
primary reason for existence is to direct the company away from threats and dangers and
towards opportunities for successful continuance and growth. Similarly, Hamilton and
Micklethwait (2006: 6) argue that ‘a board is supposed to provide a non-partisan judgement of
senior management’s actions and /strategic proposals and to look after the interests of
shareholders. The directors may not do this effectively if they are financially beholden to the
company (other than by way of proper compensation for work as a director), as their judgement
might well be clouded.’
The flip side of the coin is that, as is the case with all corporate governance mechanisms,
monitoring by boards of directors is not without costs. Outsiders on the board may lack the
expertise about the firm that the managers of the firm have, therefore, the outsiders may accept
unsound managerial proposals and reject sound ones. The outsiders may also lack the incentives
to challenge managerial decisions (Seth & Rediker, 1992/1993). Agrawal and Knoeber (1996)
argue that boards may be expanded for political reasons, perhaps to include politicians,
environmental activists or consumer representatives and that these additional outside directors
either reduce firm performance for the underlying political constraints that led to their receiving
board seats.
An accepted principle of corporate governance is that the power over board appointments
should rest with the entire board and not one individual board member such as the chairman or
chief executive officer. The Combined Code on Corporate Governance (2003) recommends that
there should be a formal, rigorous and transparent procedure for appointment of new directors
to the board. When the board is relatively large, there should be a nominations committee
consisting primarily of non-executive directors, which considers new appointments to the board
and makes recommendations to the full board.
Role of Board Committees

In order for a board to be effective and be able to discharge its duties and responsibilities, it
should appoint different committees to ensure its close oversight over the affairs of the
corporation. Through the delegation of certain responsibilities to committees of the board,
executive directors are kept at bay from some decision-making or monitoring responsibilities
(Colye, 2003). The importance of board committees lies in the work they do on behalf of the
board. They also provide the outside, non-executive directors with a further window on the
workings of their enterprises (Cadbury and Millstein, 2005).
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Carlsson (2001) states that one reason for having committees is that it provides the opportunity
of deepening the analysis of certain, demanding issues and is also a way of benefiting from a
certain expertise within the board. The board should ensure that the terms of reference, the
composition and operating procedures are clearly articulated and laid down for the functioning
of each committee.
Most corporate governance codes and best practices advocate and recommend the appointment
of at least a nomination committee, an audit committee and a remuneration committee. Principle
92 of the National Code on Corporate Governance of Zimbabwe (2014) provides as follows:
“The Board should, where appropriate, operate through committees composed only of
independent non-executive members or in which such members are in the majority. It should
have in place properly formulated terms of reference which include the scope of authority,
composition, roles, responsibilities and duties of the committees. The essential committees are
Audit Committee, Nomination Committee, Risk and Compliance Committee, Dispute Resolution
Committee and Remuneration Committee.”
The nomination committee is responsible for making recommendations to the full board
regarding appointment of new directors and board succession. An audit committee should
comprise at least three non-executive directors, with the majority being independent
nonexecutive directors. This is ideal because ‘a strong and independent audit committee is
widely seen as a necessary counterbalance to the executive management of a company, to ensure
that the audit is carried out properly and that the financial statements give a true and fair view
of the company’s financial position and performance’ (Coyle, 2003: 126). In the same vein, a
remuneration committee plays an indispensable role insofar as the determination of directors’
remuneration is concerned. The Greenbury Committee (1995) recommended that remuneration
for executive directors should be decided by a remuneration committee of the board, consisting
entirely of independent non-executive directors.
Financial reporting
Financial reporting and risk management are important facets of corporate governance.
According to Cadbury and Millstein (2005: 13), “disclosure is the key to the effectiveness of
the movement to raise governance standards.” Farrar and Hannigan (1998: 33) state that
‘disclosure has long been recognized as a dominant philosophy of most modern systems. It is a
sine quo non of corporate accountability.’ The accounts of a company are the principal way in

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which the directors make themselves accountable to the shareholders and as such it is important
that they are prepared in such a way that they present the true picture of the financial position
of the company.
Sound corporate governance places emphasis of proper and accurate financial reporting because
it is the vehicle through which directors are made accountable to the shareholders, and provides
a channel of communication from directors to shareholders. Auditors play a pivotal role in
financial reporting in that they give users of financial statements some reassurance that the
information contained in the statements is credible, objective and free from error or fraud.
Accordingly, the independence of auditors in financial reporting becomes paramount.
Hamilton and Micklethwait (2006: 7) observe that ‘a competent audit committee is essential to
ensure that the appropriate internal controls are in place and working adequately; to ensure that
company financial statements give a true and fair view of the company’s affairs; and to appoint,
oversee and, if necessary, remove external auditors. However, the same authors argue that many
audit committee members have too little financial expertise, making it difficult for them to
understand complex accounting matters. Instead, they have tended to go through the motions of
reviewing controls rather than undertaking a much more detailed study which would involve
posing challenging questions.
The Unit has covered extensive issues ranging from theories of corporate governance (agency
theory, shareholder value theory and the stakeholder theory); pillars of corporate governance,
viz: transparency; accountability; responsibility; independence; fairness; and reputation as well
as various universal principles found in most corporate governance codes and best practices.
Corporate governance issues relating to board composition, independence, balance of power,
financial reporting, among others have been discussed.
1. Why is corporate governance important to businesses and nations in general and what are the
benefits of good corporate governance
2. Discuss the agency theory, shareholder value theory and stakeholder/pluralist theory of
corporate governance and explain how these theories enhance understanding of corporate
governance.

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3. Explain the six pillars of corporate governance namely, transparency; accountability;

responsibility; independence; fairness; and reputation;
4. What are the universal principles underlying corporate governance systems in most codes of
corporate governance and best practice?

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CORPORATE GOVERNANCE CODES, COMPLIANCE AND RISK MANAGEMENT

 Explain and distinguish the various approaches to corporate governance and their merits and
demerits;
 Understand the different structures of boards of directors;
 Discuss the major corporate governance principles enshrined in various codes of corporate
governance and best practices;
 Highlight the major risk management principles and their relation to corporate governance principles

4.0 Introduction
There is no ‘one-size-fits all’ approach to corporate governance. Different approaches have been
espoused in different jurisdictions with varying degrees of success in terms implementing and
sustaining sound corporate governance systems. In this Unit, rules-based, principles-based and
‘hybrid’ systems of corporate governance will be discussed. The Unit will also cover issues of
compliance and risk management within the rubric of corporate governance.
4.1 Rules and Principles Based Approaches to Governance
There are different approaches to corporate governance in different countries. In general, three
approaches to corporate governance can be identified. These include (i) universal principles of
good corporate governance applicable on a voluntary basis; (ii) statutory rules of corporate
governance mandatory for companies to comply with; and (iii) a hybrid system of corporate
governance where some principles are voluntary while others are mandatory. There has been
an intense academic debate on which corporate governance regime is optimal, whether a
mandatory, voluntary or compromise/hybrid corporate governance system. The different
approaches to corporate governance will be discussed below as well as their merits and
demerits.
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(i) Voluntary Corporate Governance Framework

Voluntary corporate governance approaches or principles-based approaches focus on voluntary
adoption of corporate governance principles by organizations as best practice. Principles-based
systems are also described as the ‘soft laws’ of corporate governance. Zadkovich (2007:30)
highlights that “soft law involves purely voluntary codes and guidelines articulating
benchmarks for what is considered best practice in corporate governance.
Examples of voluntary codes include the UK Code on Corporate Governance (2016), which
comprises a set of principles as opposed to a set of rules. The National Code on Corporate
Governance of Zimbabwe (2014) and the King IV Code on Corporate Governance of South
Africa are also principle-based codes. They are premised on the “apply or explain” principle to
corporate governance, which implies that directors should explain the ways in which they have
applied the general principles of corporate governance.
The National Code on Corporate Governance of Zimbabwe (2014:91) further highlights that
“following the “apply or explain” approach in making decisions, the Board can conclude that
to follow a recommendation would not, in the particular circumstances, be in the best interests
of the company. It can decide, giving the necessary explanation, to apply the recommendation
differently or apply another practice and still achieve the objective of fairness, accountability,
responsibility and transparency in corporate governance. Explaining how the principles and
recommendations were applied or, if not applied, the reasons therefore, amounts to
compliance.” Advantages of a principles-based approach to corporate governance include:
 A code of corporate governance founded on a principle based model can be changed or

modified easily than statutory rules passed in the form of legislation.
 Principle-based codes encourage directors to follow the spirit of the code as opposed to
rulesbased approaches, which may result in directors following the letter of the rules rather than
their spirit. As pointed out in the King IV Code on Corporate Governance of South Africa
(2016:35), “there is also a danger that the governing body may become focused on mindless
compliance instead of applying its mind to the best governance practice for the particular issue
before it.”
 Directors enjoy more flexibility in applying the corporate governance principles in actual
circumstances peculiar to their own company as opposed to focusing on mandatory compliance
in rules-based codes. Accordingly, principle based codes provide the advantage of being
flexible, adaptable and responsive to changing business circumstances (Naidoo, 2016).

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Zadkovich (2007:29) observes that “if a company considers that a principle is inappropriate to
its particular circumstances, it has the flexibility to decide whether or not to adopt it. That choice
is, however, tempered by the requirement to explain if not, why not?”
However, disadvantages of principle-based codes are that they tend to contain general and
meaningless statements intended as guidelines to corporate governance. A voluntary system
provides no guarantees that the minimum governance standards established will be achieved
and the language used in voluntary codes is sometimes vague and less than compelling
(Zadkovich 2007:31). It is also difficult to measure compliance with the specific requirements
of a principle-based code as directors may justify non-compliance by providing explanations on
why the company did not comply.
(ii) Mandatory Corporate Governance Framework

A rules-based code of corporate governance embraces a set of rules based on ‘comply’ or
‘explain’ principle. It focuses on statutory compliance with the corporate governance principles
and therefore mandatory. A typical example of the comply or explain approach is the
SarbanesOxley Act of 2002 which a law in the United States of America applicable to all local
and foreign companies listed on the US stock exchange. Thus the US approach to corporate
governance is a statutory rules-based model different from the principles-based approaches
applicable in countries like the UK, South Africa and Zimbabwe.
However, in Zimbabwe there are pieces of legislation with mandatory corporate governance
rules. For instance, the Banking Amendment Act No. 12 of 2015 provides mandatory corporate
governance principles in respect of which banks and financial institutions must comply with or
face legal sanctions. Similarly, the Companies Act contains mandatory provisions relating to
governance and administration of registered companies.
Advantages of rules-based systems of corporate governance are that they provide clarity,
uniformity and standardization of applicable principles as all companies are required to meet
the same minimum standards of corporate governance. A major advantage of the mandatory
structure is that it allows states to establish minimum standards to which companies must adhere
(Zadkovich 2007:30). The legal penalties for non-compliance with the corporate governance
principles also act as a deterrent against poor corporate governance practices. In the same vein,
legal rules are usually clear and unambiguous than general principles making compliance and
enforcement easy to implement.
Rules-based codes of corporate governance also engender investor confidence in the stock
markets, as listed companies are required to comply with mandatory corporate governance rules
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without exception. Thus regimes with strong investor protection lead to healthy capital markets
(Zadkovich 2007).
On the other hand, disadvantages of a rules-based approach are that it tends to prescribe a
‘onesize-fits-all’ approach to corporate governance and this may not be suitable for different
types of businesses. In addition, rules-based codes result in directors focusing on following the
letter of the rules rather than their spirit. The National Code on Corporate Governance of
Zimbabwe (2014:91) highlights that the
“comply or explain approach denotes a mindless application of a code whereas the “apply or
explain” principle reflects an appreciation of the fact that it is often not a case of whether to
comply or not, but rather a case of considering how the principles of a code and
recommendations contained in it can be applied in the particular circumstances of a given
enterprise.”
Rules-based codes may also result in heavy penalties for noncomplying companies thereby
causing directors and management to spend more productive time and resources in ensuring
compliance. This creates unwarranted administrative burdens on some companies, particularly
small to medium enterprises. Typically, small to mediumsized companies should enjoy more
latitude than larger companies. In a rules-based jurisdiction, the development of small
companies may be retarded, as corporate governance compliance costs may be excessively or
unjustifiably high.
(iii) Hybrid Corporate Governance Framework

The global trend appears to be towards the development of hybrid systems, where governance
principles are increasingly being legislated (Naidoo 2016). Du Plessis et al (2005) describe a
‘hybrid’ system of corporate governance regulation as a type of enforced selfregulation. The
King IV Code on Corporate Governance of South Africa (2016:35) recognises the interface
between the law and corporate governance principles as follows:
“Good governance does not exist separately from the law, and a corporate governance code
that applies on a voluntary basis may also trigger legal consequences. A court considers all
relevant circumstances in determining the appropriate standard of conduct for those charged
with governance duties, including what the generally accepted practices for a particular setting
and situation are.”
Thus a hybrid system encompasses both voluntary and mandatory principles of corporate
governance. It is a middle path between rules based and principles-based codes of corporate
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governance. Most corporate governance regimes exhibit features of both mandatory and
voluntary approaches to corporate governance and therefore fall in the ‘hybrid’ categorization.
For instance, the King IV Code (2016: 35) highlights that “in South Africa, as in many
jurisdictions around the world, a hybrid system of corporate governance has developed as, over
time, some practices of good governance have been legislated in parallel with the voluntary
King codes of governance.” Similarly, the Zimbabwean system of corporate governance can
also be described as a ‘hybrid’ system as it comprises the voluntary national code and other
piece of legislation with mandatory minimum corporate governance requirements.
4.2 Corporate Governance Codes and Best Practices
There are many codes of corporate governance and best practices used in different parts of the
world. Each code places emphasis on different facets of corporate governance principles. Thus
codes of corporate governance and best practices are not legislative instruments but usually
provide a set of guidelines on universal principles of good governance. In this Unit, focus will
be on codes of corporate governance in South Africa, United Kingdom and Zimbabwe.
King Codes of Corporate Governance of South Africa

In South Africa, a number of codes of corporate governance have been developed under the
style “King Codes on Corporate Governance”, named after Mervin King, the chairman of the
various committees on corporate governance. The first code was the King I Report on Corporate
Governance published in 1994. This was later revised as King II (2002) and King III (2009)
Reports on Corporate Governance of South Africa. The latest edition is the King IV Code on
Corporate Governance of South Africa published in 2016. The various iterations of the King
Codes do not build on one another and the publication of a latter Code ordinarily replaces the
earlier version (Naidoo 2016).
Legal Status
The King IV Code provides a set of voluntary principles and leading practices specifically
designed for South African companies and organizations of different sizes and forms. The King
IV Code (2016:35) recognizes that “corporate governance could apply on a statutory basis as
rules, as a voluntary code of principles and practices, or as a combination of the two.” South
Africa has adopted a hybrid system of corporate governance as some of the corporate
governance principles have been eventually legislated. However, the current King IV Code is a

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code of recommended practice unless its application is made mandatory by other law or
regulations, for instance the JSE Listings Requirements (Naidoo 2016).
Major thrusts in King Codes on Corporate Governance
The King Codes on Corporate Governance are predicated on three key elements of leadership,
sustainability and good corporate citizenship. The main thrust of the codes is the philosophy
that leaders should direct the company to achieve sustainable economic, social and
environmental performance. The main principles of corporate governance incorporated in the
various King Codes are highlighted below:
(a) King I Report on Corporate Governance
The first King report on corporate governance was published in 1994 as the first corporate
governance code for South Africa. The King I code focused on recommended standards of
conduct for boards of directors of listed companies, banks, and certain state-owned enterprises.
The fundamental principles from the first King report included, inter alia:
 The composition of boards of directors, the role of nonexecutive directors and guidance
on selection of nonexecutive directors;
 Disclosure of executive and non-executive directors’ remuneration;
 Frequency and conduct of Board meetings
 Balanced annual reporting and requirements for effective auditing;
 The requirement for codes of ethics of companies.
(b) King II Report on Corporate Governance
The King I report was revised in 2002 and culminated in the publication of the King II Report
on Corporate Governance of South Africa. The King II Code introduced new principles relating
to sustainability, the role of the corporate boards and risk management. The application of the
code was also expanded to include states departments, national, provincial or local government
administration and other public institutions. The key principles in the King II report included:
 Directors and their responsibility
 Risk management
 internal audit
 Integrated sustainability reporting; and

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 Accounting and auditing.
(c) King III Report on Corporate Governance
In 2009 the King III Report on Corporate Governance was published in South Africa. The code
was applicable to all entities, public, private and non-profit. The report incorporated a number
of global emerging governance trends such as alternative dispute resolution; risk-based internal
audit; and evaluation of directors’ performance. The code also included new principles relating
to governance of information technologies and business rescue.
(d) King IV Report on Corporate Governance
A further revision of the King Codes came in 2016 in the form of King IV Report on Corporate
Governance for South Africa. Naidoo (2016: 47) summaries the main objectives of the code as
including “the promotion of good governance as integral to running a business, through
delivering an ethical culture and enhancing the legitimacy of the company, boosting the
company’s performance and enabling better control of the company by the board.”
The underlying philosophies of the King IV Code are anchored on sustainable development;
integrated thinking; organizations as integral part of society; stakeholder inclusivity and
corporate governance (King IV 2016). The Code comprises 17 corporate governance principles
focusing on leadership, ethics and corporate citizenship; strategy, performance and reporting;
governing structures and delegation; governance functional areas; stakeholder relationships;
among others.
Corporate Governance Codes of United Kingdom

The UK Code on Corporate Governance (2016) is a set of principles of good corporate aimed
at companies listed on the London Stock Exchange. The Financial Report Council exercises an
oversight on the Code and requires public listed companies to disclose how they have complied
with the code, and explain where they have not applied the code – in what the code refers to as
'comply or explain'. The Code also encourages private companies to adhere to the principles
enshrined therein although there is no requirement for disclosure of compliance in a private
company’s financial accounts. By specifying general guidelines of best practice, the UK Code
is premised on the principles-based approach. The 2016 edition of the UK Code was a
culmination of consolidation and refinement of a number of different reports and codes
concerning opinions on good corporate governance.

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Cadbury Report
The Cadbury Report published in 1992 was the first code on corporate governance in the UK.
It was developed as a reaction to corporate scandals and company failures that rocked the UK
during that time. The Cadbury Report primarily dealt with issues relating to financial, auditing
and corporate governance matters, such as:
 the requirement for separation of the roles of the chief executive officer and Chairman of a
company;
 the need for boards to have at least three non-executive directors, two of whom should have no
financial; or personal ties to executive management; and
 the requirement for boards of directors to have an audit committee comprising non-executive
directors.
The Cadbury Report on Corporate governance provides that “corporate governance is the
system by which companies are directed and controlled. Boards of directors are responsible for
the governance of their companies.”
Greenbury Report
Further developments in the UK saw the publication of the Greenbury Report on corporate
governance in 1995. The essence of the Greenbury Report was to introduce further changes to
the existing principles in the Cadbury Code. These changes included the requirement for boards
of directors to have remuneration committees and long term performance-related pay for
directors subject to disclosure in company accounts.
Hampel Report
In 1998 the Hampel Report was published, which report made recommendations on the need to
consolidate the Cadbury and Greenbury principles into a "Combined Code". The thrust of the
Hampel Report was on the role of Board chairman as the leader of non-executive directors;
voting rights of institutional investors and the requirement for disclosure of all types of
remuneration of directors.
UK Code on Corporate Governance

The UK Code on Corporate Governance (2016) stipulates standards of good practice for
companies listed on the London Stock Exchange.

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The Code requires listed companies to report on whether they have complied and if not, why
not, the based on the so-called ‘comply or explain’ approach. The Code mainly focuses on board
composition and development, remuneration, shareholder relations, accountability and audit.
The mainstay principles of the UK Code are discussed below:
(i) Leadership
The Code requires companies to be headed by effective boards of directors whose collective
responsibility is the long-term success of the company. The code recommends the need for “a
clear division of responsibilities at the head of the company between the running of the board
and the executive responsibility for the running of the company’s business.” This corporate
governance principle ultimately ensures that no one individual at the helm of the company
should have unfettered powers of decision.
(ii) Effectiveness
The Code advocates for effectiveness of the board through the appropriate balance of skills,
experience, independence and knowledge of the company. Board effectiveness can also be attained
through establishing a formal, rigorous and transparent procedure for the appointment of new
directors to the board. The Code contains various provisions relating to the need for directors to
allocate sufficient time to the company business; induction programs for new directors and
continuous training and development; board performance evaluation and submission of directors
for re-election at regular intervals subject to satisfactory performance. These corporate governance
principles are intended to improve the effectiveness and efficiency of boards of directors. (iii)
Accountability
The UK Code places emphasis on accountability as a key principle of corporate governance.

Companies’ boards of directors are expected to present a balanced and understandable
assessment of the company’s position and prospects. The board has the responsibility of setting
the organization’s risk appetite and to maintain sound risk management and internal control
systems.
(iv) Remuneration
The Code provides that “levels of remuneration should be sufficient to attract, retain and
motivate directors of the quality required to run the company successfully, but a company
should avoid paying more than is necessary for this purpose.” As a corporate governance best
practice, a significant proportion of executive directors’ remuneration should be structured so
as to link rewards to corporate and individual performance. The Code also recommends the
establishment of formal and transparent procedures for developing directors and executive
remuneration policies.

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(v) Shareholder relations
The UK Code stipulates that there should be dialogue with shareholders based on the mutual
understanding of objectives. The responsibility is placed on the board as a whole to ensure
satisfactory dialogue with shareholders. Annual general meetings should be used as a
communication channel for the company and investors.
4.3 Corporate Governance Codes of Zimbabwe
Prior to 2014, Zimbabwe did not have its own home grown national corporate governance code.
Companies, particularly those listed on the Zimbabwe Stock Exchange, applied corporate
governance guidelines from other countries like the United Kingdom and South Africa. Apart
from the Corporate Governance Framework for State Enterprises and Parastatals introduced in
2010, no specific national code was in place in Zimbabwe. In 2014, the National Code on
Corporate Governance of Zimbabwe was developed as a national code.
1 Corporate Governance Framework for State Enterprises & Parastatals in Zimbabwe

As highlighted above, the Corporate Governance Framework for State Enterprises and
Parastatals (“Corporate Governance Framework”) was published in 2010. The Corporate
Governance Framework is intended to provide government, state enterprises and parastatals
(SEPs) and stakeholders with a common frame of reference on corporate governance issues. The
fundamental objective of the Corporate Governance Framework is to promote the efficient use of
public resources and to require accountability for the stewardship of those resources
.
Application of the Corporate Governance Framework
The framework was designed as generic guidelines to be customized by each state enterprise in
agreement with the minister responsible for the state enterprise in question and the Minister of
State Enterprises and Parastatals. The Corporate Governance Framework applies to parastatals
established through an Act of Parliament (such as Zimra, NSSA, etc) as well as state enterprises
registered under the Companies Act (Chapter 24:03) (such as ZESA Holdings (Private) Limited,
NetOne Cellular (Private) Limited, etc).
Legal Status of the Corporate Governance Framework

The framework aims at providing corporate governance guidelines to complement the existing
legislation that governs the operations of state enterprises and parastatals. In the event of
inconsistency between the framework and the governing legislation, the legislation takes
precedence (Corporate Governance Framework, 2010: xix). Although the Corporate

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Governance Framework is supposed to provide guidelines, it is a mandatory code or rules-based

framework of corporate governance. Section 1.4.4 of the framework provides as follows:
Every state enterprise or parastatal shall adhere to and implement the principles of sound
corporate governance policies, procedures and practices, as required by section 50 of the
Public Finance Management Act (Chapter 22:19) (PFMA).
A state enterprise or parastatal that fails to comply with the provisions of the Corporate
Governance Framework is liable for penalties prescribed in Section 91 of the Public Finance
Management Act. Thus the framework is backed by legal penalties for noncompliance and this
renders it a rules-based framework of corporate governance.
Main principles of the Corporate Governance Framework
The Corporate Governance Framework was founded on four pillars of corporate governance,
namely: responsibility, accountability, fairness and transparency. The fifth element supporting
the pillars is the concept of Ubuntu (or unhu), which is described in the Corporate Governance
Framework as “the African philosophy that fosters a community orientation, mutuality of
interests and mutual accountability” (Corporate Governance Framework, 2010: xix). The main
corporate governance principles covered in the framework are discussed below.
Shareholders
Section 2 of the framework covers the role of shareholders, expected behavior of shareholders
and, in particular, the role and powers of the Responsible Minister. The framework provides
that shareholders shall jointly and severally protect and preserve the interests of the
organization. An important corporate governance principle enshrined in the framework is that
there should be a clear separation of government’s ownership function and other government
functions such as the regulatory function. This principle is of cardinal importance in state
enterprises as there is tendency by government to interfere with operations of state enterprises
as shareholder and regulator at the same time.
The responsible minister has various responsibilities stipulated in Corporate Governance

Framework. These include the responsibility to ensure that:
 only competent and reliable persons with appropriate knowledge, skills and experience are
appointed to the Board;
 the board is refreshed on a regular basis bringing new and sound viewpoints into discussions
and decision making;

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 the board is held accountable and responsible for the efficient and effective governance of
the organization;
 the organization acts as a good corporate citizen;
 the organization complies with all applicable laws;
 the level of remuneration for members of the Board and top management is sufficient to
attract and retain the quality and caliber of individuals needed to run the organization
successfully
.
In order to effectively manage the relationship between the minister and boards of directors, the
framework provides that “the relationship between the shareholders and the board shall be
governed by a written agreement between the Responsible Minister and the Board.”
Board of directors and management
The Corporate Governance Framework provides guidelines on the composition of the board;
selection, appointment and termination of board members; strategic responsibilities and
accountability of the board as well as directors’ remuneration policies. The code requires the
board to evaluate itself against agreed performance indicators and targets on an annual basis in
accordance with the guidelines developed by the Responsible Minister after consultation with
the Minister of State Enterprises and Parastatals. The framework recognizes the need to separate
the roles of the Chairperson and the Chief Executive Officer in order to eliminate role conflict.
Financial governance
The Corporate Governance Framework deals with general guidelines on financial governance,
reporting and internal checks and control including internal and external audit requirements
(section 5 of the framework). The board is charged with various responsibilities designed to
ensure sound financial governance of the state enterprise, including the following:
The preparation of financial statements and presentation of Annual Audited Financial Accounts
at Annual General Meetings;
The board responsibility for internal checks and controls, with the overall aim of protecting the
shareholders’ wealth.
The establishment of an audit committee consisting of not less than three non executive
members and chaired by a suitably qualified and independent non-executive director; The
appointment of external and internal auditors of the company.

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4.3.2 National Code on Corporate Governance of Zimbabwe
Scope of Application of the Code

The National Code on Corporate Governance of Zimbabwe (2016) applies to any type of
business entity. It provides that “this Code applies to all business entities regardless of the
manner and form of their incorporation or establishment and whether the business entity is in
the public or private sector or it is non-profit making.” As such, the Code is all-embracing as its
principles can be adopted and implemented by any type of business entity.
The Code however encourages special sectors such as the banking and financial services sectors
to have their own specific codes. Similarly, partnerships and small-to-medium enterprises are
encouraged to have their tailor-made codes of corporate governance to suit their own unique
requirements. The Code explicitly stipulates: “if a provision of the sector-based code is
inconsistent with any principle of this Code then the principles of this Code prevails to the
extent of that inconsistency.” This means that the national code takes precedence over the
provisions of any sector-based code.
Legal status of the Code

The National Code on Corporate Governance of Zimbabwe adopts the “apply or explain”
principle. It is therefore a voluntary code of corporate governance and therefore not mandatory
for business organizations to comply with the principles and recommendations laid down in the
Code. The Code is premised on disclosure principles to encourage compliance with the
corporate governance practices. As stipulated in the Code “voluntary codes rely on the market
as an important mechanism for encouraging compliance with the codes especially where
compliance efforts are broadly and widely disclosed or surveyed”.
Main Corporate Governance Principles

The National Code on Corporate Governance of Zimbabwe (2014) is divided into nine chapters
containing various principles and recommendations on good corporate governance. Each
chapter focuses on major issues in corporate governance. Some of the major principles covered
in the Code include the following:
(i) Ownership and Control

Chapter 2 of the Code deals with issues of ownership and control of business entities and
provides for principles and recommendations regulating the balance of power among the

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tripartite stakeholders of the company, namely: shareholders, directors and management. The
underlying principles of corporate governance are that ‘corporate power should not be
concentrated in one person or in a small group of persons’ as this will adversely affect effective
and ethical corporate leadership.
The Code recommends that the right to vote should be extended to all shareholders who must
exercise their right in annual general meetings to ensure proper business decisions are made by
directors and management in the best interests of the company. The Code also provides that
shareholders’ meetings are the forum where the board and management inform shareholders
about the company’s operations, management, administration and achievements and gives the
shareholders the opportunity to participate in formulating strategies for the company.
(ii) Boards of Directors

The role and function of boards of directors, duties of directors, qualities and qualifications of
directors are covered in Chapter 2 of the Code. The Code provides that leadership of the board
must be founded on the following principles:
 ethics, professionalism and good morality;
 the notion that strategy, risk, performance and sustainability are inseparable;
 prudent and effective controls which make it possible for risks to be assessed and managed
properly;
 complete compliance with, and respect for, applicable laws, especially the Bill of Rights as
set out in the Constitution and adherence to non-binding rules, codes and best practice
standards; and
 the recognition that the best interests of the company and its stakeholders must always be
promoted.
The Code provides broad guidelines and principles on boards of directors including the
requirement for the appointment of an independent non-executive chairperson who does not
double up as chief executive officer; various duties of directors (duty of good faith and loyalty,
duty of care and duty of diligence); and guidelines for selection and appointment of directors.
(iii) Governance of Risk

The national code encourages business leaders to understand risk and how it can be measured,
eliminated or mitigated. The code therefore recommends enterprise-wide risk management
systems. The following are some of the risk management principles espoused in the code:

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 the board must ensure that principal risks are timely identified or detected and managed
in order to mitigate or reduce damage and losses to the company;
 the board must ensure that risk assessments are performed on a continuous basis, a
framework is established for anticipating unpredictable risks, and risk monitoring is carried out
continuously by a risk management committee;
 the company’s risk management policy covers methods and procedures for identifying and
evaluating risks as well as measures in place to prevent or mitigated identified risks.
As part of governance of risk, the code provides guidelines on internal and external audit
functions, the requirement for financial statements to be audited by independent external
auditors, and the establishment of an audit committee. The audit committee is responsible for
approving risk-based internal audit plans, audit department budgets and evaluating performance
of the internal audit function.
(iv) Information Management and Disclosure

Chapter 5 of the code deals with corporate governance principles and recommendations relating
to information management and disclosure. The code emphasizes that disclosure of relevant
information is necessary for the company to remain trustworthy in the eyes of its stakeholders
and to attract investment. Accordingly, the following are some of the principles outlined in the
code in this regard:
 the board should ensure that regular, accurate, complete, timely, reliable, easy to understand
and relevant material is made available to all shareholders and directors without compromising
the confidentiality and commercial sensitivity of such material;
 the board should ensure that information communication technology (ICT) frameworks,
policies, procedures and standards are implemented with a view to minimizing ICT risks,
delivering value, ensuring business continuity and assisting the company in managing ICT
resources efficiently and cost effectively.
 The board should ensure integrated and sustainability reporting through disclosure of
information in terms of the law and the code in an integrated and holistic manner.
(v) Corporate Conflict Prevention and Resolution

Chapter 6 of the Code is dedicated to corporate conflict prevention and resolution. The code
provides principles for prevention and resolution of corporate conflicts as well as dispute
resolution mechanisms. It recommends the establishment of a conflict resolution committee to

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assist the board in an organization. As a general principle, successful resolution of corporate

conflicts involves the selection of a dispute resolution method that best serves the interests of
the company, preserves business relationships and is cost effective and efficient (Principle 333
of the Code).
(vi) Compliance and Enforcement

Having principles without mechanisms for ensuring compliance and enforcement may be an
exercise in futility. Thus, the code provides detailed principles and recommendations directed
at ensuring compliance with sound corporate governance practices. The code adopts the “apply
or explain” principles, which makes it a principles based code of corporate governance. It places
the responsibility on the board to ensure that the company, its officers, employees and agents
comply with applicable laws and non-binding rules, codes and standards. The board must also
make adequate and reasonable disclosures on the extent of the compliance with laws and
standards of corporate governance.
(vii) Governance of Stakeholder Relations

Stakeholders play an important role in the governance and general operations of business
organizations. In recognition of the importance of stakeholders, chapter 8 of the National Code
on Corporate Governance of Zimbabwe contain extensive principles and recommendations on
stakeholder relations and management. The code states that “stakeholders are the raison d’etre
for corporate governance and the prime constituency of the company.” The key corporate
governance principles stipulated in the code in this regard include, inter alia:
 the legal rights and legitimate expectations of the company’s stakeholders should be
identified, recognized, respected and promoted;
 corporate actions should take into account stakeholder and societal interests;
 The need for the company to ensure that all its stakeholders are treated fairly and equitably;
 Communication between the board and stakeholders should be transparent and effective in
order to build and maintain stakeholder trust and confidence in the company.
The Code also urges the board to identify the company’s stakeholders and formulate a clear
policy on how to engage, communicate with or relate to each stakeholder constructively. In the
same vein, stakeholders who materially affect the operations of the company should be
identified, assessed and considered as part of the risk management processes. Typical examples
of such stakeholders include tax authorities (Zimra); regulatory and licensing bodies,

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environmental management agencies and many others. Failure to manage relations with such
key stakeholders may result in serious risks to the organization.
(viii) Role of Government in Corporate Governance

The last chapter in the National Code on Corporate Governance of Zimbabwe (2014) deals with
the role of government in a corporate governance system. The code recognises that the
government plays both administrative and coordinating roles through maintenance of security,
law and order and the protection of property. The code identifies the facilitative and
participatory roles of governments, which include:
 the role of government in providing an enabling environment within which the private and
public sector can thrive;
 the participatory role in economic development through the business activities of parastatals
and state-owned enterprises;
 the fundamental role of government as the biggest employer in the economy and the
requirement for government ministries, parastatals and state enterprises to observe sound
corporate governance practices;
 the role of the government in providing critical infrastructure and basic services such as
water, electricity, communication facilities and many others.
The Code urges leaders of the country to combat corruption through the introduction of
legislation and other measures as well as enforcement of laws and codes of corporate
governance. The code also contains extracts from the Constitution relevant to good governance.
For instance, some of the constitutional provisions entrench obligations on the State to adopt
and implement policies and legislation to develop efficiency, competence, accountability,
transparency, personal integrity and financial probity in all institutions.
4.4 Types of Board Structures

Boards of directors are usually at the helm of a corporate governance system of any business
organization. As a matter of fact, most corporate governance issues revolve around the
composition and structure, selection and appointment of directors and roles and responsibilities
of boards of directors. It is therefore apropos to appreciate the different types of board structures
in order to enhance our knowledge of corporate governance. There are basically two types of
board structures, namely: unitary board structures and twotier board structures. These are
explained below.

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Figure 2: Types of Board structures
Unitary Board Structure

As illustrated in Figure 2 above, a unitary or one-tier board structure is where the organization has just
a single board of directors, usually comprising executive directors and non-executive directors in the
case of listed companies and other public companies. According to Coyle (2003:6) “a unitary board
structure means that the organization is governed by a single decision-making body, which in the case
of a company is a board of directors who have a wide range of decisionmaking powers.”
Unitary board structures are common in many countries such as the United Kingdom, United
States and African countries including Zimbabwe and South Africa. These board structures
usually require the board to consist of more non-executive directors than executive directors
and much reliance is placed on the independence of the nonexecutive directors, with no conflicts
of interest, to govern the company in the best interests of shareholders (Naidoo, 2016).
Two-tier Board Structure

A two-tier system consists of two layers of board structure, namely: a supervisory board or
council (whose membership may be equivalent to non-executive directors) and a management
board (composed of senior executives in the company). Naidoo (2016:126) states that two-tier
boards
“consists of (i) a management board responsible for running the day-to-day operations,
comprised of the executives only and chaired by the CEO; and (ii) a supervisory board,
including representatives of major shareholders, financiers and trade unions, responsible for
providing strategic direction to the company and chaired by the chairman of the board. Both
boards meet separately and there is often no formal process in terms of which operational issues
(from the management board) are communicated to the supervisory board.”
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The responsibilities for governing the organization are shared between the two boards but the
roles and relationships between the two boards vary across countries. A supervisory board’s
primary responsibility is to exercise oversight of the management board. According to Coyle
(2003:6), “the supervisory board exercises powers for strategic decisions and non-operational
decisions, such as financing and dividend policy.” In general, supervisory boards’ primary
functions are to appoint, supervise or dismiss the company’s management, and to report to
shareholders’ meetings on development of the company and the performance of management.
In terms of composition, supervisory board members may not also be members of the
company’s management board in order to avoid conflicts of interest and function.
On the other hand, a management board has the responsibility for the operational performance
of the business. In other words, the management board is responsible for the day-to-day business
of the company, and for financial accountability (Maw, 1994). The corporate two-tier system is
common in European countries such as Germany and France that make it mandatory for all
stock corporations. In the Netherlands, a two-tier system is also adopted where it is compulsory
for both large public and private companies to have a supervisory board and a management
board.
In the United States of America, a federal legal system is followed where the structure of
corporate laws affecting the corporation itself is largely legislated for by the State law. In
general, state corporation laws tend to stipulate that corporations are to be managed by their
boards of directors with little reference to management structures. According to Maw (1994)
American boards of directors of public and major corporations are typically comprised
primarily of ‘outside directors’ who are not employees of the corporation, with some ‘inside
directors’, namely ‘officers’ of the corporation such as the president, the chief executive officer
and possibly a number of senior vice-presidents.
4.5 Corporate Governance and Risk Management
Risk is intrinsically part of managing business in any organization. The complexity of the
operating environment characterised by globalisation of business has tremendously increased
the amount of risks directors and managers have to contend with in organizations. Naidoo
(2016:287) is on point when she highlights that “business, by definition, is the undertaking of
risk for reward and risk is a fact of business life. Taking and managing calculated risks is
necessary for companies to create profits and hence to grow shareholder value.”
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Risk management is central to any sound corporate governance system. The challenge for
boards and management is to maintain the optimum balance between taking as much risk as the
company can tolerate and simultaneously keeping these risks within carefully defined,
controlled and tolerable limits (Naidoo 2016). Various codes on corporate governance therefore
provide principles and guidelines relating to sound risk management in organizations.
The King IV Code on Corporate Governance of South Africa (2016:16) states that “risk is about
the uncertainty of events; including the likelihood of such events occurring and their effect, both
positive and negative, on the achievement of the organization’s objectives.” Risk management
is therefore an important facet of corporate governance. It is the responsibility of board of
directors to protect the assets of the company and safeguard the value of the shareholders’
investment. The board of directors is therefore charged with the responsibility to ensure that
measures are put in place to avert or minimize losses through error, omission, dishonesty or
embezzlement.
The National Code on Corporate Governance of Zimbabwe (2014:51) provides that “business
leaders should understand risk and how it can be measured, eliminated or mitigated. Risk
management systems on an enterprise-wide basis should be independently assured for
effectiveness in goal delivery.” Systems of internal control and checks and balances are
important safeguards including ‘those of an operational and compliance nature, as well as
internal financial controls’ (Turnbull Report, 1999).
According to Rutterman Working Group (1994) internal controls include the whole systems of
controls, financial and otherwise, established in order to provide reasonable assurance of
effective and efficient operations, internal financial control and compliance with laws and
regulations. The National Code on Corporate Governance of Zimbabwe (2014:51) requires
organizations to have risk management policies and plans in place. The Code places an
obligation on the
Board to ensure that:-
 risk assessments are performed on a continuous basis;

 a framework or methodology is established to increase the likelihood of anticipating
unpredictable risks;
 management considers and implements appropriate risk responses; and
 risk monitoring is carried out continuously by the risk committee and management.

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(2010) requires state enterprise to put in place risk management policies. It provides that “risk
management shall cover the process of identifying, analyzing and mitigating risks that can
hinder the SEP from effectively achieving its business objectives and pursuing Government
priorities and outcomes.”
Although the board has a major role in ensuring effective risk management systems in
organizations, ‘the board’s job is not to manage risk itself, but to ask tough questions of
management about the company’s mechanisms for identifying potential threats and what its
plans are should something unexpected happen’ (Naidoo 2016:288). However, it is the
responsibility of the board to set the risk ‘appetite’ and ensure an enterprise-wide risk
management framework is in place in the organization.

The Unit extensively covered various issues relating to different approaches to corporate
governance; an overview on codes of corporate governance principles in the UK, South Africa
and Zimbabwe as well as structures of boards of directors. The Unit closed by offering a brief
synopsis of risk management systems insofar as they relate to the area of corporate governance.

1. What are the main differences between principles-based and rules-based approaches to
corporate governance? In your view, which approach is the best in ensuring effective
compliance with corporate governance principles?
2. Discuss unitary board structures and two-tier board structures showing the main differences
between the two systems.
3. Briefly explain the major corporate governance principles in the National Code on Corporate
Governance of Zimbabwe and the Corporate Governance Framework for State Enterprises
and Parastatals.
4. What are the corporate governance responsibilities of the board of directors in relation to risk
management?

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FORMATION AND CONSTITUTION OF A COMPANY

 Understand the procedures relating to the formation and constitution of companies;
 Explain the roles and duties of company promoters;
 Appreciate legal principles relating to pre-incorporation contracts;
 Outline the contents of the company’s memorandum and articles of association.
5.0 Introduction
This Unit focuses on legal principles relating to the formation and constitution of companies,
roles and duties of directors and their relevance to corporate governance. It will discuss the role
of company promoters, pre-incorporation contracts, and the company registration process,
among other issues. The Unit will also cover issues relating a constitutional document, namely:
memorandum and articles of association.
5.1 Pre-incorporation contracts
When forming a company, it may be necessary to enter into certain contracts before the
company is actually formed. Macintyre (2013:289) highlights that “a company does not come
into existence until the registrar issues its certificate of incorporation. It follows that until the
certificate is issued the company has no capacity to make contracts. However, those who wish
to form the company, the promoters, might want to make contracts on the company’s behalf in
advance of incorporation.” Thus a pre-incorporation contract describes a contract made with a
third party on behalf of a company not yet formed (Nkala and Nyapadi 1995).
Kelly et al (2011: 159) further observe that “a pre-incorporation contract is a contract which
promoters enter into, naming the company as a party, prior to the date of the certificate of
incorporation and hence prior to its existence as a separate legal person. The legal difficulty, of
course, is that the company cannot enter into a binding contract until it has become incorporated,
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and it is bound by any contract made on its behalf prior to incorporation.” Principles of
common law provide that a person cannot act as an agent of a non-existent principal. In other
words, if the principal does not yet exist, it is obviously impracticable for the principal to
authorise someone to act as its agent. In the field of company law, before a company is formed,
a promoter may wish to enter into a contract with third parties for the benefit of the new
company. The promoter may not want to attract personal liability but desire the new company
to benefit from the pre-incorporation contracts.
Laws regulating pre-incorporation contracts are designed to protect the company when it is
formed from debts and liabilities incurred by speculative promoters. In terms of the common
law, a promoter has fiduciary duties requiring him to act in good faith and not to make secret
profits. A promoter is also enjoined to exercise due care and diligence and enter only into those
contracts that will ultimately benefit the company. From a corporate governance perspective, it
is important to ensure that promoters act in the best interests of the company to be incorporated,
as this will eventually affect the governance and viability of the company in future. Details of
any preincorporation contracts entered into by the company must be disclosed and the contracts
ratified by the board.
Pre-incorporation contracts are provided in terms of section 47 of the Companies Act. Section
47 stipulates that
“Any contract made in writing by a person professing to act as agent or trustee for a company
not yet formed, incorporated or registered shall be capable of being ratified or adopted by or
otherwise made binding upon and enforceable by such company after it has been duly registered
as if it had been duly formed, incorporated and registered at the time when the contract…”
However, for the pre-incorporation contract to be valid and legally binding, the following
requirements must be satisfied:
 The contract must be in writing and legally enforceable;

 The person concluding the contract must profess to be an agent or trustee for a company not
yet formed;
 the memorandum of association must contain as one of the objects of such company the
adoption or ratification of or the acquisition of rights and obligations in respect of such contract;
and
 the original copy or a certified copy of the contract must be lodged with the Registrar of
Companies simultaneously with the delivery of the memorandum of association.

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5.2 Formation and Registration of Companies
In general, companies are created through a process of incorporation’ in terms of which certain
documents are submitted to the Registrar of Companies by the individuals setting up the
company known as the promoters. A promoter is thus a person or persons who initially
incorporate the company. Promoters are the first shareholders and often also the directors. The
promoters prepare the company’s memorandum and articles for submission to the Registrar of
Companies and therefore shape the structure and direction of the company (Taylor 2013).
In order to register a company, the promoters must submit certain documents to the Registrar
of Companies. The documents include the memorandum and articles of association. The
application must state the following:
 the company’s proposed name;
 whether the company’s registered office is to be situated in Zimbabwe;
 whether the liability of the members of the company is to be limited and, if so, whether
by shares or by guarantee;
 whether the company is to be a private or a public company.
The application must also contain:
 a statement of capital and initial shareholding (for a company limited by shares) or a
statement of guarantee (for a company limited by guarantee)
 a statement of the company’s proposed officers
 a statement of the intended address of the company’s registered office 
a copy of any proposed articles of association.
The formal requirements for registration of companies are covered in sections 21 and 22 of the
Companies Act. Section 21 deals with the registration of the company’s memorandum and
articles of association by the Registrar upon payment of the prescribed fees. Section 22
stipulates that on registering the memorandum of a company the Registrar shall certify under
his hand that the company is incorporated, and the date of such incorporation.
From the date of incorporation, the subscribers to the memorandum, together with such other
persons as may from time to time also become members of the company, shall be a body
corporate by the name contained in the memorandum. In addition, the body corporate becomes
capable of exercising all the functions of an incorporated company, and having perpetual

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succession. The members of the company will assume liability to contribute to the assets of the
company in the event of its being wound up (section 22(2) of the Act).
Certificate of Incorporation
Upon registration of a company, the Registrar is required to issue a certificate of

incorporation, which certificate becomes conclusive evidence that a company has been
registered (section 23 of the Act). Upon the issuance of the certificate of incorporation, the
company assumes a legal personality of its own. The certificate of incorporation usually
states:  the name and registration number of the company;
 the date of incorporation;
 the type of the company, i.e. whether private or public company;
 whether the company is limited or unlimited and if limited whether it is limited by shares
or by guarantee; and  the company’s registered office.
Choice and use of corporate names
The promoters of a company must make an early decision to choose a name for the company to
be formed, as steps for its incorporation must be taken in that name. The first step in the
formation and registration of a company is to submit a name search for the desired name to be
registered. When this is successful this name is generally reserved for a limited period. There
are no hard and fast rules regarding the choice of names although the law may restrict or prohibit
the use of certain names. Thus a name may be descriptive of the type of business to be pursued
by the company, names of the individuals forming the company or any other words chosen by
the individuals.
Section 24 of the Companies Act deals with prohibition of undesirable names. It provides for
the reservation of a name pending registration of a company or change of name of a registered
company. Section 24(2) provides that no name shall be reserved and no company shall be
registered by a name which is identical with that for which a reservation is current or with that
of a registered company or a registered foreign company or a private business corporation.
The Registrar will not approve any name which so nearly resembles any such name as to be
likely to deceive unless the registered company or registered foreign company or private
business corporation is in liquidation and signifies its consent to the registration in such manner.
The rationale behind these restrictions on choice of company names is that if a company adopts
the name of another company it may gain improper advantages from the goodwill of the other

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company and may cause patrimonial loss. In addition, similarities in company names may
deceive or mislead persons with interest in a company such as creditors.
5.3 Company’s Constitutional Documents
A company’s constitutional documents generally contain provisions relating to the governance
structures of the company, shareholders’ rights, roles and responsibilities of the board and
management, among others. There are basically two constitutional documents which must be
submitted to the registrar of companies when registering a company, namely: memorandum of
association and articles of association. The memorandum of association and articles of
association of a company together form its constitution.
Memorandum of Association
The memorandum of association is the company’s founding document which defines the
company’s structural qualities. The memorandum and articles should be read in conjunction
with each other and in the event of a conflict between the two documents, the memorandum
will override the articles. The memorandum and articles constitute a contract between the
company and its members, in their capacity as members, as well as between the members
amongst themselves. No other contractual relationship arises from the company’s constitution.
For instance, no contractual relationship exists between directors and the company unless the
parties enter into a separate contract.
Articles of Association
Articles of Association are provided for in terms of section 17 of the Companies Act. The law
requires the articles of association to be signed by the subscribers to the memorandum. The
articles of association regulate the internal affairs and administrative aspects of the company.
To this end, articles of association are regarded as the ‘internal’ document of the company.
As indicated above, the articles constitute a contract between shareholders and the company
and also shareholders inter se (between or among themselves). Articles of association are only
enforceable as members’ rights hence outsiders cannot enforce these rights. In the case of
Hickman v Rooney Sheep Breeders Association (1915) 1 Ch 881 the articles of association
drafted before the company was formed provided that one Eley would be the solicitor of the
company and entitled to transact all its legal business. When the company was registered, Eley
was not appointed solicitor by any resolution but continued to act is such capacity. The company
subsequently stopped employing him and he instituted legal action relying on the provisions of
the articles of association. The court observed that the articles neither constituted a contract
between the company and an outsider nor gave an individual member special contractual rights
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beyond those of the members generally. The court held that there was no contract between Eley
and the company because Eley was not a member.
A company is required to register its articles of association together with the memorandum of
association at the time of incorporation. In the event that the company does not register the
articles, the regulations in table A of the Companies Act will apply to the company to the same
extent as if they were contained in duly registered articles. In general, articles of association of
a company usually include the following issues, among:
 Share capital and variation rights;
 Calls on shares, transfer of shares, transmission of shares, forfeiture of shares and conversion
of shares into stock;
 Alteration of capital;
 Notice and proceedings at general meetings;
 Voting rights;
 Appointment, roles, disqualification and removal of directors;
 The company’s borrowing powers;
 The appointment, duties and responsibilities of the company secretary;
 Payment of dividends;
 Winding up and indemnity.
Articles of association may only be altered by special resolution in terms of the Companies Act.
A special resolution requires a majority of not less than three-fourths of members entitled to
vote in person or by proxy. However, the powers of alteration must be exercised bona fide
(genuinely or without intention to deceive) for the benefit of the company as a whole.

The Unit provided an overview of issues relating to the formation and registration of companies.
The duties and responsibilities of company promoters have been highlighted. The Unit also
covered aspects of pre-incorporation contracts, memorandum and articles of association, among
other things.
1. Explain the roles and duties of promoters in the formation of companies.

2. What is a pre-incorporation contract and what are the legal principles regulating such
contracts?
3. Outline the process of formation and registration of companies in Zimbabwe.
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4. Explain the difference between memorandum and articles of association of a company.

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MANAGEMENT, ADMINISTRATION AND REGULATION OF COMPANIES

 Understand how companies are managed and directed;
 Appreciate the duties and responsibilities of company directors and officers;
 Explain principles relating to appointment, qualifications and removal of directors;
 Highlight the powers of board of directors and management.
2
.0 Introduction
Corporate governance and legal principles relating to management, administration and
regulation of companies are critical in ensuring proper and sound governance of business
organizations. Management and administration of companies depend on whether one is looking
at the requirements of the law or best practice. However, since companies are creatures of the
law, the starting point in a discussion relating to management and administration of companies
is the law. Accordingly, this unit will cover the legal and corporate governance aspects relating
1 Duties of Directors
From a legal perspective, companies are legal persons separate and distinct from their owners.
Companies act through natural persons, namely directors and officers of the company. Directors
therefore assume an important role and perform certain functions and duties in a company.
According to Maw (1994) it is well established in law that each member of the board owes,
individually, and also collectively, duties to the general body of shareholders. These are
enforceable against the directors by the company itself (rather than, generally, by the
shareholders suing as such).

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to relating to the duties and responsibilities of directors and management, how the directors and
officers are appointed and disappointed and the generals powers of the board and management.
The legal duties of directors are also provided for in many corporate governance codes and best
practice guidelines. Directors’ duties are both positive and negative in their nature. Positive
duties include duties to exercise directors’ powers and functions with proper care and
appropriate skill and diligence. Negative duties include duties of directors not fetter their
discretion, avoiding conflicts of interest and avoiding acting in bad faith or contrary to the best
interests of the company. Directors must not exercise his powers other than for the proper
purpose for which those powers were given (Maw 1994).
Common law duties of directors
At common law directors have various duties most of which are fiduciary in nature. According
to Nkala & Nyapadi (1995: 267), ‘a person possesses fiduciary duties when he is in a position
of trust, or occupying a position of power and confidence with respect to another person, such
that he is obliged by law to act solely in the interest of that other person whose rights he is to
protect.’ (See also the case of Ferguson v Wilson (1886) LR 2 Ch App 77). The doctrine of
fiduciary duties originates from the law of agency and trust. From a company law perspective,
directors may be deemed as mere trustees or agents of the company hence the fiduciary duties
imposed on them by the law.
The directors common law duties fall under the generic term ‘fiduciary duties’ which
encompasses, inter alia: (i) the duty not to have personal interest conflict with the interests of
the company; (ii) the duty not to make ‘secret profits’; and (iii) the duty to exercise powers
‘bona fide’ in the company’s interest. It is a well-established principle that directors’ fiduciary
duties are owed to their company and not necessarily to individual shareholders. This legal
position was enunciated in the English case of Percival v Wright (1902) 2 Ch 401. (i) Duty to
avoid conflict of interest
This common law duties is more or less similar to statutory duty enshrined in section 186(1) of
the Companies Act which requires directors to declare their interests in any contract with the
company. Thus a director has a common law and statutory duty to prevent situations of conflict
of interest. In addition, directors should not obtain any advantage from their authority other than
what they are entitled by way of director’s remuneration. The Zimbabwe Code on Corporate
Governance Code (2014:25) also states that directors should ‘ensure that there is no conflict
between their interets and those of the company, and that they are loyal to the company and its
business.”
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(ii) Duty to exercise powers ‘bona fide’ in the company’s interest
Directors have a legal duty at all times to act in the best interests of the company to the exclusion
of the interests of third parties. Even the courts are generally reluctant to interfere with the
directors’ ability to act in the best interests of company by compelling them to do what they
honestly believe would be detrimental to the interests of the shareholders. This position was
articulated in the case of Coronation Syndicate Ltd v Lilienfield & New Fortune Co Ltd (1903)
TS 489.
Thus a director is required to act bona fide in the interests of the company and must show
integrity and honesty when dealing with matters relating to the affairs of the company. In
Whitehouse v Carlton Hotels Ltd (1987) 162 C.L.R. 285 ( H.C.A.), the court set aside the
allotment of shares by the governing director to his sons on the basis that he was not acting in
good faith when he made the allocation. The shares had been allotted to prevent his wife and
daughters from gaining control of the company after his death.
The challenge with the duty to act in the best interests of the company is that it may not be easy
to determine what the company’s interests are. The generally accepted position is that the
interests of the shareholders themselves collectively are the interests of the company.
Accordingly, the directors cannot legitimately consider any other interest outside those of the
shareholders. A further complication is that shareholders in the same company may have
different interests. For instance, majority shareholders may promote interests which are not
necessarily the interests of minority shareholders.
(iii) Duty not to make secret profits
A director must at times act with honesty and integrity when executing his duties on behalf of
the company. It follows therefore that a director must not place himself in a position where he
takes improper advantage of his position to profit by acquiring for himself assets or
opportunities that rightly belong to the company.
A director has a duty to promote the interests of his company and not make a secret profit or to
take away business from it. In the case of Robinson v Randfontein Estates Gold Mining Co Ltd
(1921) AD 168, a director took advantage of his office to purchase a farm which he later sold to
the company at a profit. The court held that the director was not justified in making a profit
from his office as his personal interest conflicted with the duties arising out of his fiduciary
duties.

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In Jones v East Rand Extension Co Ltd (1903) TH 325 the court held that an agent cannot make
a secret profit out of anything, including information which can be used for the purposes of the
principal’s business, or anything which belongs to his principal and which the agent merely
possesses in a fiduciary capacity. In this case, an engineer in a mining company discovered that
an adjoining farm to the company’s mine had mineral reserves while drilling boreholes. The
engineer obtained an option over the farm in his own name and sought to commence mining for
his own benefit. The court held that the engineer had to hand over the mineral claim to the
company as the minerals were discussed in the course of his employment and therefore at law
belonged to the principal.
In Industrial Development Consultancy v Cooley [1972] 1 WLR 443 a company director

pretended to be ill so that he could be away from work and take some business contracts
intended for the company. The court held that the director was in breach of his fiduciary duties.
The directors’ fiduciary duties may therefore be summarized as follows:
 Directors must be careful not to engage in activities which will result in a conflict of
interest with the company. As a general rule, directors may not compete with the company.
 A director should not obtain any other advantage from his office other than that to which
he is entitled by way of the director’s remuneration or fees.
 Directors must not make secret profits. If a director obtains any additional advantages,
these will be regarded as secret profits and the director will accordingly be in breach of his
fiduciary duties.
Directors may be held liable for breach of fiduciary duties by their companies. For instance, this
can happen where there is a breach of trust when directors act for their own benefit and to the
prejudice of the company.
(iv) Duty of care and skill
Directors have a duty to act with such care and skill as is to be reasonably expected from a
person of their knowledge and experience. The Zimbabwe Code on Corporate Governance
(2014:25) provides that “the duty of care requires that directors should act with the degree of
care expected of a reasonable person in charge of the assets of an incapacitated person, that they
are good stewards of the company’s assets, and that they apply their minds honestly in making
decisions concerning the company’s business.”

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In Re City Equitable Fire Insurance Co Ltd (1925) Ch 407, the court observed that a director
need not exhibit in the performance of his duties a greater degree of skill than may reasonably
be expected from a person of his knowledge and experience. The standard or the degree of care
and skill required will also depend on the nature of the business. Thus, in the case of Fisheries
Pvt Corp of SA Ltd v Jorgensen (1980) SA 156 (W), the court observed that the type of care and
skill largely depends with the nature of the company’s business and on any particular
obligations assumed by or assigned to the director. However, directors are not expected to have
special business expertise or detailed knowledge of financial matters. A director is expected
nonetheless to exercise the care, which can be reasonably expected of a person of his knowledge
and skill. In other words, directors are under a positive duty to act, as expected of a reasonable
man put in the same position otherwise they will be liable for negligence.
Section 318 of the Companies Act deals with the responsibility of directors and other persons
for fraudulent conduct of business. It provides for personal liability of past or present directors
of a company for any debts or other liabilities where any business of a company was carried on
recklessly, or with gross negligence or with intent to defraud any person or for any fraudulent
purpose. It is therefore important for directors to act with due care and skill to avoid personal
liability.
(v) Duty to exercise independent discretion
The duty to exercise independent discretion requires directors to be independent of external

influence in executing their duties as directors of a company. As correctly observed by Nkala
& Nyapadi (1995: 276), a director’s duty is to observe utmost good faith towards the company,
and in discharging that duty he is required to exercise an independent judgment and to make
decisions according to the best interests of the company as his principal. In other words,
directors should maintain unfettered discretion and in the same vein should not be dummies,
puppets or stooges of any person when executing their responsibilities on behalf of the company
they serve (S v Shaban 1965(4) SA 646).
(vi) Duty to act intra vires the Companies Act and articles
The duties of corporate directors entail that they shall exercise their obligations intra vires the
Companies Act and articles of association and within their authority. This duty derives partly
from the longstanding common law rule known as the ‘proper purposes doctrine’, which
provides that directors’ powers should be used only for the purposes for which they were
conferred. The duty ensures that directors, as agents of their companies with extensive powers

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to manage their affairs, do not use those powers for improper purposes inconsistent with the
interests of the company.
Moral duties of directors
The Zimbabwe Code on Corporate Governance provides various additional duties of directors
of a moral nature. These 10 moral duties find expression in the concept of Ubuntu and are
summarized in Table 2 below:
Moral Duty Nature of moral duty
1. Duty of conscience irectors should act with intellectual honesty and independence of mind in the
best interests of the company.
2. Duty of character ntails demonstrating good character and courage on the part of a director to do
the right thing at all times.
3. Duty of hard work rectors should always see personal benefits as being bi-products of hard work.
4. Duty of patriotism survival and irectors must work for the good of the country and be resourceful, innovative
and creative when faced with difficult circumstances.
of
in the face
adversity
5. Duty of inclusivity irectors must take an inclusive approach by embracing legitimate interests and
expectations of the company and all its stakeholders.
6. Duty of common sense he ability of directors to listen and to find their way in the world of business.
7. Duty to speak the truth Directors must speak the truth at all times and show that they believe in what
they say and act on it.
8. Duty of courage Directors must overcome fear in order to do the right thing, taking positions
even in circumstances which make them unpopular.
9. Duty of conviction • Directors must show commitment and passion in whatever they do.
10. Duty of creative charisma he duty requires directors to inspire and generate trust in others; thinking
about others and their concerns before thinking about themselves.
6.2 Appointment, Removal and Disqualification of Directors
Appointment of directors

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The Companies Act (section 2 thereof) defines a director as including “any person occupying
the position of director, or alternate director of a company, by whatever name he may be called.”
This definition is wide and encompasses any person whose functions include essentially
directing a company, even though the person may be referred to as, for instance, the chief
executive officer, manager or any other title. It is also important to note that the Companies Act
does not distinguish between executive and non-executive directors.
However, principles of corporate governance require boards of directors to be composed of both

executive and non-executive directors, the majority of whom should be independent
nonexecutive directors. For instance, the Zimbabwe Code on Corporate Governance provides
that “the board should ideally have a majority of non-executive members, the majority of whom
should be independent.” Similarly, the King IV Code on Corporate Governance of South Africa
requires a governing body to ensure appropriate mix of executive, non-executive and
independent non-executive members.
The Companies Act requires every company to have at least two directors other than alternate
directors (section 169(1)). At least one of the directors must be ordinarily resident in Zimbabwe.
When a company is incorporated, every person signing the memorandum of a company is
deemed to be a director of the company until other directors are appointed (section 169(3)).
This implies that by signing the memorandum of a company, members agree to be the first
directors of the company until subsequent directors are appointed by an ordinary resolution of
the members (Macintyre 2013). Such persons are therefore liable for all the duties and
obligations of directors.
The articles of association typically provide for the appointment of directors. The directors may
be appointed by shareholders in a general meeting or in some instances, the articles may confer
the power to appoint directors on the directors themselves. As indicated above, subscribers to
the memorandum may be deemed the first directors unless they appoint the first directors. The
general meeting will decide what will happen to the first directors, that is, whether they will
retire or continue to hold office. The Code on Corporate Governance of Zimbabwe stipulates
that “all directors should be appointed through a formal, robust and transparent process that
reflects broadly the diversity of the shareholders.”
Alternate directors
A company’s articles of association may provide for the appointment of alternate directors to
act in the place and stead of a substantive director when he/she is not available. The definition
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of a director in section 2 of the Act includes an alternate director. In other words, an alternate
director is only a substitute director, or one appointed to act in the place of the absent substantive
director. The Companies Act provides that every company must have not less than two directors
(section 169). Alternate directors are not included in reckoning the number of directors of a
company. Alternate directors are bound to comply with all the duties of a director even though
they are not counted as directors for purposes of Section 169.
Disqualification of directors
The Companies Act does not specify the qualifications required for one to be eligible for
appointment as a director of a company. However, the Code on Corporate Governance of
Zimbabwe states that the board should be composed of persons with good leadership qualities
and core competences required by the company such as accounting or financial expertise, legal
skills, business and managerial experience, industry knowledge and strategic planning
experience.
The Companies Act stipulates (in section 173 thereof) the persons disqualified from being a
director of a company. In other words, the Companies Act prohibits certain classes of persons
from becoming company directors in a bid to protect the shareholders as well as the public and
the business community. Persons disqualified from becoming directors include the following:
 a body corporate;
 a minor or any person under legal disability;
 any person who has at any time been adjudged or otherwise declared insolvent or bankrupt
under a law in force in Zimbabwe or any other country, and has not been rehabilitated or
discharged. However, such person may become a director with the leave of the court;
 any person who has at any time been convicted, whether in Zimbabwe or elsewhere, of theft,
fraud, forgery or uttering a forged document or perjury and has been sentenced therefor to serve
a term of imprisonment without the option of a fine or to a fine exceeding level five. However,
such person may hold an office as a director with the leave of the court;
 any person who is the subject of any order under the Companies Act disqualifying him as a
director;
 any person removed by a competent court from an office of trust on account of misconduct
(save with the leave of the court);

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Apart from the above grounds, a company may also provide for further disqualifications for the
appointment of, or the retention of office by, a director in its articles of association (section
173(4) of the Act). For instance, the articles may disqualify foreigners or members of other
companies from being directors.
In the case of Tengende v Registrar of Companies (1988) the court noted that even when a person has a
string of previous convictions, he will not be disqualified by that fact alone. The court will look at the
whole character of the person to determine whether he has been rehabilitated. As pointed out in the case
of Tengende case supra, the management of companies should not be in the hands of unscrupulous or
disreputable persons. Previous criminal convictions are an indication that an individual has a tendency to
be dishonest or sometimes disregards the law. Directors by nature should be honest individuals and if a
person has been convicted of a crime which involves some sort of dishonesty, then there is a likelihood
that that person might use the company as a vehicle for future dishonest activities.
A person who is qualified and is appointed to be a director may cease to hold office as a director if he/she
is declared insolvent or bankrupt or convicted of theft, fraud, forgery or uttering a forded document or
fraud. Similarly, a person ceases to be a director if he/she is removed by the court from any office of trust
on account of misconduct (section 173(2)). It is an offence for any person disqualified to be a director to
continue acting as such or directly or indirectly taking part in the management of any company.

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Removal of directors
The provisions relating to removal of directors are contained in section 175 of the Companies
Act. Section 175(1) empowers a company, by resolution of which special notice is given, to
remove a director before the expiry of his/her period of office regardless of what the articles of
association provide. Section 175(3) provides that a vacancy created by the removal of a director
may be filled as a casual vacancy if not filled at the meeting at which he/she is removed. A
person appointed director in place of a person removed as a director is treated, for the purpose
of determining the time at which he/she retires, as if he/she had become director on the day on
which the person in whose place he is appointed was last appointed a director (section 175(5)).
A director removed from office may claim compensation or damages payable to him in respect
of the termination of his appointment. However, any payment to a director by way of
compensation for loss of office or in connection with his retirement from office, must be
disclosed to members of the company and approved by the company in general meeting in terms
of section 178 of the Companies Act.
6.3 Powers of Board of Directors and Management Powers

of directors
Powers of directors are generally provided in articles of associations and the Companies Act as
well as the common law. The board of directors has the power to act in any manner it deems fit
provided the powers conferred by the articles are not exceeded. According to Nkala & Nyapadi
(1995: 263):
‘Normally, the powers of the directors are set out in the articles, and once the powers are vested
in them only they may exercise them. This means that the shareholders have no control in the
way in which directors choose to act as long as they choose to act within their powers given to
them by the articles.’
The distinction between the powers of directors and those of the shareholders was amplified in
the English case of John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 in which the court
observed as follows:

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A company is an entity distinct alike from its shareholders and its directors. Some of its powers
may, according to its articles, be exercised by directors, certain other powers may be reserved
for the shareholders in general meeting. If powers of management are vested in the directors,
they and they alone can exercise these powers. The only way in which the general body of the
shareholders can control the exercise of the powers vested by the articles in the directors is by
altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the
directors of whose actions they disapprove. They cannot themselves usurp the powers which by
the articles are vested in the directors any more than the directors can usurp the powers vested
by the articles in the general body of shareholders.
It is clear therefore that members of the company, i.e. shareholders, do not have much control
over directors’ powers. Shareholders may only exercise control over the powers of directors in
a general meeting. Even in general meetings, the leeway of shareholders to directly control the
affairs of the company is limited particularly where the control of the company is vested in the
directors by the articles (Nkala & Nyapadi 1995). Be that as it may, shareholders can only
restrict the powers of the directors by altering the articles in terms of section 16 of the
Companies Act. The shareholders may also remove directors from office by resolution of which
special notice is required before the expiration of their tenure of office in terms of section 175(1)
of the Companies Act.
In summary, shareholders may not interfere with the powers of the directors conferred by the
articles of association of the company. If the shareholders are not pleased with the conduct of
the directors, they may alter the articles, refuse to re-elect the directors or better still remove
them from office. Accordingly, the general meeting is the forum in which members can rightly
exercise ultimate control over all the company’s affairs since they can alter the articles or
determine the persons to be their directors (Nkala & Nyapadi 1995).
It is a cardinal principle of corporate governance that boards of directors should not be

dominated by a single individual or a group of individuals. This principle is designed to ensure
that powers of directors are not exercised capriciously for self interests at the expense of the
best interests of the organization. The requirement for the separation of the roles of chairman
and chief executive officer is also designed to keep in check the exercise of powers by the top
leadership in a company.

REC 306
7.3 Distinction between Board of Directors and Management

Companies act through human agents, namely: officers of the company formally appointed by
the board of drirectors to run the day-to-day affairs of the company. The Companies Act
provides that officers of the company shall include directors, managers or secretaries (section 2
of the Act). A manager in relation to a company is defined as “any person who is the principal
executive officer of the company, by whatever title he may be designated and whether or not he
is a director” (section 2 of the Act). This definition implies that a manager may or may not be
director. A board of directors consists of the various directors of the company.
In practice, a distinction is usually drawn between executive and nonexecutive directors who
sit on the board of directors of a company. In addition, there should be an unambigous division
between the responsibilities of a chief executive officer and those of the chairman of the board
of directors (Naidoo 2016).
Executives directors or management executives are officers of the company with a service
contract who work full time for the company hence they are often refered to as full time
directors. An executive director usually has intimate knowledge of the company business and
undertakes the administration and day to day running of the company. An executive director is
almost invariably referred to as Managing Director or Chief Executive Officer.
On the other hand, non-executive directors do not work full time for the company like the
executive directors and are therefore not charged with the day to day responsibilities of running
the affairs of the company. More often than not, non-executive directors are employed
elsewhere on a full-time basis and may even be nonexecutive directors for several other
companies. Non-executive directors therefore depend on the knowledge and expertise of
executive directors regarding the affairs of the company.

A number of issues have been canvassed in this Unit including the duties and responsibilities
of company directors and officers both from legal and corporate governance perspectives. The
principles relating to appointment, qualifications and removal of directors have also been
discussed. The Unit concluded by highlighting the powers of board of directors and
management and the principles of checks and balances to ensure that no one individual enjoy
unfettered powers.

REC 306

1. Explain the duties and responsibilities of company directors and officers.
2. What are the legal and corporate governance principles relating to the appointment,
qualifications and removal of directors?
3. Highlight the differences between the roles of boards of directors and management and why it
is important to ensure a separation of the two functions?

REC 306
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CHARTERED INSTITUTE OF RISK AND SECURITY MANAGEMENT

PROFESSIONAL DIPLOMA IN RISK & SECURITY MANAGEMENT

ETHICS AND CORPORATE GOVERNANCE

Module REC 306

• Published by: Chartered Institute of Risk and Security Management

"The Six Hour Tutorial Sessions"

Session I (Two Hours)

Session II (Two Hours)

Session III (Two Hours)

BEST WISHES IN YOUR STUDIES.

INTRODUCTION TO ETHICS AND CORPORATE GOVERNANCE

Objectives of the Unit

Page 1 of 111 CIRSM

Ethics, morals and values

Defining Business ethics

1.3 Historical Development of Business Ethics

1.4 Definitions and Scope of Corporate Governance

Defining corporate governance

The OECD (1999: 1) defines corporate governance as “a set of relationships between a

summary, corporate governance is therefore concerned with:

Corporate governance and other forms of governance

It is equally important to appreciate the distinction between corporate governance and

Page 6 of 111 CIRSM

1.5 Historical Development of Corporate Governance

Development of corporate governance in UK and US

The historical development of corporate governance as a discipline was largely influenced by a

Development of corporate governance in South Africa

Development of corporate governance in Zimbabwe

Page 7 of 111 CIRSM

Page 8 of 111 CIRSM

1.6 Sources of Ethical and Corporate Governance Principles

These will be discussed below.

Corporate Governance Codes

Constitution and Legislation

Page 9 of 111 CIRSM

Page 10 of 111 CIRSM

International conventions also constitute an important source of ethics and corporate

Trade customs and practices

1.7 Interaction of Corporate Governance, Ethics and Law

Page 11 of 111 CIRSM

1.8 Unit Summary and Conclusion

Page 12 of 111 CIRSM

1.9 Review Questions

“The historical development of corporate governance was largely influenced by corporate

Page 13 of 111 CIRSM

BUSINESS ETHICS FUNDAMENTALS

Objectives of the Unit

By the end of this Unit, students will be able to:

Page 14 of 111 CIRSM

2.2 Morals, Ethics and Law

2.1 Benefits of sound business ethics

(iv) Increased investment opportunities

Page 16 of 111 CIRSM

2.2 Common Ethical issues in business

(i) Integrity and trust

Page 17 of 111 CIRSM

(ii) Diversity issues

(iii) Compliance and Governance Issues