Corporate Governance and Development

Last month, more than 30 development financing institutions signed a statement putting corporate governance at the forefront of their global development efforts.  The statement describes some of the benefits good corporate governance provides, including improved company performance, better access to capital, better stakeholder relations, stronger capital markets, as well as lower investment and reputational risk. 

But corporate governance contributes to development in so many more ways – ways that become more evident once we extend the analysis of the concept beyond its traditional application – large firms and capital markets.  We have seen good corporate governance contribute to development by:

• Cleaning up the nature of relationships between business and state (private-public transparency)
• Helping improve legal enforcement mechanisms (by protecting minority shareholders rights, for example)
• Facilitating property rights protection
• Helping combat corruption (an important but rarely recognized corporate governance benefit)
• Helping firms attract investment (thus creating jobs)
• Developing a strong SME sector and opening up family firms
• Instilling the concepts of transparency and accountability far beyond the corporate sector

The bottom line – it is becoming increasingly evident that corporate governance is not only for large firms and developed markets.  We’ve seen it transform the way business is done in places one would never consider could benefit from good corporate governance.

Just recently, I had a pleasure of interviewing Karugor Gatamah who runs a corporate governance center in Kenya.  I asked him – what does he think about the general notion of linking corporate governance with large companies?  He brought up an interesting fact, noting that

There are over 140,000 registered companies in Kenya.  Only approximately 53 are listed on the stock exchange, and only 5,000 are public companies.  So, that gives you approximately 135,000, which are either family-owned private small companies or medium-sized companies.  If you don’t address corporate governance in SMEs and family-owned companies then you are saying you are only dealing with those 53 or so companies and are completely ignoring the other 135,000.

Why corporate governance matters, I asked him? Why does it matter for Africa? Here is what he had to say

I think for Africa, the fact that we tended to associate corporate governance with foreign investment has alienated a lot of the people from seeing the benefits of good corporate governance to society at large, to the poor.  I like to talk about corporate governance and MGD’s.  This may not be a direct relationship, but as I said, if you don’t create wealth, how do you alleviate poverty? 

Karugor Gatamah hits the nail on the head – corporate governance helps to create wealth and alleviate poverty in a sustainable way.  The development financing institutions also get it, and the new agreement is a testament to their commitment.  Lets hope more people recognize corporate governance as an important development, not just an investment, tool.