Capital markets: Strong regulations needed for its smooth operation

While in Rwanda, the adoption of legal and regulatory frameworks similar to those in developed countries is not difficult, the key to developing and maintaining sound capital markets in the long term lies in strong supervision of market activities and rigorous legislation enforcement.

While in Rwanda, the adoption of legal and regulatory frameworks similar to those in developed countries is not difficult, the key to developing and maintaining sound capital markets in the long term lies in strong supervision of market activities and rigorous legislation enforcement.

Supervision and enforcement require qualified and sophisticated capital market professionals in the public sector, e.g. market regulators and judges.

This is an area where international financial institutions and bilateral donors should play a role in providing us financial and technical assistance.

Corporate governance:
Corporate governance is about an attitude, is about culture, is about ethics, and is about way of running the business. Well, if there is a clear consensus and if we all agree on that, then we ought to do nothing, but the fact of the matter is that this is one of the most elusive concepts to see in practice.

The fact of the matter is and I completely agree with many that good corporate governance does provide a clear quality in the stock markets for stock valuations.

Again, if that quality was so powerful and so compelling, in terms of a company going back to raise capital and conversely if poor corporate governance was such a debating factor, hampering and completely obstructing the ability of the corporate to raise capital, then all that we have to ensure is that the market should somehow provide for all capital needs by that simple token, I think, we would have a very powerful instrumentality of ensuring good corporate governance.

Regulating board-level management of enterprises, Transition countries wishing to attract either capital or business need to ensure that potential investors have confidence in the market.

Part of that confidence comes from knowing that the country’s companies are well managed and that there is a legal regime in place that can and will insist that good management practices are enforced. How transition countries select and implement such a regulatory regime varies enormously.

However, they all stand to learn from the successes and failures of more developed jurisdictions. We can remind ourselves of the Enron case in US, (former Enron CEOs Ken Lay and Jeff Skilling hyped Enron’s earnings in 2000 and 2001), that provoked the rule based Sarbanes Oxley, with strict rules on corporate governance.

This article draws on the experience of the United Kingdom, particularly in relation to boards of directors.

In the United Kingdom alone, the past ten years have seen publication of the Cadbury, Greenbury and Hampel Reports (all reports from government sponsored private committees).

The proposals from these committees are now protected in the Combined Code which is a precondition by the London Stock Exchange Listing Rules.

The Law Commission produced a report on company directors: Regulating conflicts of interest and formulating a statement of duties.

Corporate governance is not a term of art. It encompasses all of the various mechanisms designed to ensure that a corporate organisation pursues only those objectives for which it was set up, and pursues them in a way which embodies best business practices. Here the focus is solely on the legal regulation of corporate management, especially boards of directors.

It excludes consideration of the myriad of other options for legal and non-legal regulation of corporate governance. This narrow focus has been adopted in the light of the current attention being devoted to this area by governments and financial markets in major Western democracies.

This degree of attention suggests that the area is – or certainly will become – equally important for economies in transition. Moreover, the process of self-assessment and reform being undertaken in Western democracies can perhaps save emerging economies like ours, from mistakes already made elsewhere.

The fact of the matter is that good corporate governance is only one of the elements which go into showing up in stock market performance and very often, there are so many other factors at work that when you look at them, it is very hard for some of the market participants to figure out what is the corporate governance element.

Now,  if capital markets are so important for an economy like ours, some countries cannot afford to show up a low rate of growth because of corporate scandals or because poor examples of corporate governance which severely hamper the ability of savers and corporate users of capital to come together, then some sort of intervention approach, obviously becomes inescapable.

What I will say is there is couple of principles preserved in this approach. The principles are that management can have weaknesses. We need good disclosure, we need timely disclosures, and we need frequent disclosures. If that paradigm is not going to change in a hurry, then we obviously need to do something.

What are the couples of knots that we can squeeze to help the process along.

My sense is, it is not about policing, and it is not about somebody sitting on somebody’s head with a hammer to hit them hard when they make a mistake.

It’s about helping things along. What could help? If you have; good and a larger number of independent directors who, it is believed, will be more neutral in their outlook to all those principles and pressures, some good will prevail, some progress will be made in this area.

If audit committees are given some key conflict areas to look at, third transaction is an obvious one and so on and so forth.

Then again, some good will happen, they will ask some intelligent questions, they will ask a few more piercing questions and therefore act as a voice of conscious on the corporate, it is really as simple as that.




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