minds and I engaged in a passionate discussion over the concept of
'organisation capability', the brainchild of Dave.
Organisation capability is what an organisation is known for, what it is
good at. For customers, organisation capabilities become the brand they
experience; for the investor, they are the intangibles that give them
confidence in future earnings; for the employee inside the company they are
the desired culture. Obviously, the implications of this concept are
profound since organisation capabilities connect the internal customers to
the external customers. By delivering on organisation capabilities,
customers and investors will keep signing cheques over to the firm.
Organisation capabilities are the deliverables of HR, transfoming HR from
being a mere cost centre to a profit centre.
Theory without practice is useless. We need to illustrate organisation
capabilities in practice. There are over 14 capabilities. We will consider a
few. Charity begins at home. A careful analysis of Econet shows that its
phenomenal success rests on three capabilities namely: talent, learning and
shared mindset. Talent as an organisation capability means: we are good at
and known for attracting, retaining and motivating competent and committed
people.
The organisation capability of learning means: we are good at and known for
generating and sharing ideas with impact. Shared mindset as an organisation
capability means: we are good at and known for making sure our external
customers (investors and customers) and employees have a positive experience
with the company.
To illustrate further, we will look at Econet's learning capability in
brief. Econet is good at benchmarking (comparing best international
standards), be it communications technology or store layout and
intelligently adapting these. It explains largely why Econet is almost
always first to the market with the latest technologies. South African
telecommunications giants are still struggling with the 3G technology while
Econet has already introduced the 4G technology. Of late, due probably to
its on-going network upgrading programme, the shared mindset capability is
weakening, judging by the frequency of customer complaints over service.
Back to my discussion with the two HR fundis. I pointed out that in their
latest work on capabilities, corporate governance was not mentioned. I had
felt that corporate governance should be a key capability. Younger and
Ulrich concurred with me that indeed corporate governance is a key
capability. They pointed out they had spread aspects of corporate governance
into capabilities such as risk (we are good at and known for anticipating
and managing disruption, predictability and variance) and speed capability
(we are good at and known for making important changes fast). The discussion
led me to launch into a full research on the relationship between corporate
governance and finance.
We shall define corporate governance as an organisation capability: we are
good at and known for making and implementing decisions that ensure the
long-term success of the business. We will proceed to look at some studies
on the relationship between corporate governance and investment.
According to a paper from the Norwegian School of Management titled
Corporate governance and real investment decision firms that are
well-governed have a higher probability of making investments, have higher
market to book ratios (investors willing to pay higher share prices share
compared to current after-tax profits per share) and better access to
outside financing.
The Deutche Bank studied Standards and Poor 500 firms and found that over a
two-year period firms with improving corporate governance outperformed those
that did not by an average of 19%. In a paper written by the financial
giant ABN/AMRO titled Corporate Governance in Brazil: Is there a link
between corporate governance and financial performance in the Brazilian
market?' revealed that in 2004, firms based in Brazil, with higher corporate
governance rankings received price-to-earnings ratios that were 20% higher.
Price- to-earnings ratio, also known as P/E simply shows how many times the
current share price is bigger than the current after-tax profits per share
(earnings per share).
Normally, the higher the P/E, the more confident investors are that the firm
will in future continue to produce good after-tax profits. They show this
confidence through buying the shares now to ''book'' for a portion of the
anticipated growth in earnings.
A paper published in the Journal of Corporate Finance titled Predicting
Firms' corporate governance choices: Evidence from Korea showed that Korean
(South) firms perceived to be properly governed had share prices trading at
a premium of 160%.
This means investors were willing to pay 2,6 times the actual worth of the
shares of well-governed South Korean firms. The Mckinsey and Company 2002
investor opinion survey shows that for every 10 respondents eight would pay
a premium for the shares of a firm with strong corporate governance
practices. The premiums averaged 20-25% in Latin America and Asia, with the
highest premiums in the study recorded for Eastern Europe and Africa at 30%.
The distribution of premiums is telling. African firms that move to
strengthen corporate governance stand a better chance of attracting investor
funds. Here is hoping Zimbabwean firms are paying attention.
I could have given study after study showing beyond contest that good
corporate governance attracts investment into the company. Three lessons for
the Zimbabwean corporate arise from these empirical studies.
First, when Zimbabwe's national political and economic environment improves
investor dollars will flow in. However, only those organisations with strong
corporate governance practices will receive a meaningful share of the
investment inflows. Minister Gorden Moyo made a profound statement as
reported in the NewsDay when he said that 60% of the problems of state-owned
enterprises would dissolve by simply improving their corporate governance
practices and further said that ''it does not cost a cent'' to adopt good
corporate governance practices.
Second, firms do not need to be cajoled to adopt good corporate governance
practices. On the back of the overwhelming evidence, adopting good corporate
governance practices should be an automatic business decision. It saddens me
when firms have to wait for a national code of governance and statutory
instruments to begin to take action to practice good corporate governance.
Third, HR as business leaders in Zimbabwe needs to sell the idea of
corporate governance as a key organisation capability. Lack of cash is a
serious business challenge at present. A preliminary study I am doing on the
extent of liquidity challenges in Zimbabwe shows that for the half-year
ending June 30, listed firms are struggling to generate enough cash from
their operations to fund taxation and debt-servicing. One listed firm with a
very high P/E ratio generated negative cash flow from its operations.
Luckily, for the said firm to survive the first six months, cash generated
from last year is being used.
To survive, Zimbabwean firms have no choice but to adopt corporate
governance as an organisation capability. Competiveness is not strategy.
Competitiveness = strategy x organisation. Organisation is not structure.
Organisation is capability. That is the new HR's speciality.
Telescope Bits
Tax-free threshold in South Africa at the current exchange rate is US$667
compared to Zimbabwe's US$175.
Is there a business case for corporate governance in Zimbabwe? Share at
brettchulu@consultant.com This e-mail address is being protected from
spambots. You need JavaScript enabled to view it .
By Brett Chulu
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