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Changing Africa perceptions one company at a time

by Kimberly S Johnson, Wall Street Journal. OSCAR Onyema is battling the perception of corruption and poor transparency in Nigeria one public company at a time.

Two weeks ago, the chief executive of the Nigerian Stock Exchange launched a corporate-governance rating system that puts the exchange’s 190 major companies, including Unilever Nigeria, Total Nigeria and Oando, through a rigorous assessment.

The ratings system requires listed companies to answer questions about their business ethics, internal and external audits and controls, transparency and disclosure. Each board member must take a test to measure his awareness of a director’s fiduciary duty. Regulators, investors, suppliers and employees also are interviewed.

“Nigeria has made a big statement that we want to be in the forefront of good corporate-governance practices,” Mr Onyema said.

Sub-Saharan Africa has long lagged behind the developed world in corporate-governance practices, but political and economic stability in countries such as Ghana, Kenya and Rwanda have had a halo effect on the region. Over the past five years, more African companies have adopted International Financial Reporting Standards to help draw global investors.

Investment returns across the broader continent averaged 13% in 2012, according to consulting firm McKinsey & Company. The International Monetary Fund (IMF) expects economic growth in sub-Saharan Africa alone to reach 5.5% this year, up from last year’s 4.9%.

“Many people paint Africa with one brush, but it’s 54 different countries,” said James Newlands, a partner at EY LLP’s Africa practice.

The risks, however, continue to make headlines. The Ebola outbreak in Liberia, Guinea and Sierra Leone and a recent military takeover in Burkina Faso may make some potential investors skittish. Despite a growing acceptance of anticorruption measures and international reporting standards, companies sometimes lack the accounting resources to meet stricter financial guidelines.

Stephen Hayes, president and CEO of the Corporate Council on Africa, a Washington-based group that promotes US-Africa business and investment ties, said information on some companies in the region was “fairly sketchy” and “the governance issue slows things down.”

That is partly why the US accounted for less than 10% of the $545bn of foreign direct investment in the continent between 2003 and 2012.While Africa’s governments continue to battle extreme poverty, consumer spending is expected to hit $1.4-trillion by 2020, up from nearly $1.2-trillion in 2012. Three-quarters of the region’s 1-billion people now have a mobile phone, a McKinsey report showed.

For investors, a major challenge is that most of the region’s companies are small or midsize, closely held and family run. Most have never had an outside investor or applied for a bank loan.

Expenses are sometimes paid from a personal bank account or in cash. Board meetings were often held at the kitchen table over a Sunday night family meal, said Barakat Balmelli, MD of Sana Elias Group, a Swiss financial advisory firm focused on sub-Saharan Africa.

When working with an agriculture company in northern Nigeria, Ms Balmelli found commingled accounts and no records for equipment and other assets purchased with cash. She said she had to create Excel spreadsheets and hire an entry-level accountant to record daily activity and try to recreate older financial records on a cash-accounting basis.

“Just because they don’t have the best accounting records doesn’t mean they don’t have a good business,” she said.

Forming partnerships with dealers and distributors could help to alleviate some of the risk of entering a new market in the region, said Andy Beck, chief financial officer of Agco Corp, which makes farm machinery. The company, based in the US city of Duluth, sells its wares in Zambia, has a parts facility in SA and is manufacturing equipment in Algeria. The company trained its salespeople not to run afoul of the US’s Foreign Corrupt Practices Act, Mr Beck said.

Doing good due diligence at the outset of selecting a local distributor was often a challenge, as there was no centralised place for information, so data were often “inconsistent”, he said.

Overall, companies and investors interested in funding or acquiring small or midsize firms needed to prepare for accounting and disclosure practices that were inadequate by Western standards, said Jacob Kholi, a Ghana-based partner at the Abraaj Group, a private-equity firm focused on growth markets.

One of the goals of a private-equity investor is to better position a company for growth and itself for a positive exit five to seven years down the road. Often, the infusion of funds comes with a dose of accounting and auditing expertise.

“We’re able to identify some of these gaps and apply them to the investment plan. That’s not an imposition for us,” Mr Kholi said.

The quality of financial reporting had improved in recent years and companies were “positioned better than ever before, so we encourage them”, he said.

A man displays chickens for sale at a local market in Lagos, Nigeria. Picture: REUTERS A man displays chickens for sale at a local market in Lagos, Nigeria. Picture: REUTERS

OSCAR Onyema is battling the perception of corruption and poor transparency in Nigeria one public company at a time.

Two weeks ago, the chief executive of the Nigerian Stock Exchange launched a corporate-governance rating system that puts the exchange’s 190 major companies, including Unilever Nigeria, Total Nigeria and Oando, through a rigorous assessment.

The ratings system requires listed companies to answer questions about their business ethics, internal and external audits and controls, transparency and disclosure. Each board member must take a test to measure his awareness of a director’s fiduciary duty. Regulators, investors, suppliers and employees also are interviewed.

“Nigeria has made a big statement that we want to be in the forefront of good corporate-governance practices,” Mr Onyema said.

Sub-Saharan Africa has long lagged behind the developed world in corporate-governance practices, but political and economic stability in countries such as Ghana, Kenya and Rwanda have had a halo effect on the region. Over the past five years, more African companies have adopted International Financial Reporting Standards to help draw global investors.

Investment returns across the broader continent averaged 13% in 2012, according to consulting firm McKinsey & Company. The International Monetary Fund (IMF) expects economic growth in sub-Saharan Africa alone to reach 5.5% this year, up from last year’s 4.9%.

“Many people paint Africa with one brush, but it’s 54 different countries,” said James Newlands, a partner at EY LLP’s Africa practice.

The risks, however, continue to make headlines. The Ebola outbreak in Liberia, Guinea and Sierra Leone and a recent military takeover in Burkina Faso may make some potential investors skittish. Despite a growing acceptance of anticorruption measures and international reporting standards, companies sometimes lack the accounting resources to meet stricter financial guidelines.

Stephen Hayes, president and CEO of the Corporate Council on Africa, a Washington-based group that promotes US-Africa business and investment ties, said information on some companies in the region was “fairly sketchy” and “the governance issue slows things down.”

That is partly why the US accounted for less than 10% of the $545bn of foreign direct investment in the continent between 2003 and 2012.While Africa’s governments continue to battle extreme poverty, consumer spending is expected to hit $1.4-trillion by 2020, up from nearly $1.2-trillion in 2012. Three-quarters of the region’s 1-billion people now have a mobile phone, a McKinsey report showed.

For investors, a major challenge is that most of the region’s companies are small or midsize, closely held and family run. Most have never had an outside investor or applied for a bank loan.

Expenses are sometimes paid from a personal bank account or in cash. Board meetings were often held at the kitchen table over a Sunday night family meal, said Barakat Balmelli, MD of Sana Elias Group, a Swiss financial advisory firm focused on sub-Saharan Africa.

When working with an agriculture company in northern Nigeria, Ms Balmelli found commingled accounts and no records for equipment and other assets purchased with cash. She said she had to create Excel spreadsheets and hire an entry-level accountant to record daily activity and try to recreate older financial records on a cash-accounting basis.

“Just because they don’t have the best accounting records doesn’t mean they don’t have a good business,” she said.

Forming partnerships with dealers and distributors could help to alleviate some of the risk of entering a new market in the region, said Andy Beck, chief financial officer of Agco Corp, which makes farm machinery. The company, based in the US city of Duluth, sells its wares in Zambia, has a parts facility in SA and is manufacturing equipment in Algeria. The company trained its salespeople not to run afoul of the US’s Foreign Corrupt Practices Act, Mr Beck said.

Doing good due diligence at the outset of selecting a local distributor was often a challenge, as there was no centralised place for information, so data were often “inconsistent”, he said.

Overall, companies and investors interested in funding or acquiring small or midsize firms needed to prepare for accounting and disclosure practices that were inadequate by Western standards, said Jacob Kholi, a Ghana-based partner at the Abraaj Group, a private-equity firm focused on growth markets.

One of the goals of a private-equity investor is to better position a company for growth and itself for a positive exit five to seven years down the road. Often, the infusion of funds comes with a dose of accounting and auditing expertise.

“We’re able to identify some of these gaps and apply them to the investment plan. That’s not an imposition for us,” Mr Kholi said.

The quality of financial reporting had improved in recent years and companies were “positioned better than ever before, so we encourage them”, he said.

 

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