Embracing Corporate Governance in a Volatile Economic Landscape

Apr 22 , 2023
By Asseged G. Medhin

As the world still grapples with the consequences of the 2008 financial crisis, recent events have shown that we have yet to learn from past mistakes. The ongoing instability in the global economy, particularly with the bankruptcy of top US banks, serves as a stark reminder of the potential domino effect on international markets. For instance, the Ethiopian financial and insurance industries are not immune to such repercussions, which could eventually impact aid, foreign trade, and the country’s balance of payments.

The urgent need for robust corporate governance cannot be overstated, as it is pivotal in ensuring justice and security in any organisation. When these two key aspects are in place, employees are empowered to be engaged, productive, and committed to delivering value and customer satisfaction. However, when corporate governance is neglected, the potential for bribery, nepotism, chaos, and the collapse of established norms and values arises.

The recent failure of top American banks has highlighted the risks associated with lax regulatory measures and the systemic dangers of institutions deemed “too big to fail.” As a result, policymakers have been reconsidering which large banks should be subject to enhanced prudential regulatory requirements (EPR) to address the risk of financial instability.

With its limited investment options and inherent concentration risk, the Ethiopian financial sector can glean valuable lessons from these events. To avoid similar pitfalls, the country’s regulatory body must devise a framework that fosters policy dialogue and evaluates the risk profiles of financial institutions. Ethiopia’s financial institutions can protect themselves against potential failures by emphasising corporate governance.

For any modern company, effective corporate governance must promote sustainable income, learning, and growth while maintaining healthy customer relations. The cornerstones of corporate governance — justice, security, sustainable income, learning and growth, development, and customer relations — should be at the heart of a company’s directors` board. Failing to uphold these principles can lead to loss of credibility, inability to achieve targets, and, ultimately, bankruptcy.

Transparent corporate governance, which can be understood by employees, stakeholders, and customers alike, is essential for fostering an environment conducive to growth and development. Without such transparency, change agents may become fearful, and companies risk leaving themselves vulnerable to another financial collapse.

As the global economy continues to navigate turbulent waters, the necessity of implementing robust corporate governance becomes increasingly apparent. The Ethiopian financial sector, as well as others around the world, must take decisive action to address the risk of financial failures and to reinforce their resilience against potential crises.

One crucial aspect of corporate governance is the recognition and management of risk. Financial institutions must be able to identify inherent risks, such as concentration, liquidity, and interest rate, and develop comprehensive strategies to address them. By doing so, they can safeguard their operations and maintain stability in the face of economic challenges.

Another critical component of corporate governance is fostering a culture of accountability and transparency. The board of directors and top management should be held accountable for their actions and decisions, which should be made in the best interests of shareholders and stakeholders. Communication channels should be established to ensure that information is shared with employees, shareholders, and regulators in a timely and credible manner.

The role of regulators in overseeing and enforcing corporate governance cannot be understated. Regulatory agencies must collaborate closely with financial institutions to establish clear guidelines and expectations for corporate governance. They can foster a proactive approach to risk management and compliance, ultimately reducing the likelihood of financial collapses.

Continuous learning and adaptation in corporate governance should not be overlooked either. Financial institutions and businesses must be prepared to evolve and adapt their governance structures to keep pace with the rapidly changing economic landscape. This may involve investing in professional development for board members and top management and adopting new technologies and methodologies to enhance their governance practices.

PUBLISHED ON Apr 22,2023 [ VOL 24 , NO 1199]

Asseged G.Medhin, deputy CEO of Global Insurance Company.

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