Capital Market Ambitions Face Credibility Test Over Conflicted Oversight

Aug 16 , 2025.

A decade ago, a case in the United States (US) jolted Wall Street. An ambulance operator in the State of Arizona had, in 2011, accepted a buy-out that valued it below earlier indications. Shareholders said their bankers, lured by lucrative financing fees, had pressed the board of Rural-Metro Corporation to bless the deal without adequate valuation analysis.

A judge agreed and in 2014 ordered the adviser to pay 75.8 million dollars, about 83pc of the investors’ losses, for having “aided and abetted” directors who breached their fiduciary duties. The ruling shocked bankers by showing how conflicted advisers and sleepy boards can erode confidence in the wider marketplace.

Those active in Ethiopia’s fledgling capital market should heed this cautionary tale. The Ethiopian Securities Exchange (ESX) has yet to host its first trade, yet directorships are already piling on a single pair of shoulders.

Brook Taye (PhD), the chief executive of Ethiopian Investment Holdings (EIH), a state vehicle poised to become the Exchange’s anchor shareholder, has been nominated to the Ethiopian Securities Exchange (ESX) board. He also sits on the board of the regulator, the Ethiopian Capital Market Authority (ECMA), a body he once led as founding director general. If his nomination goes through, the question of who guards the guard becomes more than academic.

Directors are not ornamental lapel pins. They shape strategy, appoint and dismiss executives, set risk limits and, above all, safeguard other people’s money. When one individual owes loyalty to entities with conflicting mandates, something usually gives.

The history of universal banking shows the tension. A commercial-bank arm should protect deposits; the investment-bank arm goes after underwriting fees. Decisions on loan syndications, proprietary trading or merger advice often pit those duties against each other, with the side promising richer remuneration winning the director’s attention. In practice, the conflict could seep into day-to-day decisions, from pricing a working capital line for a prospective client to determining whose research report receives privileged airtime in the boardroom.

Globally, these risks are well-documented.

America’s Office of the Comptroller of the Currency lists the tricks that blossom when mandates overlap. They steer underwriting business to affiliates, favour in-house products over superior outsider options and trade on privileged information. After the 2008 crash, post-mortems across jurisdictions found that “overboarding” dulled independent challenge and bred groupthink. Large asset managers responded by capping the number of seats executives may hold, forcing companies to refresh boards and deepen expertise.

Academic studies link dense interlock networks to lower shareholder returns and higher volatility. This is a cocktail a frontier economy keen on wooing long-term capital would do well to steer clear of.

Similar rumbles are already being echoed on the streets of Ras Abebe Aregay and Ras Mekonnen. The state-owned Commercial Bank of Ethiopia (CBE) and Wegagen Bank have permitted their directors and senior executives to serve on the boards of their respective investment-bank subsidiaries, CBE Capital and Wegagen Investment Capital. Others will undoubtedly follow on the same path.

Defenders note that financial centres such as London, Toronto and Sydney do not impose blanket bans on overlapping seats. What they do insist on is rigorous disclosure and automatic recusals whenever a director’s impartiality might be called into question.

However, history lends weight to the sceptics. In the Rural-Metro saga, advisers wearing several hats buried shoddy valuations and hidden side deals until shares had changed hands. Investors eventually recovered 89.4 million dollars, cash that a cleaner governance process might have preserved. The 2012 merger between pipeline giants El Paso and Kinder Morgan echoed the pattern. Advisers with substantial equity stakes and board seats on both sides promoted a transaction that was lucrative for themselves but suspect for shareholders, who duly sued.

Ethiopia’s would-be dealmakers are unlikely to resist the same temptations unless clear rules are in place to stop them. Investment bankers, such as Brutawit Dawit of Wegagen Investment Capital and Zemedeneh Negatu of CBE Capital, hungry for fees from both buyers and sellers, could be tempted to keep critical conflicts under wraps.

Regulators have spent a century wrestling with such temptations. After the 1929 crash, America’s Glass-Steagall Act walled off commercial banking from investment banking to curb deposit-funded speculation. Eight decades later, the Gramm-Leach-Bliley Act largely dismantled that barrier in pursuit of greater efficiency. When the 2008 crisis exposed the hazards of universal banking, the Dodd-Frank Act’s Volcker rule clipped proprietary trading but left cross-directorships largely intact.

Elsewhere, the European Central Bank limits outside mandates for directors of big lenders. Canada insists that non-executives chair audit committees, and Britain’s regulators demand enough independent voices to challenge groupthink.

Ethiopia’s legal scaffold is far thinner. The law governing the Capital Market, issued in 2021, and the ESX rulebook repeat global platitudes, instructing directors to avoid conflicts “in fact and appearance” and to remain independent of the entities they oversee. Yet, allowing one individual to occupy the regulator, the Exchange, and serve as a dominant shareholder undermines those principles before the opening bell.

The ECMA, still drafting subsidiary regulations, lacks the institutional muscle to police nuanced conflicts, such as silent votes in self-interest or slow-motion insider capture of risk committees. This is a type of fragility that carries a price.

Households already distrust formal finance after years of negative real deposit rates and sporadic cash shortages. Persuading them to shift savings into equities will require proof that rules, not relationships, govern the game. Foreign portfolio investors will dissect the first enforcement action, or the absence of one, before wiring funds. If initial headlines portray insiders judging insiders, capital will stay on the sidelines. The diaspora, a potential source of badly needed foreign exchange, will also pay close attention.

Sound markets rest on three pillars of financial stability, market integrity and efficient capital allocation. Proponents of strict separation argue that bright firewalls cut systemic risk and moral hazard, shielding depositors from speculative bets. Advocates of universal banking counter that integrated firms can harvest economies of scale and a more comprehensive view of risk, which can strengthen the system.

Both camps, however, agree on the indispensability of boards remaining independent and free of conflicting loyalties.

The International Organisation of Securities Commissions warns that even a whiff of bias can repel foreign capital from emerging markets. Perception quickly hardens into reality. Spreading authority across separate and accountable boards reduces the concentration of power and signals a resolve to police conflicts. It also spares conscientious directors the impossible task of serving two masters when interests diverge. Policymakers do not need to choose between growth and probity. They should know that the world’s deepest markets thrive where both coexist, and wither where either fails.

History offers more than enough such warnings.

Ethiopia, struggling with a weakening currency and a swelling public debt burden, cannot afford such a chill. Investors already fret over thin liquidity, patchy disclosure and political risk. Add governance doubts, and the balance may tip against fresh inflows.

What, then, should policymakers do?

A plain fix is to bar employees and directors of regulated firms from serving on the ECMA board, reserving those seats for outsiders with no financial ties to prospective licensees. Another is to require that ESX directors hold no direct or indirect stake in exchange shareholders. At a minimum, any cross-board member should promptly disclose conflicts, abstain from related deliberations, and have the recusal recorded in minutes that are open to inspection.

These are not draconian curbs but standard practice in markets that aspire to be taken seriously.

PUBLISHED ON Aug 16,2025 [ VOL 26 , NO 1320]