The Missed Opportunity for Effective CSR Regulation in Ethiopia

Jan 15 , 2022
By Yehualashet Tamiru Tegegn

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Corporate social responsibility is not as widespread in Ethiopia because there are no provisions that regulate it directly. The revised Commercial Code missed an opportunity with its introduction of a two-tier board structure, writes Yehualashet Tamiru Tegegn (yehuala5779@gmail.com), lawyer, consultant and researcher.

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The terms corporate accountability, corporate ethics, corporate citizenship, corporate stewardship, corporate responsibility, and responsible entrepreneurship are all nomenclatures for corporate social responsibility (CSR). There is no universally accepted single definition for the term. The European Commission, for instance, defines it as

“A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”

Under the existing Ethiopian legal framework, no specific law directly governs CSR. However, there are various provisions that intentionally or by incident regulate it.

Take the FDRE Constitution. As the supreme law of the land, any act, law or decision from government officials should be in line with its terms and conditions. Otherwise, they will have no legal effect. The constitution imposed an obligation on all citizens, organs of state, political organisations, “other associations,” and their officials to ensure its observance and obey it.

The term “other associations” is arguably intended to mean, among others, business organisations or corporations. Among the many duties imposed by the constitution is the duty to protect the environment, human rights, and social aspects of citizens' rights. In the case of businesses entities they have to respect these obligations which by implicationis CSR.

Another legal document that somehow regulates CSR are bilateral investment treaties (BITs). They are agreements concluded between sovereign countries, home state and host state, with the prime objective of promoting investment and protecting the investor. The treaties regulate investment relations between party states. However, recent trends have included environmental, human rights and labour rights protection provisions in BITs. Ethiopia thus far has concluded around 34 of them. However, only 23 of these are enforceable and ratified.

Most of the BITs Ethiopia concluded do not contain environmental obligations towards the investors. However, there are instances whereby treaties recognise the responsibility of foreign investors towards the home state.

An article Ethiopia concluded with the Belgium-Luxembourg Economic Union, for instance, states the right of each contracting party to “establish its own levels of domestic environmental protection and environmental development policies and priorities, and to adopt or modify accordingly its environmental legislation.” It adds that “each Contracting Party shall strive to ensure that its legislation provide for high levels of environmental protection and shall strive to continue to improve this legislation and it’s inappropriate to encourage investment by relaxing domestic environmental legislation.”

The third legal framework is the tax regime. Under the Income Tax Proclamation and its implementation regulation, there are exemption provisions for business entities provided they give donations and gifts. The exemptions apply if the donations are made out to locally registered non-profits; in response to a call for development or an emergency call issued by the government to defend the sovereignty and territorial integrity of the country; or to prevent or provide relief to disasters.

But the most relevant provision relating to CSRs is the Commercial Code as it directly regulates the forms and the manner of operation of business entities.

Parliament unanimously passed the revised Commercial Code not long ago. Although the old Commercial Code was ahead of its time when legislated six decades ago, much has changed since then, necessitating an amendment.

Like its predecessor, the revised version does not contain an explicit provision concerning CSR. The overall reading of the provisions of the revised Commercial Code exhibits that it adopts a traditional shareholder-centric approach of corporate governance, disregarding the interests and involvement of other stakeholders. Thus, there is no legal obligation for the company's management to consider the interest of other stakeholders such as employees, the community, customers or people in the supply chain.

There can be no doubt that profit maximisation is a founding principle of any profitable organisation and remains the pillar and foundation of company structure. Under the revised Commercial Code, business entities obtain legal personality, distinct from their members, upon registration before the concerned body. Although upon its establishment, the company is entitled to sue, be sued, own property, enter into various transactions and have its own name and trademark. But, in effect, any company is led by the general shareholders who ultimately transfer their power to the board of directors and finally to the CEO or manager.

The general meeting of shareholders, which is the ultimate supreme organ of the company, has significant power in connection to the appointment of board directors, assessing their report and approval or amendment of the memorandum of association. This implies that the board of directors, considered the legal representative of the shareholders, can perform and implement only tasks and mandates indicated under the memorandum of association (MoA) and decisions agreed upon during the general meeting.

Thus, the directors can only pursue CSR as indicated in the MoA or decided by way of resolution. As shareholders and board of directors work is in aligned objective and unified interest of profit maximisation, any issue that not directly contributes towards profit maximisation is all but a secondary issue.

Because the corporate structure is based on the assumption that there is a coincident of interest between the management of the company and its shareholders, the decision-making process is that on which, on its face value, is presumed to be in the interest of the shareholders.

But unlike past times when shareholders would shoulder much of the risk and responsibility, nowadays, they leave the management aspect for the board of directors and the manager.

This agency and principal relationship of the company and the board directors seems to limit the role and significance of CSR in corporate set-ups. Thus, in such arrangements, one of the most recurring problems in contemporary corporate governance is the issue of agency – the principal relationship between shareholders as real owners of the company and the board of directors as a representative of shareholders.

This agency problem may arise in three different instances. It could be between the management and the shareholders; majority and minority shareholders; or between the controllers of the company, either managers or majority shareholders of the company, and non-shareholder stakeholders, such as employees and debenture holders.

In the separation of ownership and management, the most prominent structural characteristic of the board of directors is whether it is a one or two-tier institution. Ethiopia’s previous Commercial Code did not recognise the latter. The revised one does. But unlike the one-tier board structure, in two-tier boards, executive directors (the management board) are responsible for the company's daily operations. In contrast, non-executive directors (the supervisory board) supervise and monitor executive directors. This latter set may develop a plan for the company to engage in other “non-profit” activities.

However, this possibility is highly unlikely under the revised Commercial Code's existing structure for at least two reasons. The first and foremost setback is that the board members should be shareholders. As shareholders, they are primarily, if not only, motivated by profit and hence, CSR would not be their major concern. A supervisory board is supposed to serve as a gatekeeper for the acts and activities of the management team. But, this is unlikely to be the case in overseeing the implementation of the CSR, as they themselves are shareholders, it will be a subsidiary and secondary matter.

Even if the supervisory board takes the matter of CSR, as one mechanism of enhancing the good image of the company, their power of influence is extremely low as they cannot hire and fire the misbehaving CEO and the ultimate decision lies on the board of director as they have no voting rights. If the supervisory board pushes for CSR, which in the majority of the shareholders deemed to minimize the purse of the company, the law entitles the general meeting of shareholders to fire without good cause the member of supervisory board that either causes or pushes the cause for CSR.

Had they been non-shareholders with voting right in the supervisory board of directors, there could have been an interesting overseeing of the board vis-à-vis the CSR of the company.

The second setback is that it is absolutely within the freedom of the company whether to embody a supervisory board or not. Thus, the voluntary nature of the board structure coupled with profit considerations prevents the development of a comprehensive CSR strategy.

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PUBLISHED ON Jan 15,2022 [ VOL 22 , NO 1133]

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