Ms Josephine Okui Ossiya, the Chief Executive Officer at Capital Markets Authority. PHOTO/ FILE
Access to capital remains the top challenge that business founders and owners in Uganda face. In the case of bank financing, access to capital is mainly driven by variables such as cash-flow projections (an indicator of ability to service debt) and the availability of a security that can be pledged by a borrower.
In simple terms, if a borrower does not demonstrate the ability to generate cash-flows in the future or provide a satisfactory security, they are unlikely to access credit from a bank. In the case of capital markets, among the key drivers determining access to capital is projections around your cash-flows and how organised your business is, as represented by your corporate governance practices. The ability to generate cash-flows in the future and sound corporate governance practices are critical to accessing long-term, patient, non-bank capital in the capital markets. But what role does corporate governance play in increasing access to capital markets?
Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community.
Sound governance consists of several pillars that ensure a company adheres to rules and regulations imposed by external authorities, as well as meets the unique requirements of internal stakeholders. These pillars may include, but are not limited to: Accountability, leadership, stakeholder engagement, transparency, independent assurance, risk management and fairness. While all pillars of corporate governance are important, I will limit myself to Accountability through corporate reporting, transparency as well the role of a board as pillars that business owners and founders ought to lean on, to attract providers of capital to their companies.
Corporate reporting
Corporate reporting and transparency, as pillars of corporate governance, are foundational. Reporting and transparency provide insights to stakeholders on the company’s performance and financial position. Through reporting, providers of capital gain access to a company’s financial and non-financial information and can support them in forming a view on how the business is being managed. Providers of capital can rely on corporate reports and disclosure to: assess company performance and that of its directors and managers; make valuation and investment decisions; and assess a company’s compliance with legal commitments such as debt contracts.
The board of directors plays a crucial role in a company’s governance, providing oversight and strategic guidance to ensure the company’s success. Shareholders select or elect a board of directors to represent their interests. The board is the policy-making organ of a company and its policies are executed by management.
The board provides strategic direction and oversight in an organisation. Providers of capital look out for aspects around a board of directors before they decide to commit capital. Key among indicators that providers of capital consider include diversity among board members in terms of skills, experience, expertise, independence, and gender; clarity of roles and responsibilities among a board and its committees; proactive risk management; timely and transparent disclosures; and ensuring that a company has strong internal controls. In addition to the favourable rating by providers of capital for companies with sound corporate governance, there are other merits. A company with sound corporate governance practices is likely to see its cost of capital come down as capital providers perceive it as being less risky, reducing the risk premium charged on the cost of capital for companies with weak corporate governance practices. Sound corporate governance sends a strong signal that a company is primed for value creation, key to attracting providers of capital. Companies that seek to borrow from capital markets can be given a credit rating, which is an opinion on the ability of a company to pay its debt obligations.
Stock brokers at Uganda Securities Exchange. Sound corporate governance sends a strong signal that a company is primed for value creation. PHOTO / FILE
Strong corporate governance, can contribute to a company obtaining a favourable credit rating, which is also critical to raising debt capital at a lower cost.
Business owners and founders should consult professionals such as lawyers, chartered secretaries and accountants to provide the necessary guidance and advice on sound corporate governance practices.
Josephine Okui Ossiya is chief executive officer at Capital Markets Authority.
