By Kimberly S. Johnson
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 PLC,
Total Nigeria PLC and Oando PLC--through a rigorous assessment.
The ratings system requires listed companies to answer questions
about their business ethics, internal and external audit and
control, 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 like Ghana, Kenya and Rwanda have had a halo
effect on the region.
Over the past five years, more Africa's 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 & Co. And
the International Monetary Fund 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 Ernst & Young
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. And, 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 U.S.-Africa business
and investment ties, said information on some companies in the
region is "fairly sketchy" and "the governance issue slows things
down."
That's partly why the U.S. accounted for less than 10% of the
$545 billion 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 one
billion people now have a mobile phone, according to a McKinsey
report.
For investors, a major challenge is that the majority 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 are often held at the kitchen table over a
Sunday night family meal, said Barakat Balmelli, managing director
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 added.
Forming partnerships with dealers and distributors can help
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 Duluth, Ga., sells its wares
in Zambia, has a parts facility in South Africa and is
manufacturing equipment in Algeria. The company trains its
salespeople not to run afoul of the U.S.'s Foreign Corrupt
Practices Act, Mr. Beck said.
Doing good due diligence at the outset of selecting a local
distributor is often a challenge, as there's no centralized place
for information, so data is often "inconsistent," he said.
Overall, companies and investors interested in funding or
acquiring small or midsize firms need to prepare for accounting and
disclosure practices that are 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 has improved in recent years and
companies are "positioned better than ever before, so we encourage
them, " he said.
John Kester contributed to this article.
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